Chapter 13 (2)

National Income
Accounting and
the Balance
of Payments
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• National income accounts

– measures of national income
– measures of value of production
– measures of value of expenditure

• National saving, investment, and the current

account
• Balance of payments accounts

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 The National Income Accounts

• Records the value of national income that

results from production and expenditure.
– 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.

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 The National Income Accounts

• There have two types to calculate national

income:
1. Gross National Product (GNP)
2. Gross Domestic Product (GDP)

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 The National Income Accounts (cont.)

• Gross national product (GNP) - 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
domestic-owned factors of production are counted as
domestic GNP.
– E.g. : US factory open in Thailand, the income will be
counted in US GNP.

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 The National Income Accounts (cont.)

• 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

GNP = C+I+G+(X-M)

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 Fig. 13-1: U.S. GNP and Its
Components

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 The National Income Accounts
(cont.)

• In theory:
National Product (GNP) = National Income
• In reality:
National Product ≠ National Income

• How economists solve this matter?

• There must be a ways to solve this by make
adjustment in National Product (GNP).

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 The National Income Accounts
(cont.)

• The adjustments are:

1. Subtract the GNP from the Depreciation(D)
of capital.
2. Added Net Unilateral transfer(NUT) to GNP.

• Finally:
National income = GNP-D+NUT
where;
GNP-D called Net National Product (NNP)

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 The National Income Accounts (cont.)

• Gross Domestic Product (GDP):

–measures the final value of all goods and services
that are produced within a country in a given
time period.
GDP = C+I+G+(X-M)

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 Difference between GNP & GDP
Gross Domestic Product – Gross National Product –
GDP GNP

A measure of the total economy of a

What is it? Same as GDP
nation

Measuring all income earned within a

GDP, plus income from foreign sources,
country, or by measuring all
How it’s calculated less income paid to foreign citizens and
expenditures within the country, which
entities
should approximately match

It measures both the size and direction

of economic activity (growth, stagnation
Why is it important? Same as GDP
or contraction) – expansions and
recessions are based on changes in GDP

Politicians, economists, large companies

Who uses it? Same as GDP
(especially multi-nationals)

Shows the relative strength of the

nations economy compared to that of
What does it mean to me? Same as GDP
other nations; provides a base from
which to measure economic changes

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 National Income Accounting for
an Open Economy

• For closed economy:

Y =C+I+G
• For open economy:
Y = C + I + G + (EX – IM)
= C + I + G + CA

Expenditure by domestic Net expenditure by foreign

individuals and institutions individuals and institutions

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 National Income Accounting for an
Open Economy (cont.)

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 < 0
– when a country exports less than it imports, it earns less income
from exports than it spends on imports
– net foreign wealth is decreasing

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 Table 13-1: National Income Accounts for
Agraria, an Open Economy (bushels of
wheat)

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 Saving and the Current Account

• National saving (S) = national income (Y) that is

not spent on consumption (C) or government
purchases (G).

S = I (closed-economy)

S=Y–C–G

• An open economy can save by building up its

capital stock or by acquiring foreign wealth.

S = I + CA

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 Private and Government Saving

• Private saving - part of disposable income

(national income, Y, minus taxes, T) that is saved
rather than consumed:
Sp = Y - T – C
• Government saving - net tax revenue, T, minus
government purchases, G:
Sg = T - G
• Private and government saving add up to national
saving.
S = (Y – T – C) + (T – G)
S = Sp + S g

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 Private and Government Saving

• If we re-write national saving:

S=I+CA , S= Sp + Sg

Sp + Sg = I+CA
Sp = I+CA- Sg
Sp = I+CA-(T-G)
Sp = I+CA+(G-T)
• So, Sp takes 3 form such as I, CA and (G-T)

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 Fig. 13-2: The U.S. Current Account
and Net International Investment Position,
1976–2012

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 Next study:

Balance of Payments

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 Balance of Payments Accounts

• BOP records the composition of current account

(CA) and many transactions that finance it.
• BOP track both its payments to and its receipts
from foreigners.
• An international transaction involves two parties,
and each transaction enters the accounts twice:
once as a credit (+) and once as a debit (–).
• Receipts from foreigners » credit (+)
• Payments to foreigners » Debit (-)

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 Balance of Payments Accounts (cont.)

• BOP are separated into 3 broad accounts:

– current account: accounts for flows of goods
and services (imports and exports).
– financial account: accounts for flows of
financial assets (financial capital).
– capital account: flows of special categories of
assets (capital): typically nonmarket, non-
produced, or intangible assets like debt
forgiveness, copyrights and trademarks.

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 Example of Balance of Payments
Accounting

• You import a fax machine from Olivetti.

• Olivetti deposits your check in a U.S. bank.

Fax machine (current account, U.S. good import)

–$80

Bank deposit (financial account, U.S. asset sale)

+$80

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 How Do the Balance of Payments
Accounts Balance?

• Due to the double entry of each transaction, the

balance of payments accounts will balance by the
following equation:

current account +
financial account +
capital account = 0

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Table 13-2:
U.S. Balance
of Payments
Accounts for
2012 (billions
of dollars)

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 Summary

1. A country’s GNP is roughly equal to the income received by

its factors of production.
2. In an open economy, GNP equals the sum of consumption,
investment, government purchases, and the current
account.
3. GDP is equal to GNP minus net income from foreign
countries for factors of production. It measures the value of
output produced within a country’s borders.

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 Summary (cont.)

4. National saving minus domestic investment equals the

current account (≈ exports minus imports).
5. The current account equals the country’ s net foreign
investment (net outflows of financial assets).
6. The balance of payments accounts records flows of
goods & services and flows of financial assets across
countries.
– It has 3 parts: current account, capital account, and
financial account, which balance each other.
– Transactions of goods and services appear in the current
account; transactions of financial assets appear in the
financial account.

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 Summary (cont.)

7. Official international reserve assets are a component of the

financial account, which records official assets held by
central banks.
8. The official settlements balance is the negative value of
official international reserve assets, and it shows a central
bank’s holdings of foreign assets relative to foreign central
banks’ holdings of domestic assets.
9. The U.S. is the largest debtor nation, and its foreign debt
continues to grow because its current account continues to
be negative.

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 Thank you

Next topic :

Exchange Rates and the Foreign

Exchange Markets: An Asset Approach

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