National accounting in an open economy
description
Transcript of National accounting in an open economy
![Page 1: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/1.jpg)
National accounting in an open economy
Gianni VaggiApril 2014
![Page 2: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/2.jpg)
The components of GDP: closed and open economy
Closed economy
GDP (Y) is the sum of the following: Consumption (C) Investment (I) Government expenditures (G)
Y = C + I + G
Open Economy
plus Net Exports (NX) Y = C + I + G + NX
![Page 3: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/3.jpg)
Saving, Investments and Trade National saving S (private and public) is the
income of the nation that is left after paying for current consumption and government purchases:
S = Y - C - G = I + NX
S = I + NX
NX = (X – M) = Trade Balance or Balance of Goods
and services
For the moment suppose that NX is the only component of the Current Account of the BoP
![Page 4: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/4.jpg)
Saving, Investments and Trade
S – I = X – M
(Sp – Ip) + (T – G) = (X – M)
Sp private savings Ip private investments T taxes G government expenditures
![Page 5: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/5.jpg)
The Current Account Balance
In the BoP the Current account balance (CA) is the sum of three items:
Trade balance (X-M), Net income transfers (interest
payments, dividends, etc.;)= Net Primary Income = NPI
Net unilateral transfers (gifts, donations, remittances, international aid, etc.)= Net Secondary Income = NSI
![Page 6: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/6.jpg)
The Current Account Balance
CA = [(X-M) + NPI + NSI]
Sometimes(NPI + NSI) are called Net Factor Income =
NFIand NPI is called Net Incomesand NSI is called Net transfers
![Page 7: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/7.jpg)
The Financial and the Capital Account
The Financial Account , FA, has largely absorbed The Financial Account , FA, has largely absorbed what was formerly called the Capital account!!what was formerly called the Capital account!!
In the BoP CA + FA = 0Current Account Balance + Financial Account Balance = 0
Net of Changes in reserves, R. The overall balance of payments also includes movements of Official reserves, if private transactions do not match exactly. Suppose: ∆R = 0.
FA = NCF = Net Capital Flows
NCF = (Inflows – Outflows)
![Page 8: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/8.jpg)
The Current and Capital Accounts NCF can be +/- depending on CA
If CA = +10 then FA = -10 Which means: Outflows >Inflows Therefore: NCF = -10
And CA = - NCF
![Page 9: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/9.jpg)
The Equality of Current Account and Net Capital Flows
For an economy as a whole CA, and NCF must balance:
CA= [(X-M) +NPI+NSI] = FA (+/-) = NCF(+/-)
This holds true because every transaction that affects one side of the BoP must also affect the other side by the same amount.
In principle the sign of FA (+/-) depends on that of CA
![Page 10: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/10.jpg)
Saving, Investment, and International Flows
Y = C + I +G+[(X-M) + NPI + NSI]
(S – I) = [(X-M) + NPI + NSI]= CA = FA= NCF
Saving = Domestic Investment + Net Capital FlowsS = I + NCF
![Page 11: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/11.jpg)
Saving, Investment, and International Flows
Investments may be financed either by national saving (S) or by foreign saving (NCF):
I = S – NCF
Remember that in general the sign of FA (+/-) and NCF depends on the Current Account Balance, CA,…BUT… with large international flows…
![Page 12: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/12.jpg)
![Page 13: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/13.jpg)
![Page 14: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/14.jpg)
![Page 15: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/15.jpg)
National accounting in an indebted open
economy
Gianni VaggiApril 2014
![Page 16: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/16.jpg)
The national accounting in an indebted open economy
Suppose D0 = 100 to be repaid in 10 years and i = 5%,
each year:
iD interest payments = 5 ΔD principal repayment = 10
iD + ΔD = DS Debt Service
![Page 17: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/17.jpg)
![Page 18: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/18.jpg)
The national accounting in an indebted open economy
Remember: FA = NCF = Net Capital Flows = (Inflows – Outflows)
FA = [(Inflows - Other Outflows) -ΔD] = dD/dt• ΔD<0 in an indebted economy ΔD is an
outflow because debt must be repaid• dD/dt is the change of the debt stock
during the year, which depends also on inflows and other outflows in the FA.
