Slides for International Finance - American University · Slides for International Finance ......
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National Income and Product AccountsBalance of Payments Accounting
Slides for International FinanceMacroeconomic Accounting (KO Chapter 12)
Alan G. Isaac
American University
2010-10-03
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Preview
National income accounts
Measure national income and value of productionMeasure value of expenditures
consumption (C)investment (I)government expenditure (G)current account (CA)
Balance of payments accounts
Record transactions with foreign residents
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
National Income Accounts
Record the value of national income that results from production andexpenditure.
National income is often defined to be the income earned by anation’s factors of production.
Producers earn income by selling goods and services to buyers.
Expenditure by buyers = income for sellers (= the value ofproduction).
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Gross national product (GNP)
GNP is the value of all final goods and services produced by a nation’sfactors of production in a given time period.Factors of production:
land (natural resources)
labor (workers, entrepreneurs)
physical capital (like buildings and equipment).
The value of final goods and services produced by US-owned factorsof production are counted as US GNP.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Calculating GNP
GNP is calculated by adding the value of expenditure on final goodsand services produced.Types of expenditure:
Consumption: expenditure by domestic consumers
Investment: expenditure by firms on buildings & equipment
Government purchases: expenditure by governments on goodsand services
Current account balance (exports minus imports): netexpenditure by foreigners on domestic goods and services
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
GNP = Expenditure
Y = Cd + Id +Gd +EX
= (C −Cf )+(I − I f )+(G−Gf )+EX
= C + I +G+EX − (Cf + I f +Gf )
= C + I +G+EX − IM
= C + I +G+CA
(1)
GNP = absorption + current account
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
National Income
A more precise measure of national income is GNP adjusted forfollowing:
Depreciation of physical capital results in a loss of income tocapital owners, so the amount of depreciation is subtracted fromGNP.
Unilateral transfers to and from other countries can changenational income: payments of expatriate workers sent to theirhome countries, foreign aid and pension payments sent toexpatriate retirees
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
GDP and national income (US, 2009, billions)
Gross national product ....... 14,265.3Less: Consumption of fixed capital... 1,861.1Less: Statistical discrepancy........ 179.1
Equals: National income.............. 12,225.0
Q: What is missing from this concept?A: Net unilateral transfers received from abroad (UTr).Source: http://bea.gov/newsreleases/national/gdp/2010/txt/gdp2q10_adv.txt
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Gross Domestic Product (GDP)
If we subtract from GNP the net factor payments from abroad (FP) weget GDP, another approximate measure of national income.
GDP = GNP - FP GNP = GDP + FP
FP = payments from foreign countries for factors of production -payments to foreign countries for factors of productionGross domestic product measures the final value of all goods andservices that are produced domestically (i.e., within a country) in agiven time period.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
GNP and GDP in the Philippines
GDP and GNP in 2005 (PHP millions at constant 1985 prices)
Personal Consumption Expenditure 947,799Government Consumption 76,465Capital Formation 225,601Exports 541,982Imports 630,181Statistical Discrepancy 42,866GDP 1,204,533Net Factor Income from abroad 101,002GNP 1,305,535
Most of net factor income is measured as remittances from overseasFilipino workers (OFWs), and is often referred to as OFW remittances.Source: http://dirp3.pids.gov.ph/ris/eid/pidseid0606.pdfAlan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
GDP and GNP (US, 2009, billions)
Gross domestic product............... 14,119.0
Plus: Income receiptsfrom the rest of the world.......... 629.8Less: Income payments tothe rest of the world............... 483.6
Equals: Gross national product....... 14,265.3
Source: http://bea.gov/newsreleases/national/gdp/2010/txt/gdp2q10_adv.txt
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
GDP Components (US, 2009, billions of dollars)
Gross domestic product (GDP)....... 14,119.0
Personal consumption expenditures.... 10,001.3Goods.............................. 3,230.7Durable goods.................... 1,026.5Nondurable goods................. 2,204.2
Services........................... 6,770.6
Source: http://bea.gov/newsreleases/national/gdp/2010/txt/gdp2q10_adv.txt
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
GDP Components (US, 2009, billions of dollars)
Gross private domestic investment.... 1,589.2Fixed investment................... 1,716.4Nonresidential................... 1,364.4Structures..................... 451.6Equipment and software......... 912.8
Residential...................... 352.1Change in private inventories...... -127.2
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
GDP Components (US, 2009, billions of dollars)
Net exports of goods and services.... -386.4Exports............................ 1,578.4Goods............................ 1,063.1Services......................... 515.3
Imports............................ 1,964.7Goods............................ 1,587.8Services......................... 376.9
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
GDP Components (US, 2009, billions of dollars)
Government consumption expendituresand gross investment................ 2,914.9Federal............................ 1,139.6National defense................. 771.6Nondefense....................... 368.0
State and local.................... 1,775.3
Source: http://bea.gov/newsreleases/national/gdp/2010/txt/gdp2q10_adv.txt
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Components of US GDP
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Components of US GDP (as pct)
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
National saving (S)
National saving (S) = national income (Y) that is not spent onconsumption (C) or government purchases (G).
