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Macroeconomic Accounting

Macroeconomic Accounting. Selcuk Caner B i lkent Un i vers i ty. Outline. Flow of Funds Current Account Capital Account Macroeconomic Consistency Framework. Flow of Funds. Consider an economy consisting of The government, Private sector, External sector

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Macroeconomic Accounting

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  1. Macroeconomic Accounting Selcuk Caner Bilkent University

  2. Outline • Flow of Funds • Current Account • Capital Account • Macroeconomic Consistency Framework

  3. Flow of Funds • Consider an economy consisting of • The government, • Private sector, • External sector • Monetary system (central bank and commercial banks)

  4. Income = Wages and Salaries + Operating surplus + Income of self-employed + imputed value of household production + property income (interest, dividend, royalties, rent, patents, rights) • Value of services by financial institutions included in GDP. • Service charges • Difference between income received on loans and interest/claims paid on deposits.

  5. Basic Relationships in an Economy? • Production and income (+ transfers) • Income and Expenditures • Savings and Asset Acquisition • Income and transfers = Used for financing expenditures = S + Exp.

  6. Current Accounts • Current domestic product (expenditures at market prices) = Ymp = Cg + Cp + X – Z + I • Ymp + Z = (T – Sb)+ OSg + (W+p) + Z + I Imports Operating Surplus of Other Enterprises (Taxes – Subsidies) Operating Surplus of Gov. Enterprises

  7. Current Accounts • Total Government Current Use (Expenditure) • CEXPg = Cg + NTRCgp + INTg + INTe + Sg • Total Government Income • Yg = (T – Sb)+ OSg + Td + NTReg • Household Expenditure (Private sector) • CEXPp = Cp +Td + INTpe + S • Household Income (Private sector) • Yp = W + p + ps+ NTRgp + INTgp + NTRep + NFPep Property income included in operating surplus of producing units

  8. Current Accounts • Current Account Balance • Total Current Foreign Exchange Receipts = X + NTReg + NTRep + NFPep + CA (or Se) • Total Sources of Income Accruing to Foreign Residents = INTge + INTpe + Z => X + NTReg + NTRep + NFPep + CA = INTge + INTpe + Z

  9. Capital Accounts • Financing of the acquisition of assets by the government, private sector and the external sector through the monetary system • Government expenditure on asset acquisition = Ig • Gross fixed assets • Inventories and working capital • Acquisition of financial and foreign assets • Financing by government (Government savings + D in gov. borrowing) = Sg + DDCg + DNPBg + DNFBg New borrowing from monetary system Foreign borrowing New direct borrowing from private sector

  10. Capital Accounts • Monetary system • Acquisition of new liabilities = DM • (I.e., new currency issues, demand deposits, other liabilities such as T-bills) • Acquired assets • DM = + DDCg + DDCp + DR • Private sector • Change in assets of private sector DASp = Ip+DNPBg + DM Net lending to government

  11. Financing private sector assets (private sector savings + D in borrowing) = Sp + DDCp + DNFBp • External Sector • Change in foreign borrowing DNFB = DNPBg + DNPBp • Savings of Foreign Residents (CA) and Net Accumulation of Foreign Assets • = CA + DR => Borrowing from foreigners Borrowing from monetary system S+CA = I DNFB = CA+ DR

  12. Macroeconomic Consistency Framework • Government Savings • Sg + DDCg + DNPBg + DNFBg = Ig • Private Sector Savings Ip+DNPBg + DM = Sp + DDCp + DNFBp • Foreign Savings • CA + DR = DNPBg + DNPBp • Or • CA = DNPBg + DNPBp - DR So difficult to keep track Foreign borrowing by: gov. departments, monetary system, directly by private sector

  13. GDP • Ymp = Cg + Cp + X – Z + Ip + Ig Ymp – (C + I) = (X – Z) (Ymp – C) - I = (X – Z) CA = I – S and CA = I - (Ymp – C) Trade gap Savings gap

  14. Government Budget Constraint • Yg = (T – Sb)+ OSg + Td + NTReg Rewrite as • Yg = CEXPg + Ig – (DDCg + DNPBg + DNFBg) So, Budget Deficit is Financed as Yg - CEXPg - Ig = – (DDCg + DNPBg + DNFBg) Budget deficit If this is limited then crowding out can occur So, IMF programs have restrictions on credit to fight inflation

  15. Private Sector Budget Constraint • Yp = W + p + ps+ NTRgp + INTgp + NTRep + NFPep = CEXPp + Sp • Since Sp = Ip+DNPBg + DM - DDCp - DNFBp • Substitute in the above expression for Sp and rearrange yielding Yp = CEXPp + Ip+DNPBg + DM – (DDCp + DNFBp) Yp + (DDCp + DNFBp) - CEXPp = Ip+DNPBg + DM Private sector financing of asset acquisition Private sector asset acquisition

  16. External Sector Budget Constraint X + NTReg + NTRep + NFPep + CA = INTge + INTpe + Z • Substitute DNPBg + DNPBp - DR for CA (INTge + INTpe + Z) – (X + NTReg + NTRep + NFPep) = DNPBg + DNPBp - DR Asset acquisition by foreigners A fall in this means capital flight There is an opportunity cost to holding high reserves in terms of foregone consumption and investment

  17. Assets and Liabilities of the Monetary System DM = DDCg + DDCp + DR • If DM = 0, then, DR = -DDC • That is an increase in credits are offset by a reduction in reserves.

  18. Absorption and Domestic Credit • Ymp – A = X – Z = (DNFB – INT) - DR • But since DR = DDCg + DDCp - DM • We can rewrite as (Ymp + DNFB – INT) – A = DDCg + DDCp

  19. Current Government Deficit CA • S + CA = I • Sg + (Sp – I) = - (NFBp + NFBg – DR) • Current external balance (right hand side) can only improve if government savings rise => So, is the reason for primary surplus

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