Scarica Understanding International Transactions: Impact on National Income and Wealth e più Schemi e mappe concettuali in PDF di Macroeconomia solo su Docsity! CHAPTER 5 – Income, Wealth, and the BoP In this chapter, we study economic transactions between countries and what impact they have on the macroeconomy. In particular, we will explain the international system of trade and payments, and get through on how these international transactions relate to national income and wealth. 1. Measuring Macroeconomic Activity: An Overview A nation’s aggregate economic activity is measured and recorded in the national income and product accounts. In an open economy, however, we must also account for cross-border flows which are recorded in a nation’s balance of payments accounts. • The flow of payments in a Closed Economy (Only National Income and Products Accounts) There are three key measures based on expenditure, product and income: - The Gross National Expenditure (GNE): the total expenditure on final goods & services by home entities in any given period. - The Gross Domestic Product (GDP): the value of all (intermediate and final) goods & services output sold by firms, minus the value of all goods & services purchased as intermediate inputs by Firms. - The Gross National Income (GNI): the total income resources of the economy • The flow of payments in an Open Economy (NI-and-PA Incorporating the BoP) The circular flow in an open economy is different: - The Gross National Expenditure (GNE): unchanged from the closed economy - The Gross Domestic Product (GDP): the total value added of production in the economy, also considering net exports and imports (Trade Balance i.e., TB) - The Gross National Income (GNI): the total income earned by domestic entities from all sources, domestic and foreign, also considering EX and IM of factor services (NFIA) i.e., services generated by using the factors of production i.e., land, labour, capital and entrepreneurship. - The Gross National Disposable Income (GNDI): the total national income in an open economy, also considering Net Unilateral Transfers (NUT) i.e., transfers involving sending funds, goods, or services to a receiving party, who does not return anything in kind. The CURRENT ACCOUNT (CA) is a tally of all international transactions in goods, services, and income that occur through market transactions or transfers (TB, NFIA, NUT). - The Total resources available for expenditure in the home country: the GNDI, also considering the category of assets summing to it both (1) the Financial Account (FA) i.e., the value of all asset exports minus all asset imports, (2) and the Capital Account (KA) i.e., the value of capital transfers received from the rest of the world minus those given to the rest of the world. This colour: Measures belonging to the National Income and Product Accounts (including measurements of national expenditure, product, and income). This colour: Measures belonging to the Balance of Payments Accounts (including measurements of international transactions). GRAPH SLIDE 13 2. Income, Products, and Expenditure There are three Different Approaches to measuring Economic Activity: ✓ The Expenditure Approach: it measures spending on demand for final goods & services, thus the key measure is GNE. ✓ The Product Approach: it measures the value of firms’ goods & services sold as output minus those purchased as inputs, thus he key measure is GDP. ✓ The Income Approach: it tracks the amount of income received, thus the key measures are gross national income (GNI) and gross national disposable income (GNDI), which includes net transfers. NB. in a closed economy all of these measures must produce the same result, but in an open economy they may not. - Assessing Global imbalances Surpluses and deficits per se need not be problematic. In fact, especially for young, fast-growing economies that need to invest to grow—tapping external resources by importing more than they export and borrowing to cover the implied deficit may well be appropriate and beneficial. However, Current account balances ca become excessive, that is, larger than warranted by the economy’s fundamentals and appropriate economic policies. In fact, economies that borrow too much from abroad by running current account deficits that are too large may become vulnerable to sudden stops in capital flows (e.g., protectionist measures) that can be destabilizing not only at country level, but also globally. How to tackle imbalances? Reforms that encourage investment and discourage excessive saving—through the removal of entry barriers or stronger social safety nets—could support external rebalancing in excess surplus countries. Instead, reforms that reduce fiscal deficits, encourage household saving, and improve productivity and workers’ skill base are appropriate in countries with excess external deficits. 3. The Balance of Payments (BoP) The balance of payments accounts consist of: Goods, services, factor services, and unilateral transfers measurements - Current Account (CA) Asset Trades measurements - Financial Account (FA): it measures how the country can increase or decrease its holdings of assets through international transactions. It is done by subtracting asset imports from asset exports, considering both real assets (e.g., land or structures), and financial assets (e.g., debt or equity). - Capital Account (KA): it covers two remaining areas of asset movement, both of minor quantitative significance by considering the net of: (1) Capital transfers (i.e., gifts of assets), (2) The acquisition and disposal of non-financial, non-produced assets (e.g., patents, copyrights, trademarks). BoP Identity – A Macroeconomic view CA + KA + FA = 0 This identity in supported by the Double-Entry principle, according to which if party A engages in a transaction with a counterparty B, then A receives from B an item of a given value, and in return B receives from A an item of equal value.
