International Economics: National Income & Balance

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Questions and Answers

What effect do unilateral transfers have on national income?

Unilateral transfers can increase national income by providing additional funds, such as foreign aid or expatriate worker remittances.

How is GDP calculated in relation to GNP?

GDP is calculated as GDP = GNP - payments from foreign countries for factors of production + payments to foreign countries for factors of production.

Explain the components of the national income identity for an open economy.

The components are consumption (C), investment (I), government spending (G), exports (EX), and imports (IM).

What does it indicate when a country has a current account surplus?

A current account surplus indicates that the country exports more than it imports, leading to an increase in income and net foreign wealth. Signup and view all the answers

What is the relationship between domestic expenditure and production in terms of trade balance?

When domestic production exceeds expenditure, it usually results in exports being greater than imports, leading to a positive trade balance. Signup and view all the answers

What is national income and how is it calculated?

National income is the income earned by a nation's factors of production, calculated by the total value of production and expenditure. Signup and view all the answers

Define Gross National Product (GNP) and its significance.

GNP is the value of all final goods and services produced by a nation's factors of production in a specified time period, indicating the economic performance of national production. Signup and view all the answers

List the four main components used to calculate GNP.

The four components are consumption, investment, government purchases, and the current account balance. Signup and view all the answers

How does the current account balance affect GNP?

The current account balance affects GNP by accounting for net expenditure by foreigners on domestic goods and services, reflecting trade performance. Signup and view all the answers

What adjustments are made to GNP to derive a more precise measure of national income?

National income is derived from GNP by subtracting depreciation of physical capital. Signup and view all the answers

Explain the role of factors of production in calculating GNP.

Factors of production such as labor, capital, and natural resources contribute to the value of final goods and services included in GNP. Signup and view all the answers

What does the term 'expenditure by domestic consumers' refer to in the context of GNP?

'Expenditure by domestic consumers' refers to the total spending on final goods and services by individuals and households within the nation. Signup and view all the answers

How do government purchases factor into the GNP calculation?

Government purchases account for the total expenditure by governments on goods and services, impacting overall GNP. Signup and view all the answers

How do unilateral transfers impact the economic status of expatriate workers?

Unilateral transfers increase the national income of the expatriate workers' home countries by adding to their income when they send money back home. Signup and view all the answers

What is the relationship between GDP and exports in the context of an open economy?

In an open economy, GDP increases when exports exceed imports, as the country earns more income from its exports. Signup and view all the answers

What does a negative current account balance signify about a country’s trade?

A negative current account balance indicates that the country imports more than it exports, resulting in a trade deficit. Signup and view all the answers

Why is it important to adjust GNP to obtain GDP?

Adjusting GNP to obtain GDP is important to account for payments to and from foreign countries for factors of production, reflecting domestic production accurately. Signup and view all the answers

How do government expenditures contribute to the national income identity?

Government expenditures are a component of total domestic spending, contributing directly to the calculation of national income through the identity Y = C + I + G + EX − IM. Signup and view all the answers

What constitutes the value of national income according to the national income accounts?

National income is the value of production that results from the income earned by factors of production, which equates to buyers' expenditures. Signup and view all the answers

How does Gross National Product (GNP) differ from Gross Domestic Product (GDP)?

GNP measures the value of all final goods and services produced by a nation's factors of production, regardless of location, while GDP focuses on the production within a country's borders. Signup and view all the answers

What are the four major components used to calculate GNP?

The four components are Consumption, Investment, Government purchases, and the Current account balance. Signup and view all the answers

Why is depreciation subtracted from GNP when calculating a more precise measure of national income?

Depreciation represents the loss of income to capital owners, and subtracting it accounts for the reduction in value of physical capital over time. Signup and view all the answers

In terms of GNP, what role does the current account balance signify?

The current account balance indicates net expenditure by foreigners on domestic goods and services, affecting overall national income. Signup and view all the answers

How does investment by firms contribute to GNP calculation?

Investment by firms on buildings and equipment is included as a component of GNP, reflecting their expenditure on capital goods. Signup and view all the answers

What is the relationship between consumer expenditure and national income?