S = Y - C - GS = (Y - C - T) + (T - G)S = S^p + S^g
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
National Saving and the Current Account
Absorption approach:
CA = Y - (C + I + G )
Current account surplus spending < less than national incomewe must be lending abroad (on net)This implies a financial capital outflow or positive net foreigninvestment.
Current account deficit spending > national incomewe must be borrowing abroad (on net)This implies a financial capital inflow or negative net foreigninvestment.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
National Saving and the Current Account
current account = net foreign investmentRewrite this as
CA = (Y −C −G)− I
= S− I(2)
current account = national saving - investmentA country that imports more than it exports has low national savingrelative to investment.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
CA and NFA
CA = EX − IM
= Y − (C + I +G)(3)
When production > domestic expenditure, exports imports: currentaccount >0. A country exports more than it imports, it earns moreincome from exports than it spends on imports net foreign wealth isincreasingWhen production < domestic expenditure, exports < imports: currentaccount <0. A country exports less than it imports, it earns less incomefrom exports than it spends on imports net foreign wealth is decreasing
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Current Account
http://research.stlouisfed.org/fred2/series/BOPBCA?cid=125
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
U.S. Current Account (CA/GDP)
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
U.K. Current Account (CA/GDP)
Source: United Kingdom Balance of Payments - The Pink Book
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Euro Area Current Account (%GDP)
Source: ECB
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
U.S. Exports and Imports
Source:http://bea.gov/newsreleases/international/transactions/2010/pdf/trans110.pdf
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
U.S.: CA and NFA
Source: Krugman and Obstfeld (fig 12.2)
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Investment Finance
Countries can finance investment either by saving or by acquiringforeign funds equal to the current account deficit.Recall
CA = S - I
When S > I, then CA > 0 so that net foreign investment and financialcapital outflows for the domestic economy are positive.
I = S - CA
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Twin Deficits
CA = S-I = (S^p + S^g) - I = (S^p - government deficit) - I =(S^p - I) - government deficit
Government deficit is equal to G - T.G-T>0 is negative government saving.A rising government deficit is associated with a declining currentaccount balance when other factors remain constant.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Twin Deficits vs. Ricardian Equivalence
Late 1990s: EU governments slashed deficits from 5.4% to 0.8% ofGDP. (Required to participate in January 1999 launch of euro.)The current account for EU countries was little changed. Why? Privatesaving decreased by about the same amount!Explanations:
Household wealth increases.
Financial wealth rose in this period.
Ricardian equivalence.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
No Twin Deficits in EU (%GDP)
Year CA Sp I G-T1995 0.6 25.9 19.9 -5.41996 1.0 24.6 19.3 -4.31997 1.5 13.4 19.4 -2.51998 1.0 22.6 20.0 -1.61999 0.1 21.8 20.8 -0.8
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Net International Investment Position
Net International Investment Position (NIIP) foreign assets - foreignliabilities
NIIP is affected by capital gains and losses:
changes in asset prices in own currency
exchange rate changes -> changes in domestic price
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
CA vs. Change in NIIP
CA and NIIP (US, $billions)
NIIP 2009 (eop) -2,738NIIP 2008 (eop) -3,494Delta NIIP 756CA 2009 -378
Q: How can we have CA<0 and Delta NIIP >0??A: changes in asset prices (as measured in own currency)
capital gains on foreign assets (given E)
depreciation of E
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Net International Investment Position (NIIP)
Foreign assets held by the US have grown since 1980, but USliabilities (our debt held by foreigners) have grown more quickly.The US current account in 2009 was -$378B: US net foreign wealthcontinued to decrease.The US has the most negative net foreign wealth in the world, and sois therefore the world’s largest debtor nation.By the end of 2009, the US international investment position was-$2.74T.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
U.S.: NIIP
Data Source: BEA
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Investment Income
In 2006, the US ran a surplus on Investment Income.
Income receipts were about $650B.
Income payments were about $614B.
How can the US NIIP be so negative, yet we have this surplus?
Mismeasurement of the NIIP? (But still ... !)
Differing rates of return on assets and liabilities.
Relative return: Higgins (2005) argues that our FDI has a muchhigher rate of return.
