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Section III overview

Section III overview. From international Micro economy to open-Macro economy About macro economy target : price, growth, employment, and balance of payments. The core property of open-Macro economic is how an economy can get the equilibrium of internal- and external

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Section III overview

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  1. Section III overview • From international Micro economy to open-Macro economy • About macro economy target : price, growth, employment, and balance of payments. • The core property of open-Macro economic is how an economy can get the equilibrium of internal- and external • What should we learn from section III?_ an integrated model of exchange rate and output determination • This section comprises of 6 chapters, namely 12-17

  2. Chapter 12 National Income Accounting and the Balance of Payments • Introduction • The National Income Accounts • National Income Accounting for an Open Economy • The Balance of Payment Accounts • Summary

  3. Introduction • Microeconomics • It studies the effective use of scarce resources from the perspective of individual firms and consumers. • Macroeconomics • It studies how economies’ overall levels of employment, production, and growth are determined. • It emphasizes four aspects of economic life: • Unemployment • Saving • Trade imbalances • Money and the price level

  4. Introduction • The national income accounts and the balance of payments accounts are essential tools for studying the macroeconomics of open, interdependent economies. • National income accounting • Records all the expenditures that contribute to a country’s income and output • Balance of payments accounting • Helps us keep track of both changes in a country’s indebtedness to foreigners and the fortunes of its export- and import-competing industries

  5. The National Income Accounts • Gross national product (GNP) • The value of all final goods and services produced by a country’s factors of production and sold on the market in a given time period • It is the basic measure of a country’s output. • Real and nominal GNP with GNP price inflator

  6. The National Income Accounts • GNP is calculated by adding up the market value of all expenditures on final output: • Consumption • The amount consumed by private domestic residents • Investment • The amount put aside by private firms to build new plant and equipment for future production • Government purchases • The amount used by the government • Current account balance • The amount of net exports of goods and services to foreigners

  7. The National Income Accounts Figure 12-1: U.S. GNP and Its Components, 2000

  8. The National Income Accounts • National Product and National Income • National Income • It is earned over a period by its factors of production. • It must equal the GNP a country generates over some period of time. • One person’s spending is another’s income (i.e., total spending must equal total income).

  9. The National Income Accounts • Capital Depreciation, International Transfers, and Indirect Business Taxes • Adjustments to the definition of GNP: • Depreciation of capital • It reduces the income of capital owners. • It must be subtracted from GNP (to get the net national product). • Net unilateral transfers of income • They are part of a country’s income but are not part of its product. • They must be added to the net national product. • Indirect business taxes • They are sales taxes. • They must be subtracted from GNP.

  10. The National Income Accounts • Gross Domestic Product (GDP) • It measures the volume of production within a country’s borders. • It equals GNP minus net receipts of factor income from the rest of the world. • It does not correct for the portion of countries’ production carried out using services provided by foreign-owned capital.

  11. National Income Accounting for an Open Economy • Consumption • The portion of GNP purchased by the private sector to fulfill current wants • Investment • The part of output used by private firms to produce future output • Government Purchases • Any goods and services purchased by federal, state, or local governments

  12. National Income Accounting for an Open Economy • The National Income Identity for an Open Economy • It is the sum of domestic and foreign expenditure on the goods and services produced by domestic factors of production: Y = C + I + G + EX – IM (12-1) where: • Y is GNP • C is consumption • I is investment • G is government purchases • EX is exports • IM is imports • In a closed economy, EX = IM = 0.The National Income Accounts

  13. National Income Accounting for an Open Economy • The Current Account and Foreign Indebtedness • Current account (CA) balance • The difference between exports of goods and services and imports of goods and services (CA = EX – IM) • A country has a CA surplus when its CA > 0. • A country has a CA deficit when its CA < 0. • CA measures the size and direction of international borrowing. • A country’s current account balance equals the change in its net foreign wealth.

