ECO2008 International Economics Week 11 PDF

ECO2008 International Economics National Income and the Balance of Payments Week 11 Brian Varian The National Income Accounts (1 of 5) Records the value of national income that results from production and expenditure. – Producers earn income from bu...

ECO2008 International Economics National Income and the Balance of Payments Week 11 Brian Varian The National Income Accounts (1 of 5) Records the value of national income that results from production and expenditure. – Producers earn income from buyers who spend money on goods and services. – The amount of expenditure by buyers = the amount of income for sellers = the value of production. – National income is often defined to be the income earned by a nation’s factors of production. Copyright © 2018 Pearson Education, Ltd. All rights reserved. The National Income Accounts (2 of 5) Gross national product (GNP) is the value of all final goods and services produced by a nation’s factors of production in a given time period. – What are factors of production? Factors that are used to produce goods and services: workers (labor services), physical capital (like buildings and equipment), natural resources and others. – The value of final goods and services produced by US-owned factors of production are counted as US GNP. Copyright © 2018 Pearson Education, Ltd. All rights reserved. The National Income Accounts (3 of 5) GNP is calculated by adding the value of expenditure on final goods and services produced: 1. Consumption: expenditure by domestic consumers 2. Investment: expenditure by firms on buildings & equipment 3. Government purchases: expenditure by governments on goods and services 4. Current account balance (exports minus imports): net expenditure by foreigners on domestic goods and services Copyright © 2018 Pearson Education, Ltd. All rights reserved. Figure 13.1 U.S. GNP and Its Components America’s gross national product for the first quarter of 2016 can be broken down into the four components shown. Source: U.S. Department of Commerce, Bureau of Economic Analysis. The figure shows 2016:QI GNP and its components at an annual rate, seasonally adjusted. Copyright © 2018 Pearson Education, Ltd. All rights reserved. The National Income Accounts (4 of 5) GNP is one measure of national income, but a more precise measure of national income is GNP adjusted for following: 1. Depreciation of physical capital results in a loss of income to capital owners, so the amount of depreciation is subtracted from GNP. 2. Unilateral transfers to and from other countries can change national income: payments of expatriate workers sent to their home countries, foreign aid and pension payments sent to expatriate retirees. Copyright © 2018 Pearson Education, Ltd. All rights reserved. The National Income Accounts (5 of 5) Another approximate measure of national income is gross domestic product (GDP): – Gross domestic product measures the final value of all goods and services that are produced within a country in a given time period. – GDP = GNP − payments from foreign countries for factors of production + payments to foreign countries for factors of production Copyright © 2018 Pearson Education, Ltd. All rights reserved. National Income Accounting for an Open Economy (1 of 2) The national income identity for an open economy is Y = C + I + G + EX − IM = C + I + G + CA – where C + I + G is expenditure by domestic individuals and institutions – and CA is net expenditure by foreign individuals and institutions Copyright © 2018 Pearson Education, Ltd. All rights reserved. National Income Accounting for an Open Economy (2 of 2) CA = EX − IM = Y − (C + I + G ) When production > domestic expenditure, exports > imports: current account > 0 and trade balance >0 – when a country exports more than it imports, it earns more income from exports than it spends on imports – net foreign wealth is increasing When production < domestic expenditure, exports < imports: current account < 0 and trade balance