International Economics: National Income & Balance

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.

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.