Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
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
b. The Flow of Payments in an Open Economy: Incorporating the Balance of
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
f. What the National Economic Aggregates Tell Us
g. Headlines: Are Rich Countries “Stingy” with Foreign Aid?
3. Balance of Payments
a. Accounting for Asset Transactions: The Financial Account
b. Accounting for Asset Transactions: The Capital Account
d. How the Balance of Payments Accounts Work: A Macroeconomic View
g. Understanding the Data for the Balance of Payments Account
i. The Statistical Discrepancy
h. What the Balance of Payments Account Tells Us
4. External Wealth
a. The Level of External Wealth
b. Changes in External Wealth
c. Understanding the Data on External Wealth
d. What External Wealth Tells Us
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
domestic economy? What can policy makers do to address it? Should they?
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
flow of income, spending, and production. Economic activity is measured using the
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.
■ Gross private domestic investment (investment) is the total spending by firms and
In the closed economy, total spending (GNE) must be equal to the supply of goods and
services in the market.
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
In the closed economy, spending must be equal to production, or GNE = GDP. The
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
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
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
The circular flow is completed by adding financial and capital account balances to
Second, circular flow identities still hold in the open economy. The transactions from
2 National Accounts: Product, Expenditure, and Income
This section reviews NIP accounts, highlighting the distinctions among expenditure,
Three Approaches to Measuring Economic Activity
There are three approaches to measuring economic activity:
■ Expenditure approach: GNE
Demand for final goods and services
■ Product approach: GDP
Supply of goods and services
produced
■ Income approach: GNI, GNDI
Payments to factors of production
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 = C + I + G
GNE measures domestic spending. But that includes spending on products produced in
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:
■ TB > 0: trade surplus
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
not the same as portfolio investment, the purchases of financial assets solely for purposes
of obtaining income or capital gains. The specific difference is that FDI intends to control
the enterprise, whereas portfolio investment is made with no intention of control.
By definition, GDP is paid as income to all factors:
GNI is income earned by domestic factors of production:
Based on the previous definitions:
This is the GNI identity: income receipts less income payments are equal to the
country’s NFIA.
APPLICATION
Celtic Tiger or Tortoise?
Trade in factor services can explain differences between a country’s GNI and its GDP:
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
compared with that of other rich countries in the European Union.
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
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
Y = GNDI = GNI + NUT From here on, we will use GNDI as our measure of national
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
This expression shows how international transactions affect the NIP accounts. We can
see that in the closed economy, TB + NFIA + NUT = 0, so GNDI = GNI = GDP = GNE.
In more detail,
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:
■ Private donations in the United States are relatively high (they account for 60% of
■ According to the article, other aid is not counted in these UN numbers:
Lessons:
■ The true aid granted by the United States may be understated when measured
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
Y = C + I + G + CA
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.
■ 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
■ The U.S. has experienced persistent current account deficits since 1990, resulting
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:
SP = Y − T − C
From Figure 16-8, we observe that private saving in the United States is low relative
to the other countries under study. Japan’s savings rate is high, although it has declined
Government saving is also known as the government budget. It is equal to taxes less
government consumption:
Sg = T − G
■ Sg > 0—budget surplus
SP + Sg = (Y − T − C) + (T − G) = Y − C − G = S
The previous expressions show the possibility of “twin deficits”—a current account
deficit associated with a government budget deficit. Combing the expression above with
the current account identity gives us
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
■ Industrialized countries have run current account deficits since the late 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.
IMA: Import of assets refers to the total value of financial assets received from the rest
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,
copyrights, franchises)
■ capital transfers (debt forgiveness, gifts of assets)
KA = KAIN − KAOUT
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.
An external asset is a foreign asset owned by a home country resident. It represents
FA = EXA − IMA
Note that the previous expressions reveal flows of assets into and out of the home
country:
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.
The previous expression represents the resources available from income. The home
country can save up or borrow additional resources through the exchange of external
assets and external liabilities.
To account for all resources available, we first calculate the resources available from
the exchange of assets:
