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Questions and Answers
What is the formula for calculating Net Investment?
What is the formula for calculating Net Investment?
Which type of consumption refers to inputs used in production?
Which type of consumption refers to inputs used in production?
How is Net Exports calculated?
How is Net Exports calculated?
What is included in the Income Approach for measuring GDP?
What is included in the Income Approach for measuring GDP?
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What does Absorption (A) represent in macroeconomic terms?
What does Absorption (A) represent in macroeconomic terms?
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What does CIF stand for in the context of international shipping?
What does CIF stand for in the context of international shipping?
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What is the primary responsibility of the buyer when goods are shipped on an FOB basis?
What is the primary responsibility of the buyer when goods are shipped on an FOB basis?
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Which section of the Balance of Payments (BOP) includes exports and imports of goods and services?
Which section of the Balance of Payments (BOP) includes exports and imports of goods and services?
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What type of investment is categorized under Direct Investment in the Financial Account?
What type of investment is categorized under Direct Investment in the Financial Account?
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Which of the following components is NOT part of the Current Account?
Which of the following components is NOT part of the Current Account?
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What does the Capital Account typically involve?
What does the Capital Account typically involve?
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Which component of the Balance of Payments reflects net errors and omissions?
Which component of the Balance of Payments reflects net errors and omissions?
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Which currency is most commonly used as a stable foreign currency for transactions?
Which currency is most commonly used as a stable foreign currency for transactions?
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What does the Current Account Balance (CAB) include?
What does the Current Account Balance (CAB) include?
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Which of the following components contributes to the financial account?
Which of the following components contributes to the financial account?
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What are net errors and omissions used for in the Balance of Payments?
What are net errors and omissions used for in the Balance of Payments?
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In which section of the Balance of Payments would you find 'exports of goods'?
In which section of the Balance of Payments would you find 'exports of goods'?
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Which of the following best describes the capital account in the Balance of Payments?
Which of the following best describes the capital account in the Balance of Payments?
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Which of the following is NOT included in official international reserves?
Which of the following is NOT included in official international reserves?
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What is the formula for Gross National Income (GNI)?
What is the formula for Gross National Income (GNI)?
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Which of the following correctly represents the relationship between Gross National Disposable Income (GNDI) and the current account balance (CAB)?
Which of the following correctly represents the relationship between Gross National Disposable Income (GNDI) and the current account balance (CAB)?
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What do financial derivatives in the financial account primarily represent?
What do financial derivatives in the financial account primarily represent?
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What does the GDP deflator particularly measure?
What does the GDP deflator particularly measure?
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Which component falls under the primary income section of the current account?
Which component falls under the primary income section of the current account?
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Which of the following measures of inflation includes only domestically produced goods?
Which of the following measures of inflation includes only domestically produced goods?
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Which formula correctly represents the savings relationship given GNDI?
Which formula correctly represents the savings relationship given GNDI?
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How often should transactions in the Balance of Payments records be valued?
How often should transactions in the Balance of Payments records be valued?
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Which of these is NOT a measure of inflation?
Which of these is NOT a measure of inflation?
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What does the Gross National Saving (S) represent?
What does the Gross National Saving (S) represent?
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What does a positive figure indicate in the context of transactions above the Overall Balance?
What does a positive figure indicate in the context of transactions above the Overall Balance?
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What represents a deficit in the context of the Overall Balance?
What represents a deficit in the context of the Overall Balance?
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Which of the following formulas represents the Current Account Balance?
Which of the following formulas represents the Current Account Balance?
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In terms of reserves and related items, what does a positive movement indicate?
In terms of reserves and related items, what does a positive movement indicate?
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Which term describes the balance between what is saved and what is invested in an economy?
Which term describes the balance between what is saved and what is invested in an economy?
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What does the equation $S - I = (X - M + BPI + BSI)$ imply?
What does the equation $S - I = (X - M + BPI + BSI)$ imply?
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What aspect is indicated by negative values for transactions below the Overall Balance?
What aspect is indicated by negative values for transactions below the Overall Balance?
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If the Saving-Investment Gap (S-I) is greater than 0, what does this imply?
If the Saving-Investment Gap (S-I) is greater than 0, what does this imply?
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What does BPI represent in the context of national accounts?
What does BPI represent in the context of national accounts?
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What does a surplus in the Overall Balance indicate?
What does a surplus in the Overall Balance indicate?
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Study Notes
The System of National Accounts (SNA)
- The SNA is an accounting framework for macroeconomic data that provides financial data for analyzing, evaluating, and monitoring a country's economic performance.
- Gross output refers to the value of all goods and services produced by an economy
- Value added (VA) is the value derived from gross output after subtracting the value of intermediate consumption
- Consumption is divided into:
- Intermediate Consumption (inputs in production)
- Final Consumption (goods and services consumed by households and government sectors).
