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16 National and International Accounts: Income, Wealth, and the
Balance of Payments
Notes to Instructor
Chapter Summary
This chapter begins by discussing an integrated view of national income and product
(NIP) accounts with balance of payments (BOP) accounts. The chapter then presents NIP
accounts in detail. For advanced students, most of this will be a review. The next section
covers BOP accounts, highlighting the double-entry accounting that may be familiar to
Comments
This chapter includes a detailed exposition of NIP and BOP accounts. This exposition
lays the foundation for analysis in Chapter 18; however, much of the detail will be
simplified. The most detailed analyses appear in the applications and sidebars.
First, data are revised frequently. International account revisions are often quite large.
Second, of course, there are newer data available than what’s in the textbook. This
1. Measuring Macroeconomic Activity: An Overview
a. The Flow of Payments in a Closed Economy: Introducing the National
2. National Accounts: Income, Product, and Expenditure
a. Three Approaches to Measuring Economic Activity
b. From GNE to GDP: Accounting for Trade in Goods and Services
c. From GDP to GNI: Accounting for Trade in Factor Services
d. Application: Celtic Tiger or Tortoise?
e. From GNI to GNDI: Accounting for Transfers of Income
3. Balance of Payments
a. Accounting for Asset Transactions: The Financial Account
b. Accounting for Asset Transactions: The Capital Account
c. Accounting for Home and Foreign Assets
4. External Wealth
a. The Level of External Wealth
5. Conclusions
a. Side Bar: Beware of Greeks Bearing Statistics
Lecture Notes
In the next three chapters, we shift our focus to economic transactions between countries
that involve the trade of goods and services and the exchange of assets.
The measurement of aggregate variables is a key component of macroeconomic
analysis. In the closed economy, we focus on the behavior of components of spending:
consumption, investment, and government purchases. In an open economy, the flow of
goods, services, and assets has implications for key macroeconomic variables such as
GDP. For example, is a trade deficit a bad thing? Is it a sign of an imbalance in the
1 Measuring Macroeconomic Activity: An Overview
This chapter relies on accounting principles used to track flows of income, spending, and
production in both closed and open economies. These flows are modeled with the circular
The Flow of Payments in a Closed Economy: Introducing the National Income and
Product Accounts
Figure 16-1 in the text shows the circular flow for a closed economy. Gross national
expenditure (GNE) represents the economy’s total spending on final goods and services.
It can be divided into three components:
■ Personal consumption expenditures (consumption) are the total spending by
households on final goods and services.
Note that GNE is equal to total spending on final goods and services. Firms also sell
intermediate goods and services, which are used in the production of final goods and
services. Firms use the revenues collected from selling both final and intermediate goods
and services in two ways:
■ payments for intermediate goods and services
■ income payments for factors of production, such as wages and salaries to labor,
dividends and interest to capital, and rent to landowners
In the closed economy, spending must be equal to production, or GNE = GDP. The
value added is paid as income to factors of production, such as households, government,
The Flow of Payments in an Open Economy: Incorporating the Balance of
Payments Accounts
A nation’s BOP account records international transactions in the open economy. In this
case, the three key variables defined previously—GNE, GDP, and GNI—need not be
equal. Figure 16-2 shows the circular flow for an open economy with the BOP. The key
equations covered later in the chapter are shown in the following.
There are five key points in Figure 16-2 that highlight the nature of international
transactions.
1. GNE + TB = GDP TB = EX − IM
2. GDP + NFIA = GNI NFIA = EXFS − IMFS
Factors of production may be imported from abroad; factor services may be
3. GNI + NUT = GNDI NUT = UTIN − UTOUT
The country’s available (retained) income may differ from its income earned
because of unilateral transfers to (UTOUT) and from abroad (UTIN). The net
4. FA = EXA − IMA
We observe that the economy can increase or decrease the resources available for
5. KA = KAIN − KAOUT
6. GNDI + FA + KA = GNE
From studying the circular flows, we learn two important lessons. First, all transactions
within the domestic economy are recorded in the NIP accounts, with the net international
transactions affecting a nation’s expenditure, production, and income. The flows into and
out of the country are recorded on the BOP.
2 National Accounts: Product, Expenditure, and Income
This section reviews NIP accounts, highlighting the distinctions among expenditure,
production, and income that are important in the open economy.
Three Approaches to Measuring Economic Activity
There are three approaches to measuring economic activity:
■ Expenditure approach: GNE
Demand for final goods and services
GNE = total expenditure on all final goods and services
■ Product approach: GDP
From GNE to GDP: Accounting for Trade in Goods and Services
Recall that the GNE is the sum of personal consumption expenditures (C), gross private
domestic investment (I), and government consumption expenditures and gross investment
(G):
GNE measures domestic spending. But that includes spending on products produced in
other countries that are not part of domestic production. Because GDP measures
exports (again, including both final and intermediate products).
This expression is the GDP identity: GDP is equal to the GNE plus the TB.
The trade balance is also known as net exports. It can be either positive or negative:
From GDP to GNI: Accounting for Trade in Factor Services
Trade in factor services occurs when one country is paid income by another in
compensation for labor, capital, and land. A country exports factor services and receives
factor income in return. Factor income includes payments for labor services (wages and
salaries), payments on income from assets (dividends or interest), and payments for use
of land (rent). Foreign direct investment (FDI) is an example of trade in capital services.