CA = [(X-M) + (NPI – iD) + NSI]
![Page 19: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/19.jpg)
The national accounting in an indebted open economy
CA+FA = 0
Suppose an indebted economy where there are only foreign debt related flows:
(Inflows - Other Outflows) = 0
and no other item in NPI and NSI other than –iD
[(X-M) - iD] - ΔD = 0
(X-M) = iD + ΔD = DS
Take the example: DS = 5 +10 = 15
(X-M) - iD = ΔD
![Page 20: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/20.jpg)
The national accounting in an indebted open economy
IF IF the trade balance is 15 and exactly covers the debt service, thenthen the overall debt decreases by ΔD = D0 - D1 , according to the original scheduled payments or:
-ΔD = 90 -100 = -10 = -dD/dt
IF IF the trade balance is 5 and covers interests only, thenthen ΔD = 0 and the overall debt does not change:
dD/dt=0
IF IF the trade balance is less than 5 and, thenthen the overall debt increases:
dD/dt=>0
![Page 21: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/21.jpg)
The Current Account BalanceNow suppose there are other financial flows in the
CA
In the BoP the Current account balance (CA) is the sum of three items:
Trade balance (X-M) Net income transfers (interest payments,
dividends, etc.;)= Net Primary Income = NPI Net unilateral transfers (remittances,
international aid, etc.)= Net Secondary Income = NSI
![Page 22: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/22.jpg)
The national accounting in an indebted open economy
Net primary income: Net primary income: Interests on foreign debt Dividends (on portfolio investments); Earnings of FDIs, profit repatriation Rents on land and natural resources; Compensation of employees (cross-border
workers).
Net secondary income:Net secondary income:
Personal transfers (i.e. remittances); Current) International cooperation,ODA
![Page 23: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/23.jpg)
The national accounting in an indebted open economy
Consider the following flows:
-iD are outflows in NPI = -5
Compensation of employees are often included in remittances
NSI includes -remittances
-international aid , ODA
![Page 24: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/24.jpg)
The national accounting in an indebted open economy
Remember:
[(X-M) + NPI + NSI] = CA Current Account Balance
and CA + FA = 0
[(X-M) - iD + NSI] + (-ΔD) = 0
[(X-M) + NSI] = iD + ΔD = DS = 15
![Page 25: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/25.jpg)
Debt sustainability - 1 D = overall foreign debt Y = GDP gn = (dY/dt)/Y is the nominal growth rate
Thresholds d(D/Y)/dt < 0< 0
The latter: Domar 1944
![Page 26: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/26.jpg)
Debt sustainability - 2
By total differentiation of D/Y:
d(D/Y)/dt = [ (dD/dt)*Y - (dY/dt)*D ]/ Y2
= (dD/dt)Y - [ (dY/dt)/Y ] * (D/Y)
= (1/Y) [dD/dt - gn * D ]
But dD/dt = [inD - (X – M)]
![Page 27: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/27.jpg)
Debt sustainability - 3
i = (in - dp/dt) and g = (gn - dp/dt)
dp/dt inflation rate on debt
d(D/Y)/dt = (i - g)D/Y - (X - M)/Yd(D/Y)/dt = (i - g)D/Y - (X - M)/Y
i, g are the real interest rate and the GDP growth rate
d(D/Y)/dt = inD/Y - gnD/Y - (X - M)/Y
![Page 28: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/28.jpg)
Debt sustainability - 4But there are also other financial flows:Current Account (CA)= [(X-M) + NPI + NSI ]
NICA = [CA – iD] = Non-Interest Current Account
NICA = [CA – iD] = [(X-M) + NPI + NSI] - iD
NICA largely depends on the trade balance, but not only.
![Page 29: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/29.jpg)
Debt sustainability - 5
The correct sustainability formula is
d(D/Y)/dt = (i - g)D/Y - d(D/Y)/dt = (i - g)D/Y - NICANICA/Y/Y
![Page 30: National accounting in an open economy](https://reader035.fdocuments.in/reader035/viewer/2022062217/56815a93550346895dc80b0d/html5/thumbnails/30.jpg)
Debt sustainability – 6- and national public debt
NICA is the equivalent for foreign debt of the concept of Primary surplus (net of interests) for domestic(public) debt
(T – G) = Primary surplus
[(T – G) – iD] (<0) = overall Fiscal Deficit = FD
FD/Y must not exceed 3%