Gross Investment and Depreciation
- Gross investment represents the increase in the physical capital stock of an economy
- Depreciation is used to distinguish net investment from gross investment
- Net investment (Gross investment - Depreciation) provides a more accurate measure of the addition to production capacity compared to gross investment
Absorption
- Gross Domestic Product (GDP) can also be measured based on the value of absorption
- Absorption is the domestic aggregate demand and is calculated by adding consumption and investment (A = C + I)
- GDP is derived from adding both absorption (A) and net exports (X-M): GDP = A + (X – M)
Alternative Approaches to Measuring GDP
- GDP can be measured using three approaches:
- Production Approach (sum of value added across all sectors of the economy + (taxes – subsidies on products))
- Income Approach (compensation of employees + rent + interest + profits + (taxes – subsidies on products))
- Expenditure Approach (C + I + (X-M) = A + (X-M))
Other Macro Aggregates
- Gross National Income (GNI, formerly called Gross National Product, GNP): GNI = GDP + Net factor income from abroad
- Gross National Disposable Income (GNDI): GNDI = GNI + Net current transfers from abroad
- Gross National Saving (S): S = GNDI – C
Basic Accounting Relationship - Absorption, Income, and Current Account Balance
- GNDI is equal to absorption plus the Current Account Balance (CAB)
- GNDI – A = CAB
Basic Accounting Relationship - Saving, Investment and Current Account
- The current account balance (CAB) is equal to saving (S) minus investment (I)
- GNDI – C – I = CAB
- S–I = CAB
Real vs Nominal Magnitudes - Current vs Constant Prices
- Nominal GDP measures the value of the output of the economy at current prices
- Real GDP measures the value of the output of the economy using the prices of a fixed base year to eliminate inflation and offer a more accurate comparison across years
Measuring Inflation
- Inflation is a sustained and persistent increase in an economy's overall price level
- Inflation can be measured using:
- Consumer Prices Index (CPI)
- GDP Deflator
- Wholesale Price Index
- The three measures differ in:
- The types of goods and services covered
- The GDP deflator includes only domestically produced goods
- The prices of goods are aggregated differently
Balance of Payments
- The Balance of Payments (BoP) records the flows of foreign funds in and out of an economy
- The accounts are based on the residency of the economic agents involved in the transactions
- Transactions are recorded over specific period of time (year, quarter)
- Transactions are valued using market prices
- The BoP is recorded using a f.o.b. (free on board) basis for both exports and imports
Balance of Payments (BoP) components
- BoP is divided into:
- Current Account: (surplus/deficit)
- Exports of Goods and Services
- Imports of Goods and Services
- Primary Income (net)
- Secondary Income (net)
- Official
- Private
- Capital Account (surplus/deficit)
- Financial Account
- Direct Investment
- Portfolio Investments
- Financial Derivatives
- Other Investments
- Net Errors and Omissions
- Overall BOP Balance (surplus/deficit)
- Change in Reserve Assets (increase/reduction)
- Current Account: (surplus/deficit)
Current Account
- The current account tracks the flow of goods, services, and income between a country and the rest of the world.
- If a country has a surplus in its current account, it means that it has earned more income from its exports than it has paid out for its imports.
- Examples of current account transactions include:
- Exports of goods and services (e.g., selling cars, tourism services)
- Imports of goods and services (e.g., buying oil, importing cars)
- Investment income (e.g., dividends, interest earned on foreign investments)
- Transfers (e.g., remittances from migrants)
Capital and Financial Account
- The Capital Account (typically small) records transfers related to capital and the acquisition/disposal of non-produced non-financial assets. Examples include, transfers related to investment and sale of fixed assets (e.g., selling land to embassies).
- The Financial Account records the transactions related to:
- Direct Investment (e.g., Foreign Direct Investment (FDI))
- Portfolio Investment (e.g., buying/selling of marketable debt (bonds) and equity shares).
- Other Investments (e.g., Loans, Derivatives)
Official International Reserves and Changes in Reserve Assets
- Official International Reserves are a country's holdings of foreign currencies, gold, Special Drawing Rights, and IMF reserves.
- Changes, hence flows, refer to the increase or reduction in the quantity of these assets controlled by the government.
Balance of Payments financing constraint
- The financing constraint exists due to the fundamental connection between the current account balance (CAB) and the change in a nation's overall reserve assets.
- The BoP constraint states that a country can only finance a current account deficit by drawing down its reserves or by borrowing from abroad.
Saving-Investment Perspective
- The Current Account Balance (CAB) is equivalent to the difference between saving (S) and investment (I), known as the Saving-Investment Gap.
- S - I = CAB
- This implies that a country with a current account surplus (CAB > 0) is saving more than it is investing, while a country with a current account deficit (CAB < 0) is investing more than it is saving.
Saving-Investment Gap Consequence
- A positive Saving-Investment Gap (S - I > 0) means that a country is saving more than it is investing, therefore, it is lending money to the rest of the world.
- A zero Saving-Investment Gap (S - I = 0) means that a country is saving and investing at the same rate.
- A negative Saving-Investment Gap (S - I < 0) means that a country is investing more than it is saving, therefore, it is borrowing money from the rest of the world.
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Description
Test your knowledge on the System of National Accounts (SNA) and its components, including gross output, value added, and consumption. Understand the impact of gross investment and depreciation on economic performance and measure GDP accurately. This quiz will enhance your understanding of macroeconomic data analysis.
