Chapter 13
National Income Accounting and
the Balance of Payments
■ Chapter Organization
The National Income Accounts.
National Product and National Income.
Capital Depreciation and International Transfers.
Gross Domestic Product.
National Income Accounting for an Open Economy.
Consumption.
Investment.
Government Purchases.
The National Income Identity for an Open Economy.
An Imaginary Open Economy.
The Current Account and Foreign Indebtedness.
Saving and the Current Account.
Private and Government Saving.
Case Study: The Mystery of the Missing Deficit.
The Balance of Payments Accounts.
Examples of Paired Transactions.
The Fundamental Balance of Payments Identity.
Chapter 13 National Income Accounting and the Balance of Payments 81
The Current Account, Once Again.
The Capital Account.
The Financial Account.
Statistical Discrepancy.
Official Reserve Transactions.
Case Study: The Assets and Liabilities of the World’s Biggest Debtor.
Summary
Chapter 13 National Income Accounting and the Balance of Payments 83
forgiveness or immigrants moving wealth with them) are now in the new capital account. Credits and
debits are marked in the same manner; if money comes into a country, it is a credit. A description of the
changes along with revised estimates for 1982–1998 can be found in the article by Christopher Bach (see
references). These changes were made in conjunction with the IMF’s new standards. A description of
these new standards can be found in the Survey of Current Business article listed at the end of the
references.
The chapter also includes a discussion of official reserve transactions. You may want to stress that, from
the standpoint of financing the current account, these official capital flows play the same role as other
financial flows. You may also briefly mention that there are additional macroeconomic implications of
central-bank foreign asset transactions. A detailed discussion of these effects will be presented in Chapter
18.
The chapter concludes with a case study examining the foreign assets and liabilities of the United States. A
breakdown of the different components of the U.S. international investment position is presented. Of
particular importance is that although the United States is the world’s largest debtor, American debt
relative to American GDP is significantly lower than many other countries. The chapter also includes a
discussion of how the value of a nation’s foreign debt may be affected by exchange rate changes, a nice
segue into the next chapter relating exchange rates and the asset market.
■ Answers to Textbook Problems
1. The reason for including only the value of final goods and services in GNP, as stated in the question,
is to avoid the problem of double counting. Double counting will not occur if intermediate imports
are subtracted and intermediate exported goods are added to GNP accounts. Consider the sale of U.S.
2. Equation 13-2 can be written as CA = (Sp − I) + (T − G). Higher U.S. barriers to imports may have
little or no impact upon private savings, investment, and the budget deficit. If there were no effect on
84 Krugman/Obstfeld/Melitz • International Economics: Theory & Policy, Eleventh Edition
these variables, then the current account would not improve with the imposition of tariffs or quotas. It
3. a. The purchase of the German stock is a debit in the U.S. financial account. There is a
b. Again, there is a U.S. financial account debit as a result of the purchase of a German stock by an
American. The corresponding credit in this case occurs when the German seller deposits the U.S.
c. The foreign exchange intervention by the Korean government involves the sale of a U.S. asset,
d. Suppose the company issuing the traveler’s check uses a checking account in France to make
payments. When this company pays the French restaurateur for the meal, its payment represents a
86 Krugman/Obstfeld/Melitz • International Economics: Theory & Policy, Eleventh Edition
6. A current account deficit or surplus is a situation that may be unsustainable in the long run. There are
instances in which a deficit may be warranted, for example to borrow today to improve productive
7. The official settlements balance, also called the balance of payments, shows the net change in
international reserves held by U.S. government agencies, such as the Federal Reserve and the
8. A country could have a current account deficit and a balance of payments surplus at the same time if
the financial and capital account surpluses exceeded the current account deficit. Recall that the
balance of payments surplus equals the current account surplus plus the financial account surplus
Chapter 13 National Income Accounting and the Balance of Payments 87
© 2018 Pearson Education, Inc.
The “textbook” consequence of this is a balance of payments of zero, while the actual figures showed
a slight balance of payments surplus between 1982 and 1985. These years were also marked by large
current account deficits. Thus, the financial inflows into the United States between 1982 and 1985
exceeded the current account deficits in those years.
9. If both assets and liabilities pay 5%, then the net payments on the net foreign debt would be 1.25%.
While not trivial, this is probably not too bad a burden. At 100% net foreign debt–to-GDP ratio, the
10. The United States receives a substantially higher rate of return on its assets held abroad than
11. The case study states that U.S. foreign assets are equal to 129% of GDP and foreign liabilities are
equal to 148% of GDP. Furthermore, 70% of U.S. foreign assets are in foreign currencies, and 100%
12. To incorporate capital gains or losses, one would have to consider these valuation changes as part of
national income. We would thus change Equation 13-1 to read:
88 Krugman/Obstfeld/Melitz • International Economics: Theory & Policy, Eleventh Edition
13. Collecting data on the U.S. international investment position and nominal GDP over the period
1976–2012 allows us to generate the following chart:
As the U.S. current account has been negative since 1980, it should not be surprising that the U.S.
international investment position has been declining since 1980. To finance a current account deficit,
■ References
Christopher Bach. “U.S. International Transactions, Revised Estimates for 1982–1998.” Survey of Current
Business 79 (July 1999), pp. 60–74.
“The International Monetary Fund’s New Standards for Economic Statistics.” Survey of Current Business
76 (October 1996), pp. 37–47.