National Income National Income Accounting & Accounting &

Balance of PaymentBalance of Payment

Review of Review of MacroeconomicsMacroeconomics

• To ensure the world’s scarce productive resources (factors) to be fully employed.

1. Unemployment (no idle)

2. Saving (equal to income)

3. Trade imbalances (export = import; wealth)

4. Money and the price level(medium; spill over)

What can be induced?What can be induced?

• Equilibrium vs. Balance (Condition)

• EquilibriumEquilibrium: a condition that all influences are canceled by others, resulting in a stable, balanced, or unchanging system.

• BalanceBalance: a state of equilibrium or parity

Y: National IncomeY: National Income

Y=GNP – depreciation + net unilateral transfer

– indirect business taxes

(GNP = GDP + net receipts of factor income from rest of world)

(closed economy)

Imports from abroad add to foreign countries’GNPs, but do not add directly to domestic GNP

GICY

Open EconomyOpen Economy

• A country with current account deficit is importing present consumption and exporting future consumption.

CAGICY

IMEXCA

IMEXGICY

)(

U.S.A. became a net U.S.A. became a net debtor to foreignersdebtor to foreigners

CAIS

GCYS

IS

Saving=Private S+Government S

)(

)(

TGCAI

GTCAISCAIS

CAISSS

GTS

CTYS

gp

gp

g

p

G-T=government budget deficit

Government Budget Deficit Government Budget Deficit worsen the Current Accountworsen the Current Account

)( TGISCA p

Balance of PaymentBalance of Payment

Any transactions:

A Payment go foreigners(outflow of money)

A Payment go foreigners(outflow of money)

A Receipt from foreigners(inflow of money)

A Receipt from foreigners(inflow of money)

Debit (--)Purchase of assets (capital account)

= importing

Debit (--)Purchase of assets (capital account)

= importing

Credit (+)Sales of assets

(capital account)= exporting

Credit (+)Sales of assets

(capital account)= exporting

Double-entry Double-entry bookkeeping rulesbookkeeping rules

• Every international transaction automatically enters the balance of payment twice: once as a credit and once as a debit.

• (i.e., you pay a foreigner for goods you buy; then the foreigner spend or store the amount you paid.)

Example 1:Example 1:

• Chinese firm exports wheat paid for by transfer to domesticdomestic bank account:

• [+] entry in “Exports” of Current AccountCurrent Account

• [- ] entry in Non-Official Portfolio Investment in Capital AccountCapital Account.

Example 2:Example 2:• US Fund buys RMB 100 million Haier sharshar

eses using Chinese bank deposits.• In this case there are no goods/services flow

s so there is no entry in the current account• Two capital account transactions:• [+] entry in Portfolio Investment• [- ] entry in Portfolio Investment

IMF’s category of BOP .1IMF’s category of BOP .1

• Balance of Payment is a statistical statement for a given period showing :(a) transactions in goods, services, and income between an between an economyeconomy and the rest of the world;(b) changes of ownership and other changes in that economy’s monetary gold, special drawing rights (SDRs) and claims on and liabilities to the rest of the world;

IMF’s category of BOP.2IMF’s category of BOP.2

• and (c) unrequited transfers and counterpart entries that are needed to balance, in the accounting sense, any entries for the foregoing transactions and changes which are not mutually offsetting.

• ---- adapted from Balance of Payment Statistics Yearbook 1989, IMF

Krugman:Krugman:

• A country’s balance of payments is net purchases of foreign foreign assets by the home central bank less net purchases of domestic assetsdomestic assets by the foreign central banks.

BOP has the following elements:BOP has the following elements:

- It is a statistical statement

- of all economic transactions

- between the residents and non-residents

The distinction between accounts

• Current: Flows of goods and services (international trade flows)

• Capital: Records asset changes (payments or receipts for trade flows)

• Balancing Account :

U.S. Balance of Payments Account for 1991

Credits Debits

Current account

(1) Exports +704.9

Of which:

Merchandise +416.0

Investment income received +125.3

Other service +163.6

(2) Imports -716.6

Of which:

Merchandise -489.4

Investment income paid -108.9

Other services -118.3

(3) Net unilateral transfers +8.0

Balance on current account -3.7

[(1) + (2) + (3)]

Capital account

(4) U.S. assets held abroad -62.2

(increase —)

Of which:

Official reserve assets +5.8

Other assets -68.0

(5) Foreign assets held in U.S. +67.0

(increase +)

Of which:

Official reserve assets +18.4

Other assets +48.6

Balance on capital account +4.8

[(4) + (5)]

Statistical discrepancy -1.1

[sum of (1) through (5)

with sign reversed

Calculation Practice

中国国际收支结构中国国际收支结构

国际收支平衡表的恒等式THE BALANCE-OF-PAYMENTS IDENTITY

BCA + BKA + BRA = 0BCA + BKA + BRA = 0 (BOPI)Where:

BCA = balance on the current account

BKA = balance on the capital account

BRA = balance on the reserves account

BCA + BKA = - BRABCA + BKA = - BRA

BCA = -BKA

The U.S.’s Balance-of-Payments Trend: 1980-1995

CruxCrux

• BCA + BKA = - BRA (fixed)BCA + BKA = - BRA (fixed)

• BCA = -BKA (flexible)

U.S. >strong dollar>deficit in BCAU.S. >strong dollar>deficit in BCA

DiscrepancyDiscrepancy

• (page 318-321)

• …different sources

• …Customs inspectors vs. check to bank

• …coverage, accuracy, and timing

• …rounding error

The Mystery of the Missing SurplusThe Mystery of the Missing Surplus

• the world is a closed economyclosed economy, world saving must equal world investment; world spending must equal world output…

• the world as a whole is running a substantial current account deficitcurrent account deficit.

①the systematic misreporting of international interest income flowsinterest income flows. Interest payment earned abroad are often not reported to government authorities in the recipient’s home country.

Such interest payments are credited directly to a foreign bank account and do not even cross national borders.

②Much of the world’s merchant shipping merchant shipping fleetfleet is registered in countries that do not report maritime freight earnings to the IMF.

Error and Omission in China’s case.