National Income & BOP

2/24/2023
National Income & National

Product
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Instructor: H. A. Qureshi
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National Income and National Product
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Gross Domestic Product
1. Is it an alternative name for NP?
2. How is GDP defined?
3. In what terms is GDP measured? And at what stage?
4. What is the difference between GNP and GDP?
5. What does GDP growth signify?
Instructor: H. A. Qureshi 3
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Weaknesses of GDP as a Measure of

Economic Well-being
1. Ignores the value of goods and services left over from previous years
2. Fails to recognize the size of the population that it must support
3. Gives no account of how the goods and services produced by the economy
are distributed among members of the economy
4. Growth may overstate the growth of the standard of living
5. Does not account for negative production and consumption externalities
6. Growth may not be indicative of a healthy economy in some circumstances
7. Ignores the value of consumption in the economy which is more important
for economic well-being
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GDP
• GDP = C + I + G + EX – IM
• C= Foreign & Domestic Goods & Services
• I= Fixed Investment, Inventory, Raw Material, Construction, PP&E, (No
Financial Investment) by Businesses (Residential/Non-Residential) or
NPOs
• G= Federal & Provincial spending on Salaries, HE, Medical, Social
Insurance, Subsidies (Aid not included)
• EX= Sold to non-residents (Payments of Factor Income & Transfer
Payments not included)
• IM= purchases from ROW
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Why subtract Imports?
• Because it represent cost to economy? Opportunity cost?
• Do higher imports cause lower GDP?
• They are hidden in all
• GDP = (CD + CF) + (ID + IF) + (GD + GF) + (EXD + EXF) – IM
• IM = CF + IF + GF + EXF
• GDP = CD + ID + GD + EXD
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• Below are the economic data for the fictional country X. Write out the national
income identity. Verify whether X’s data satisfy the identity.
X’s Economic Data (Billions of Dollars)
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• GVA=GDP-SP-TP
• GDP at Factor Cost = Sum of all GVA at factor cost.
• GDP at Basic Price = GDP at factor cost - Taxes + Subsidies
• GDP at Market Price = GDP at factor cost + Taxes - Subsidies
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Balance of Payments
Accounts
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Merchandise
Account
Current
Account
Balance of
Payment Service Account
Accounts
Financial
Account
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Current Account
• What are Income Payments?
• What are Income Receipts?
• What are Unilateral Transfers?
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Merchandise Trade Balance/Goods

Balance
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Services Balance
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Goods and Services Balance
• When press reports trade deficit/surplus referring to the broad

measure of trade, what are they reporting? Current Account or
Merchandise Trade Account or Goods & Services Balance?
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GDP versus GNP
• GNI vs GNP?
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Financial Account Balance
• Assets represent all forms of ownership claims in things that

have value. They include bonds, Treasury bills, stocks, mutual
funds, bank deposits, real estate, currency, and other types of
financial instruments.
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Recording BOP
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• It takes the form of a ledger
• What does (+) and (-) denote?
• What is the difference between capital account and financial

account?
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Example
Pakistan BOP (Rs.)
Step 1
Credits (+) Debits (-)
Current Account 0 0
Financial Account +1,000 (Rs. Currency) -1,000 (¥ Currency)
Pakistan BOP (Rs.)

Step 2
Current Account 0 -1,000 (Camera)
Financial Account +1,000 (¥ Currency) 0
Pakistan BOP (Rs.)

Step 3
Current Account +1,000 (Textile) 0
Financial Account 0 -1,000 (Rs. Currency) 27
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Summary
Pakistan BOP (Rs.)
Summary (1,2,3)
Current Account +1,000 (Textile) −1,000 (camera)
Financial Account −1,000 (Rs. currency), −1,000 (¥
+1,000 (Rs. currency), +1,000 (¥ currency)
currency)
Summary (1,2,3) – Pakistan BOP (Rs.)

After Cancellation Credits (+) Debits (-)
Current Account +1,000 (Textile) −1,000 (camera)
Financial Account 0 −0
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Pakistan BOP (Rs.)