Portfolio composition: our accumulated net FDI position is verypositive.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Income Account: Payments and Receipts
Data Source: BEA
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
U.S. CA Components
Source:http://bea.gov/newsreleases/international/transactions/2010/pdf/trans110.pdf
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Net International Investment Position
NIIP was measured at “historical value” until 1991.
original purchase price
BEA now uses two different measures affected by capital gains andlosses
current cost cost today of same direct investment
market value price at which assets could be sold
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Net International Investment Position
Both assets and liabilities have grown over time
1976
foreign assets = 25% of GDPforeign liabilities = 16% of GDP
2006
foreign assets = 104% of GDPforeign liabilities = 123% of GDP
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
GDP and GNPNational IncomeCurrent Account
Net International Investment Position
Large gross positions but denomination differs
liabilities almost all in dollars
assets 70% in foreign currencies
so exchange rate changes -> large change in net dollar position
2006 based example for hypothetical 10% depreciation:
10% x (70% x 104%) = 7.3%
7.3% x GDP = 7.3% x $13.2T = $964B
bigger than CA deficit
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
Balance of Payments Accounts
A country’s balance of payments accounts record its payments to andits receipts from foreigners.An international transaction involves two parties.Each transaction enters the accounts twice: once as a credit (+) andonce as a debit (-).
Credit (+): outflow of value
Debit (-): inflow of value
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
Financial Flows
Financial inflow: Foreigners loan to domestic citizens by buyingdomestic assetsDomestic assets sold to foreigners are a credit (+) because thedomestic economy acquires “money” during the transaction
Financial outflow: Domestic citizens loan to foreigners by buyingforeign assetsForeign assets purchased by domestic citizens are a debit (-)because the domestic economy gives up “money” during thetransaction.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
Balance of Payments: The Accounts
The balance of payments accounts are separated into 3 broadaccounts:
current account: records flows of goods and services (importsand exports).
financial account: records flows of financial assets (financialcapital).
capital account: records flows of special categories of assets(capital): typically non-market, non-produced, or intangible assetslike debt forgiveness, copyrights and trademarks.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
World Trade Volume
World Exports Relative to GDP, 2000 = 100Source: http://www.wto.org/english/news_e/pres10_e/pr598_e.htm
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
BoP Accounts Always “Balance”
Due to the double entry of each transaction these three accounts mustsum to zero.current account + financial account + capital account = 0(In reality we include a statistical discrepancy due to recordingproblems.)
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
BoP Sub Accounts: CURRENT ACCOUNT
Merchandise TradeServices
tourismtransportationbusiness, professional and other services
Income (Factor Services)Investment IncomeEmployee Compensation
Unilateral Current Transfers (incl. workers remittances)government grantsgovernment pensionsprivate remittances and other transfers (including taxes)
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
BoP Sub Accounts: CAPITAL AND FINANCIAL ACCOUNT
Capital AccountUnilateral Capital Transfers (debt forgiveness, investment grants)Acquisition/Disposal of IPRs
Financial Account (Private)Direct Foreign InvestmentPortfolio Investment (long term and short term)
Financial Account (ORT) (gold, IMF credits and SDRs, foreignexchange reserves)
Changes in domestic assets held by foreign monetary authorityChanges in foreign assets held by domestic monetary authority
Statistical Discrepancy (reported in Financial Account)
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
Official Settlements Balance
Official Settlements Balance = -ORTSometimes called the balance of payments.
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
BoP Example: Imports
You import a DVD of Japanese anime by using your debit card. (Say,Princess Mononoke by Hiyao Miyazaki.)The Japanese producer of anime deposits the money in its bankaccount in San Francisco.The bank credits the account by the amount of the deposit.
Account Amount
Current Account -$30Financial Account +$30
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
BoP Example: Securities
You invest in the Japanese securities market by buying $5000 in Sonybonds.You pay with a check that Sony deposits in its NY bank account.The bank credits the account by the amount of the deposit.
Account Amount
Financial Account (bond acquired) -$5000Financial Account (deposit ownership) +$5000
Alan G. Isaac Slides for International Finance
National Income and Product AccountsBalance of Payments Accounting
Balance of Payments Accounts
BoP Example: Debt Forgiveness
A US bank forgives a $20M debt owed by the government of Argentina.Here the outflow of value (credit) is evident: forgiveness means thatvalue flows from the US bank to the Argentine government.But what is the other half (debit) side of the transaction?It is handled as an accounting convention and recorded in the Capitalaccount.
Account Amount
Capital Account (debt forgiveness) -$20MFinancial Account (deposit ownership) +$20M
Alan G. Isaac Slides for International Finance