National Income Account

Balance of Payment Account

International Macroeconommics
Chapter 5. National and International Accounts: Income,
Wealth, and the Balance of Payments

Instructor: Yuan Liu

Department of Economics, UCDavis

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Outline

1 National Income Account

2 Balance of Payment Account

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Outline

1 National Income Account

2 Balance of Payment Account

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

How to measure the size of an economy?

GDP(product measure) gross domestic product
Total value of all final goods and services
produced within the borders of a country
GNE(expenditure measure) gross national expenditure
Total expenditure on final goods and services by
home entities.
GNI(income measure) gross national income
Total value of income earned by a country’s
factor of production.

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

In a closed economy:
Home entities buy only domestic products. Products are
sold to only home entities.
Production employs only domestic factors of production.
Domestic factors of production contribute to only home
production.
GNE = GDP = GNI
GDP = C + I + G
S = GNI − C − G
S=I
In a closed economy, the amount of investment is limited by
the country’s supply of savings.

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

In an open economy, countries interact with the rest of the

world:
Trade in goods and services
Factor income: capital and labor
International gifts

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Goods trade

Imports (IM), Exports (EX), Trade balance (TB)

An american purchased a chanel bag in paris: US imports

Japan purchased a Boeing 767: US exports

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Factor Income
Imports of factor services (IMFS ), Exports of factor services
(EXFS ), Net factor income abroad (NFIA)

Japanese owned auto factories in the U.S., genertes

income for the Japanese owners: US imports of factor
services or domestic income payments to foreign factors.
U.S. writers work for the Economist in London, earns
income in Britain : US exports of factor services or
foreign income payments to domestic facotrs.
Instructor: Yuan Liu CH3
 National Income Account
Balance of Payment Account

International Gifts

Unilateral Transfer (NUT): Negative entry for the giving

country
Gross national disposable income (GNDI)

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Current Account
Current Account (CA): record all international transactions in
goods, services and income

Y − C − G = I + CA
S =Y −C −G
CA = S − I
A nation’s investment is no longer limited by its own savings.
Current account deficit: CA < 0. Spending more than its
earnings, I > S.
Instructor: Yuan Liu CH3
 National Income Account
Balance of Payment Account

Twin Deficit
Tendency for government budget deficits to cause current
account deficit.
Government Savings S g = T − G
Government Burdget Deficit G − T = −S g
Private Savings S p = Y − C − T
National Savings S = Y − C − G
Sp + Sg = Y − C − G = S
CA = S − I = S P + S g − I
Twin Deficit Hypothesis: Will a fall in S g (a rise in
government deficit) lead to a current account deficit?
If all else constant (S p , I remain unchanged) then the answer
is yes.
Instructor: Yuan Liu CH3
 National Income Account
Balance of Payment Account

What could cause a current account deficit?

CA = S p + S g − I

Government Budget Deficit (The Twin Deficit

Hypothesis): S g ↓
Private savings: S p ↓
Investment: I ↑

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Figure 1
U.S. current account
US$
(billions)
200

-200

-400

-600

-800

-1000
80 82 84 86 88 90 92 94 96 98 00 02 04 06

Source: IMF

Instructor: Yuan Liu CH3

 US current account balance
National Income Account
Balance of Payment Account

Figure 2
U.S. current account and components
share of GNP

.25

.20 investment

.15
private saving
.10

.05
government
.00
saving
-.05 current
account
-.10
10
80 82 84 86 88 90 92 94 96 98 00 02 04

Source: IMF 21

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Global Imbalance

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Global Imbalance

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Outline

1 National Income Account

2 Balance of Payment Account

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Balance of payments accout (BOP): record international

transactions in both goods and assets
BOP = CA + FA + KA
CA The current account records international
transactions in goods, services and factor of
productions.
CA = EX − IM + EXFS − IMFS + NUT
FA The financial account records international
transactions in financial assets
FA = EXA − IMA = (EXAH − IMAH ) − (IMAF − EXAF )
KA The capital account records acquisition and
disposal of nonfinancial, nonproduced assets
(patents, copyright), forgiveness of debts, gifts.
Instructor: Yuan Liu CH3
 National Income Account
Balance of Payment Account

Three rules of recording international transactions:

A transaction resulting in a payment to foreigners is a
”deficit” with a negative sign.
A transaction resulting in a receipt from foreigners is a
”credit” with a positive sign.
EX(+) EXFS (+) EXA (+) IM(-) IMFS (-) IMA (-)
Transactions put into one of three categories:
(1)CA: goods, services and factor income (2)FA: financial
assets (3)KA: nonmarket transactions.
Every international transaction will ultimately imply two
BOP entries. One as a credit and one as a debt.
This implies that BOP = CA + FA + KA = 0.
”BOP indentity” must hold as definition.

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Examples
George buys $100 French wine in a bar in Paris. George
pays with his AMEX card.
Wine#
US# France#
Financial#Assets#

CA: -$110 IM(-) FA: +$110 EXAH (+)

George buys French stock $10,000 from a French bank
BNP. George sends BNP a check from his BOA account.
Stock#
US# France#
BOA#check#

FA: -$10,000 IMAF (-) FA: +$10,000 EXAH (+)

Instructor: Yuan Liu CH3
 National Income Account
Balance of Payment Account

a deficit current account indicates a net purchase of

goods and services which generates a ”financial outflow”.
a surplus financial account indicates a net sale of assets
which generates a ”financial inflow” to finance account
deficit.
FA includes ”official reserve assets”: the purchase and
sale of foreign currency reserves by central bank.

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Statistical Discrepancy: -(CA+FA+KA)

Impossible to track every single international transactions
correctly:
measurement errors, omissions, smuggling of goods, trade tax
evasion, money laundering, capital tax evasion.

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

Instructor: Yuan Liu CH3

 National Income Account
Balance of Payment Account

CA deficit decreases nation’s external wealth.

$ depreciates: home assets owned by rest of world ↓

rest of world assets owned by home ↑

∆W > 0

Instructor: Yuan Liu CH3