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NATIONAL AND INTERNATIONAL ACCOUNTS: INCOME, WEALTH, AND THE BALANCE OF PAYMENTS
1 Measuring Macroeconomic Activity 2 National Accounts 3 Balance of Payments Accounts 4 External Wealth 5 Conclusions

Outline
1. Closed Economy National Accounting: A Reminder 2. Open Economy National Accounting: Basic Identities 3. Current Account Balance 4. External Wealth

Today: 1 and 2

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Introduction
At the beginning, I talked about global financial imbalances, and different kinds of surplus and deficits (trade, current account), about the balance between saving and investment, etc.

Now the terms will be properly defined

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National Accounting Apparatus constructed in the 1930s and 1940s Si Simon K Kuznets, t N Nobel b l 71

Richard Stone, Nobel 84

Here, open economy version

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Micro example
Think of a small farm with following accounts Expenditures consumption $ 11,797 investment $ 2,213 total $ 14,010 Income production interest total

$ 13,247 $ -50 50 $ 13,197

Balance excluding interest: $ -763 Total balance: $ -813

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Macro interpretation
Multiply by 1 bn, and this is the US Expenditures consumption bn$ 11,797 investment bn$ 2,213 GNE bn$ 14,010 Income GDP NFIA GNI TB CA

bn$ 13,247 bn$ $ -50 bn$ 13,197 bn$ -763 bn$ -813
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1. Closed Economy National Accounting: A Reminder

Three approaches to measuring economic activity:

Expenditure approach: GNE
GNE = total expenditure on all final goods and services.

Product approach: GDP

GDP = value of all goods and services produced by firms, less intermediate goods purchased.

Income approach: GNI

GNI = value of all payments earned by factor residents in the economy.

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Flow of Payments in a Closed Economy

Gross national expenditure (GNE): total national spending on final goods and services. Three components: C , I, G

GNE = C + I +G
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Understanding the Data for the National Economic Aggregates

U.S. trends for Gross National Income (GNE)
US Consumption, Investment and Government Expenditures
Billi Billion dollars d ll 16000 14000 12000 10000 8000 6000 4000 000 2000 0

Government expenditure

Investment

Consumption

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Flow of Payments in a Closed Economy

In a closed economy, GNE must equal total sales by firms of goods excluding sales to other firms.
This measure is known as value added.
Firms sell intermediate goods and services to other firms. These are excluded to avoid double counting. Sum of value added: GDP

GDP= GNE
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Flow of Payments in a Closed Economy

Firms use revenues in two ways:
Payments for intermediate goods and services. Income payments to factors of production: wages and salaries to labor, dividends and interest to capital, and rent to landowners. This is value added.

Gross national income (GNI) is the sum of factor income payments received by national entities. GNI=GDP
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The Circular Flow in a Closed Economy GNE = GDP = GNI

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2. Open Economy National Accounting: Basic

Identities In the flow of payments for an open economy, the transactions with the rest of the world affects the flow of spending, income, and production.
GNE, GDP, and GNI need not be equal. Transactions with rest of the world (ROW) come in between

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Flow of Payments in an Open Economy

Some home spending is on foreign goods; and some foreign spending is on home goods. GDP identity GDP = GNE + TB

TB = EX IM

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Flow of Payments in an Open Economy

Exports and imports in the U.S.
US Export and Import Shares in GDP
% of GDP 20 18 16 14 12 10 8 6 4 2 0

Exports

Imports

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A subtlety: trade between firms

Exports and imports include the trade of intermediate inputs between firms Globalization and outsourcing trade in intermediate goods increasingly important Trade flows not a measure of value added.

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Who Makes the iPod?

The retail value of the iPod is $299 (2007). $163 of the $299 retail is paid to American companies and workers.
$80 paid to Apple (e.g., design, IP, support) $75 distribution (e.g., transport/ wholesale/retail) $8 for various domestic components (U.S.-made parts)

Most of hardware imported from China, but using imported inputs (little value added in China)
Reuters/CORBIS

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Flow of Payments in an Open Economy

Some home GDP is paid as income to foreigners, and some foreign GDP is paid as income to residents. residents GNI identity GNI = GDP + NFIA
NFIA = EXFS IMFS

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Celtic Tiger or Tortoise?

75% of f Irelands I l d industrial i d ti l GDP originated in foreignowned plants in 2004 Ireland is 4th richest economy in OECD in terms of GDP per capita, but 17th in terms of GNI p per capita p

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Flow of Payments in an Open Economy

Net unilateral transfers (NUT) is the net amount the country receives from the rest of the world (foreign aid, remittances) Gross national disposable income (GNDI) is income available including transfers.
GNDI = GNI + NUT

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From GNI to GNDI: Transfers in Income

In some countries NUT can be a significant fraction of GNDI

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Recap
Two key expressions for the open economy
GDP = GNE + TB GNI = GDP + NFIA

Can see why the three measures differ in an open economy but not in a closed economy economy, economy.
In a closed economy, TB = NFIA = 0

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The U.S. accounts

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The current account balance

Current account balance: definition CA = GNI GNI-GNE GNE = TB+NFIA

National income identity GNI=GNE+CA

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The current account balance

US Trade Balance and Current Account Balance
Billion dollars 100 0 -100 -200 -300 -400 -500 -600 -700 -800 -900

Trade Balance

Current Account Balance

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What the Current Account Tells Us

Why is the current account balance an interesting indicator?

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Applications

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Applications

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