  14. National Income Accounting for an Open Economy • CA balance is equal to the difference between national income and domestic residents’ spending: Y – (C+ I + G) = CA • CA balance is goods production less domestic demand. • CA balance is the excess supply of domestic financing. • Example: U.S. CA deficit P. 297

  15. National Income Accounting for an Open Economy Figure 12-2: The U.S. Current Account and Net Foreign Wealth Position, 1977-2000

  16. National Income Accounting for an Open Economy • Saving and the Current Account • National saving (S) • The portion of output, Y, that is not devoted to household consumption, C, or government purchases, G. • It always equals investment in a closed economy. • A closed economy can save only by building up its capital stock (S = I). • An open economy can save either by building up its capital stock or by acquiring foreign wealth (S = I + CA). • A country’s CA surplus is referred to as its net foreign investment.

  17. National Income Accounting for an Open Economy • Private and Government Saving • Private saving (Sp) • The part of disposable income that is saved rather than consumed Sp= I + CA – Sg = I + CA – (T – G) = I + CA + (G – T) (12-2) • T is the government's “income” (its net tax revenue) • Sgisgovernment savings (T-G) • Government budget deficit (G – T) • It measures the extent to which the government is borrowing to finance its expenditures.

  18. 1992-2000年中国国内储蓄率与总投资率的差异

  19. The Balance of Payments Accounts • A country’s balance of payments is a summary statement in which all the transactions of the residents of this country with the residents of all others are recorded during a particular period of time • Every international transaction automatically enters the balance of payments twice: once as a credit (+) and once as a debit (-)_ Double –entry • The rules of entry : Any transaction which induce the increase of foreign exchange supply and debt , the decrease of claim enters credit(+) ; Any transaction which induce the increase of demand for foreign exchange and claim, the decrease of debt enters debit(-).

  20. The Balance of Payments Accounts • Three types of international transactions are recorded in the balance of payments: • CA shows the transaction of real economy, namely: Exports or imports of goods or services, income and unilateral transfers of goods or services • Financial account shows up the international settlements and transactions of financialassets; Any transaction of international financial assets with central bank enters the international reserve account • Unilateral transfers of wealth between countries are recorded in the capital account, when they are involved in the transfers of financial assets; They are recorded in the CA, when they are involved in the transfers of goods or service

  21. The Balance of Payments Accounts • Examples of Paired Transactions • A U.S. citizen buys a $1000 typewriter from an Italian company, and the Italian company deposits the $1000 in its account at Citibank in New York. • That is, the U.S. trades assets for goods. • This transaction creates the following two offsetting entries in the U.S. balance of payments: • It enters the U.S. CA with a negative sign (-$1000). (induces the increase of demand for foreign exchange) • It shows up as a $1000 credit in the U.S. financial account. (induces the increase of debt to nonresidents)

  22. The Balance of Payments Accounts • 一中国外贸公司进口货物，价值100万美圆，货到后三个月付款 • 一旅游公司组织新、马、泰游，向对方支付10万美圆 • 我国在海啸灾害中向受灾国捐赠2亿美圆，其中1亿为物资 • 松下公司在杭州扩大投资2000万美圆，1千万为进口设备， 1千万为现金 • 我国向世界银行借款1亿美圆 • 中国银行卖给中央银行一亿美圆

  23. The Balance of Payments Accounts • A U.S. citizen buys a $95 newly issued share of stock in the United Kingdom oil giant British Petroleum (BP) by using a check drawn on his stockbroker money market account. BP deposits the $95 in its own U.S. bank account at Second Bank of Chicago. • That is, the U.S. trades assets for assets. • This transaction creates the following two offsetting entries in the U.S. balance of payments: • It enters the U.S. financial account with a negative sign (-$95). • It shows up as a $95 credit in the U.S. financial account.