Step 3*
Current Account 0 0
Financial Account +1,000 (Pak. savings bond) −1,000 (Rs. currency)
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Summary
Pakistan BOP (Rs.)

Summary (1,2,3*)
Current Account 0 −1,000 (camera)
Financial Account +1,000 (Rs. currency), +1,000 (¥ currency), −1,000 (Rs. currency), −1,000 (¥
+1,000 (Pak. savings bond) currency)
Summary (1,2,3*) – Pakistan BOP (Rs.)

After Cancellation Credits (+) Debits (-)
Current Account 0 −1,000 (camera)
Financial Account +1,000 (Pak. savings bond) −0
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• Current account balance + Financial account balance = 0

• In the aggregate, imbalances on a current account, a trade account, or a
financial account do not represent unequal exchanges between countries.
• Statistical Discrepancy
• When imports of goods exceed exports, we are buying more foreign
goods and services than foreigners are buying of ours. However, at the
same time, a current account deficit implies a financial account surplus. A
financial account surplus, in turn, means that foreigners are buying more
of our assets than we are buying of theirs.
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Relationship between Budget Deficit and

CA Deficit
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CA Deficit
• Can SHH be negative?
• What is Marginal Propensity to
Consume & Marginal Propensity
Save
• SHH + SB = I
• SP = SHH + SB
• SP = I
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CA Deficit
• SG = T - TR - G
SHH + SB + SG = I
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CA Deficit
• GNP = C + I + G + EX − IM
• SF = IM − EX
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Twin-Deficit Identity
• SHH + SB + SG + SF = I
• SP + SG + SF = I
• SG = T − TR − G,
• SF = IM − EX,
• SP = SHH + SB.
• SP + T − TR − G + IM − EX = I.
• (SP − I) + (IM − EX) = (G + TR − T)
• (SP − I) = (G + TR − T) - (IM − EX) 42
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Twin Deficit Case for Pakistan – Reading

Assignment
• Source: https://profit.pakistantoday.com.pk/2018/11/29/pakistans-twins-
deficits-and-how-can-they-contained/
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Misc. Points
• A country’s international investment position (IIP) shows the
total holdings of foreign assets by domestic residents and the
total holdings of domestic assets by foreign residents at a
point in time
• Domestic assets (foreign assets held by domestic residents)
and domestic liabilities (domestic assets owned by foreign
residents)
• If Domestic Assets (Debt & Equity) surpass Domestic
Liabilities, then country is Creditor.
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National Income & BOP

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National Income & BOP

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2/24/2023

National Income & National

National Income and National Product

Gross Domestic Product

1. Is it an alternative name for NP?

2. How is GDP defined?

3. In what terms is GDP measured? And at what stage?

4. What is the difference between GNP and GDP?

5. What does GDP growth signify?

Weaknesses of GDP as a Measure of

Why subtract Imports?

• Because it represent cost to economy? Opportunity cost?

• Do higher imports cause lower GDP?

• They are hidden in all

• GDP = (CD + CF) + (ID + IF) + (GD + GF) + (EXD + EXF) – IM

X’s Economic Data (Billions of Dollars)

• What are Income Payments?

• What are Income Receipts?

• What are Unilateral Transfers?

Merchandise Trade Balance/Goods

Goods and Services Balance

• When press reports trade deficit/surplus referring to the broad

GDP versus GNP

Financial Account Balance

• Assets represent all forms of ownership claims in things that

• It takes the form of a ledger

• What does (+) and (-) denote?

• What is the difference between capital account and financial

Pakistan BOP (Rs.)

Pakistan BOP (Rs.)

Summary (1,2,3) – Pakistan BOP (Rs.)

Pakistan BOP (Rs.)

Pakistan BOP (Rs.)

Summary (1,2,3*) – Pakistan BOP (Rs.)

• Current account balance + Financial account balance = 0

Relationship between Budget Deficit and

Relationship between Budget Deficit and

Relationship between Budget Deficit and

Relationship between Budget Deficit and

• (SP − I) + (IM − EX) = (G + TR − T)

• (SP − I) = (G + TR − T) - (IM − EX) 42

Twin Deficit Case for Pakistan – Reading

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