Consumer expenditure directly influences national income, as it represents spending that drives production and income for sellers. Signup and view all the answers

How are natural resources classified in relation to factors of production in GNP?

Natural resources are classified as one of the factors of production that contribute to the total value calculated in GNP. Signup and view all the answers

Study Notes

International Economics - National Income and the Balance of Payments

National income is the value of all goods and services produced within a country.
National income results from production and expenditure.
Producers earn income from buyers' spending; buyers' expenditure equals sellers' income, equal to production value.
National income often defined as income earned by a country's production factors.
Gross national product (GNP) is the value of all final goods and services produced by a country's factors of production in a given time period.
Factors of production are workers (labor), physical capital (buildings, equipment), natural resources, etc.
GNP accounts for the value of final goods and services produced by domestically-owned factors.
GNP calculation sums expenditure on final goods and services produced in 4 categories: Consumption, Investment, Government Purchases, and Current Account balance (exports minus imports).
Visual representation of U.S. GNP components (2016 Q1) shows their breakdown into Consumption, Investment, Government Purchases, and Current Account
GNP adjusted for depreciation (loss of income to capital owners) and unilateral transfers (payments across countries like foreign aid.)
Gross domestic product (GDP) is another measure of national income. GDP measures final value of goods and services produced within a country.
GDP = GNP - payments from foreign countries + payments to foreign countries

National Income Accounting for an Open Economy

National income identity for an open economy: Y = C + I + G + EX – IM (Y is national income, C is consumption, I is investment, G is government spending, EX is exports, IM is imports).
Y = C + I + G + CA (where CA = current account; net expenditure by foreign individuals and institutions).
When production exceeds domestic expenditure (exports > imports), the current account is positive, and foreign wealth increases.
When production is less than domestic expenditure (imports > exports), the current account is negative, and foreign wealth decreases.

Saving and the Current Account

National saving (S) is national income (Y) not spent on consumption (C) or government purchases (G): S = Y - C - G
Open economies can save by building up capital or acquiring foreign wealth, where S = I + CA.

Private and Government Saving

Private saving (SP) is the part of disposable income (Y - T) that's not consumed: SP = Y - T - C.
Government saving (S^g) is net tax revenue (T) minus government purchases (G): S^g = T - G.
National saving (S) = private saving (SP) + government saving (S^g)

The U.S. Current Account and Net International Investment Position (1976-2015)

A graph shows the U.S. current account and net foreign wealth from 1976-2015.
The graph illustrates a string of current account deficits starting in the early 1980s, leading to a substantial net foreign debt accumulation by the early 21st century.

Balance of Payments Accounts

A country's balance of payments accounts track payments to, and receipts from, foreign countries.
International transactions are entered twice: as a credit (+) and a debit (-).
The balance of payments accounts are categorized into current account, financial account, and capital account.

Current Account

Includes flows of goods and services like exports and imports.
Further broken into merchandise flows, services flows, and income receipts.

Financial Account

Records flows of financial assets between countries (foreign and domestic).
Records both inflows and outflows.

Capital Account

Includes special categories of assets, typically nonmarket, non-produced, or intangible assets. The capital account is a minor account in the US. It also includes net unilateral transfers (gifts between countries).

Examples of Balance of Payments Accounting

Detailed examples of international transactions, such as importing a fax machine, buying lunch, or buying a share of a company, and how these transactions are recorded in each account.

How Balance of Payments Accounts Balance

The accounts balance based on a double entry principle.
Current account + financial account + capital account = 0.

Balance of Payments Accounts (more detail)

Current account subcategories: merchandise trade, services (travel, shipping, financial, etcetera), and income.
Capital account, records gifts and transfers between countries (usually a minor account).
Financial account, details purchases and sales of assets like financial assets or reserve assets.

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Description

Explore the key concepts of national income and balance of payments in this quiz on International Economics. Understand how national income is measured and the significance of Gross National Product (GNP) in economic analysis. Test your knowledge on production factors, expenditure categories, and their impact on a country's economy.