  24. The Balance of Payments Accounts • The Fundamental Balance of Payments Identity • Any international transaction automatically gives rise to two offsetting entries in the balance of payments resulting in a fundamental identity: Current account + financial account + capital account = 0 (12-3)

  25. The Balance of Payments Accounts Table 12-2: U.S. Balance of Payments Accounts for 2000 (billions of dollars)

  26. The Balance of Payments Accounts Table 12-2: Continued

  27. The Balance of Payments Accounts • The Current Account, Once Again • The balance of payments accounts divide exports and imports into three categories: • Merchandise trade • Exports or imports of goods • Services • Payments for legal assistance, tourists’ expenditures, and shipping fees • Income • International interest and dividend payments and the earnings of domestically owned firms operating abroad

  28. The Balance of Payments Accounts • The Capital Account • It records asset transfers and tends to be small for the United States. • The Financial Account • It measures the difference between sales of assets to foreigners and purchases of assets located abroad. • Financial inflow (capital inflow) • A loan from the foreigners with a promise that they will be repaid • Financial outflow (capital outflow) • A transaction involving the purchase of an asset from foreigners

  29. The Balance of Payments Accounts • The Statistical Discrepancy • Data associated with a given transaction may come from different sources that differ in coverage, accuracy, and timing. • This makes the balance of payments accounts seldom balance in practice. • Account keepers force the two sides to balance by adding to the accounts a statistical discrepancy. • It is very difficult to allocate this discrepancy among the current, capital, and financial accounts.

  30. The Balance of Payments Accounts • Official Reserve Transactions • Central bank • The institution responsible for managing the supply of money • Official international reserves • Foreign assets held by central banks as a cushion against national economic misfortune • Official foreign exchange intervention • Central banks often buy or sell international reserves in private asset markets to affect macroeconomic conditions in their economies.

  31. The Balance of Payments Accounts • Official settlements balance (balance of payments) • The book-keeping offset to the balance of official reserve transactions • It is the sum of the current account balance, the capital account balance, the nonreserve portion of the financial account balance, and the statistical discrepancy. • Example: The U.S. balance of payments in 2000 was -$35.6 billion, that is, the balance of official reserve transactions with its sign reversed.balance charter.doc • A country with a negative balance of payments may signal that it is running down its international reserve assets or incurring debts to foreign monetary authorities.

  32. The Balance of Payments Accounts • Case Study: Is the United States the World’s Biggest Debtor? • At the end of 1999, the United States had a negative net foreign wealth position far greater than that of any other single country. • The United States is the world’s biggest debtor. • However, the United States has the world’s largest GNP.

  33. Summary • A country’s GNP is equal to the income received by its factors of production. • GDP is equal to GNP less net receipts of factor income from abroad, measures the output produced within a country’s territorial borders. • In a closed economy, GNP must be consumed, invested, or purchased by the government. • In an open economy, GNP equals the sum of consumption, investment, government purchases, and net exports of goods and services.

  34. Summary • The capital account records asset transfers and tends to be small in the United States. • Any current account deficit must be matched by an equal surplus in the other two accounts of the balance of payments, and any current account surplus by a deficitsomewhere else. • International asset transactions carried out by central banks are included in the financial account.

  35. Summary • All transactions between a country and the rest of the world are recorded in its balance of payments accounts. • The current account equals the country’s net lending to foreigners. • National saving equals domestic investment plus the current account. • Transactions involving goods and services appear in the current account of the balance of payments, while international sales or purchases of assets appear in the financial account.

  36. readings • 王月溪“解读中国国际收支平衡表：结构特征、形成动因、调整方向及政策建议”《管理世界》2003年4期 • 方文“对国际收支危机传染的比较研究”《世界经济》2000年6期 • 王一萱“资本项目国际收支危机与东南亚金融危机”《国际金融研究》2001年10期 • 杨柳勇“中国国际收支的超前结构：特征、形成原因、变动趋势和调整方向” 《世界经济》2002年11期

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