International Economics

Lecture 1
16.10.22
• All the material can be accessed on
https://elearning.iliauni.edu.ge/
 National Income Accounting and the Balance of
Payments

• The national income accounts and the balance of

payments accounts are essential tools for studying the
macroeconomics of open, economies.

• International macroeconomics – cares about full

employment of scarce economic resources and price level
stability.
 National Income Accounting and the Balance of Payments

• A country's gross national product (GNP) = the value of all final goods and
services produced by the country’s factors of production and sold on the
market in a given time period
• It is to avoid such double counting that we allow only the sale of final
goods and services to enter into the definition of GNP
• Gross Domestic Product (GDP) = GNP - Factor payments from foreign
country + Factor payments to foreign country
• The national income accounts divide national income according to the
types of spending that generate it: Consumption (C) , Investment (I),
Government(G) purchases, and the Current Account (CA) balance
• Y = GNP = C + I + G + EX - Is National Income Identity
 The Current Account and Foreign Indebtedness

• The difference between exports of goods and services and

imports of goods and services is known as the current account
balance (or current account).
• If we denote the current account by CA, we can express this
definition in symbols as
CA = EX – IM
• The current account is also important because it measures the
size and direction of international borrowing.
• a country’s current account balance equals the change in its net
foreign wealth.
 Private and Government Saving

• To explain the most important of these implications, we define the concept of

national saving, that is, the portion of output, Y, that is not devoted to
household consumption, C, or government purchases, G.
• In a closed economy, national saving always equals investment
S = Y - C – G=I
• Private saving is defined as the part of disposable income that is saved rather
than consumed. Disposable income is national income, Y, less the net taxes
collected from households and firms by the government, T.
𝑆𝒑 = Y - T - C
• Government saving: the government’s “income” is its net tax revenue, T, while its
“consumption” is government purchases, G.
𝑆𝒈 = T - G
 National Income Accounting and the Balance of Payments

• In an open economy
• GNP = C + I + G + CA ( Remember EX – IM ≈ CA)
• Trade does not have to be balanced if the economy can borrow from and lend
to the rest of the world.
• Current Account balance, equals the difference between the economy's
output and its total use of goods and services
• The Current Account also equals the country's net lending to foreigners. open
economy can save by domestic and foreign investment. National saving
therefore equals domestic investment plus the current account balance.
 National Income Accounting and the Balance of Payments

• Three types of international transaction are recorded in the

balance of payments:
• 1. Transactions that arise from the export or import of goods or
services and therefore enter directly into the current account.
• 2. Transactions that arise from the purchase or sale of financial
assets. The financial account of the balance of payments records all
international purchases or sales of financial assets.
• 3. Certain other activities resulting in transfers of wealth between
countries are recorded in the capital account.
 National Income Accounting and the Balance of Payments

• All transactions between a country and the rest of the world are recorded in
its balance of payments (BoP) accounts.
• Current Account + Financial Account + Capital Account = 0,
• Any current account deficit 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.
• BoP has three accounts and holds the equation:
• Current Account (CA)
• Financial Account (FA)
• Capital Account (KA)
 Problem 1

• Define budget deficit and trade deficit.

• The excess of private investment over private savings of a
country in a particular year was $ 2000. The amount of budget
deficit was (– ) $1,500. What was the volume of trade deficit of
that country?
 Answer Problem 1

• Budget deficit refers to the situation when the amount of the

government's expenditure exceed the tax revenue earned by the
government.
• Budget deficit = Tax revenue – Government expenditure = T – G
• Trade deficit refers to the situation when the amount of the import
expenditure exceeds the export revenue earned by the economy.
 Answer to Problem 1

• S = Y – C – G (Remember this is from the closed economy example)

• Y = C + I + G + CA ➔ CA + I = Y – C – G ➔ S = CA + I
• S = 𝑆 𝒑 + 𝑆𝑔 = CA + I ➔ 𝑆 𝒑 = CA + I - 𝑆𝑔
• 𝑆𝑔 = T – G
• 𝑆 𝒑 = CA + I – (T – G) ➔ CA = 𝑆 𝒑 - I + (T – G)
• When we have a trade deficit, we have that CA is negative thus, all terms
have changed sign
• Trade Deficit = ( I – 𝑆 𝒑 ) + ( G – T ) = 2000 + ( - 1500 ) = 500
 Problem 2
• Consider how each of the following events is likely to affect GNP.
Do you think the change in GNP reflects a similar change in
economic well-being?

• a. A hurricane in California beach almost destroys all the touristic

places
• b. Georgian have discovered a new, easy-to-grow nut tree how
this will affect GNP?
• firms throughout the economy experience falling demand,
causing them to fire workers.
 Answer to Problem 2

• GNP – Decreases
• GNP – Increases
• GNP – Decreases
 Problem 3

• Can you think of reasons why a government might be

concerned about a large current account deficit or surplus? Why
might a government be concerned about its official settlements
balance (that is, its balance of payments)?
Problem 4

Which one of the following statements is

the most accurate?
a. An increase in disposable income does not affect the current
account.
b. An increase in disposable income worsens the current
account.
c. An increase in income worsens the current account.
d. An increase in disposable income improves the current account.
Answer to Problem 4
• CA : Credit Debit
Exports Of which
Merchandise
Services
Income receipts

Imports Of which:
Merchandise - $ 10,000,000
Services
Income payments

• FA :
U.S. assets held abroad (increase —) Of which:
Official reserve assets
Other assets (6)
Foreign assets held in U.S. (increase +) Of which:
Official reserve assets
Other assets + $10, 000, 000
Discussion Question

Does the Economy Benefit From Global

Trade?