When a firm builds or purchases a physical asset in another country, it is engaging in
FDI. That investment will produce future income for the firm in its home country. FDI is
APPLICATION
Celtic Tiger or Tortoise?
Trade in factor services can explain differences between a country’s GNI and its GDP:
GNI = GDP + NFIA
In the early 1970s, Ireland was one of the poorer countries in Europe. Between 1980 and
2007, its real GDP per person grew at 4.1% per year, an exceptional growth rate
This highlights why GDP may be a misleading measure of economic performance.
The Irish outflow of net factor payments demonstrates how countries that rely heavily on
factor services from abroad can achieve a growth in GDP that is not coupled with a
From GNI to GNDI: Accounting for Transfers of Income
International nonmarket transactions affect the income available for spending in the
economy (Y). Foreign aid, charitable gifts, and income remittances by individuals are
recorded as transfers on the BOP.
Y = GNDI = GNI + NUT From here on, we will use GNDI as our measure of national
income (Y). This corresponds to the resources available to households, firms, and the
What the National Economic Aggregates Tell Us
We arrive at three key expressions for the open economy from the derivations given
previously:
GDP = GNE + TB
Combining these, we see that
Y = GNDI = GNE + TB + NFIA + NUT
This expression shows how international transactions affect the NIP accounts. We can
H E A D L I N E S
Are Rich Countries “Stingy” with Foreign Aid?
Background:
Following the December 26, 2004, tsunami, United Nations Undersecretary for
Humanitarian Affairs and Emergency Relief Jan Egeland stated, “It is beyond me why we
are so stingy.” This was in response to the relatively low assistance given, especially
from the United States, which fell below the United Nation’s goal of 0.7% of GNI.
Key Findings:
■ In 2003, the United States gave double the aid of the second largest donor, Japan.
■ In per person terms, the United States is at the bottom of the list, officially
Understanding the Data for the National Economic Aggregates
This section explains the NIP accounts for the United States in 2009. (All figures are in
billions of dollars.) The important data are:
■ TB = –$392; GNE > GDP; expenditure > production
Some Recent Trends Figure 16-5 shows the shares of GNE: consumption (68.9%),
government consumption (20.0%), and investment (11.1%). Investment tends to fluctuate
more than the other two components. Figure 16-6 shows the current account (CA) over
What the Current Account Tells Us
Note that national income can be expressed as
This is the national income identity: national income is equal to expenditure plus the
current account. From this expression, we see that
■ GNDI > GNE if and only if CA > 0—current account surplus
This expression is the current account identity. The current account is equal to the
difference between national saving and investment.
■ S > I if and only if CA > 0—current account surplus
APPLICATION
Global Imbalances
We can use the previous expressions to understand the sources of global imbalances—
large current account deficits and surpluses.
From Figure 16-7, we observe the following:
■ Saving and investment have declined steadily in the United States, Japan, and the
euro area. There are two exceptions to this generalization. First, until 2006, U.S.
investment remained around 20% of GDP. The recession that began in 2008
caused a precipitous decline in investment in all three regions. Second, both
saving and investment in other industrial countries have increased fairly steadily
since 1990.
■ U.S. investment demand increased dramatically until 2006, the result of a long
economic expansion.
■ Savings has declined partially because of the increasing fraction of the population
that is older, with their tendency to spend more than their income.
To understand the trends in national saving, we can disaggregate saving between
private saving and government saving. Private saving is equal to disposable income less
consumption:
Government saving is also known as the government budget. It is equal to taxes less
government consumption:
Sg = T − G
CA = SP + Sg − I
It is not clear that budget deficits cause current account deficits. Why not?
■ Private savings may change when the government changes taxes (e.g., tax rates).
Suppose tax rates decrease, causing a decrease in government saving. According
■ The current account may move independently of saving, namely because of
changes in investment. Figures 16-7 and 16-8 illustrate that the current account
does not necessarily follow movements in saving.
All else equal, a budget deficit will be associated with a current account deficit. From
Figure 16-9, we observe:
■ Emerging markets and oil producers began running current account surpluses in
the 1990s.
Note that the current account for the world must be equal to zero. If one country has a
current account deficit, this implies another must have a surplus. In other words, total
exports by all countries in the world must equal total imports.
3 Balance of Payments
The balance of payments accounts keep records of international transactions involving
Accounting for Asset Transactions: The Financial Account
The financial account (FA) records transactions involving financial assets between
residents and nonresidents.
EXA: Export of assets refers to the total value of financial assets received by the rest of
the world from the home country.
FA = EXA − IMA
■ FA < 0: country imported more assets than it exported; country accumulates
Accounting for Asset Transactions: The Capital Account The capital account (KA) is
relatively small, accounting for:
■ the acquisition or disposal of nonfinancial, nonproduced assets (patents,
KA = KAIN − KAOUT
■ KA < 0: country gave more transfers than it received.
Accounting for Home and Foreign Assets
We study financial asset transactions now in more detail to understand the role of the
asset issuer and the asset owner.
FA = EXA − IMA
Note that the previous expressions reveal flows of assets into and out of the home
country:
(EXHA − IMHA) = Net export of home assets = Net additions to external liabilities (home
How the Balance of Payments Accounts Work: A Macroeconomic View
We can derive the relationship among these accounts by using the identities developed in
the preceding section.
Y = GNDI = GNE + TB + NFIA + NUT = GNE + CA
To account for all resources available, we first calculate the resources available from
the exchange of assets:
