5
NATIONAL AND 1
INTERNATIONAL Measuring
Macroeconomic
ACCOUNTS: Activity
2
INCOME, WEALTH, AND National Accounts
THE BALANCE OF 3
Balance of Payments
PAYMENTS Accounts
4
External Wealth
5
Conclusions
Chapter Outline
1. Measuring Macroeconomic Activity: An Overview
2. National Accounts: Product, Expenditure, and Income
3. Balance of Payment Accounts: International
Transactions
4. External Wealth
5. Review and conclusions
Today: 1 and 2
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1. Measuring Macroeconomic Activity: Overview
• 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
Simon Kuznets, Nobel 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 $ 13,247
financial $ -50
total $ 13,197
Non-financial balance: $ -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 (Gross National Expenditure)
Income
GDP bn$ 13,247 (Gross Domestic Product)
NFIA+NUT bn$ -50 (Net Factor Income from Abroad)
GNDI bn$ 13,197 (Gross National Disp. Income)
TB bn$ -763 (Trade Balance)
Current account balance: bn$ -813
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Objectives
• Understanding how micro accounting (which is
intuitive) relates to macro accounting
• Learn the vocabulary:
Gross National Expenditure (GNE)
Gross Domestic Product (GDP)
Net Factor Income from Abroad (NFIA)
Gross National Income (GNI)
Trade Balance
Current Account Balance
Saving, investment, consumption
• We start with closed 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:
Personal consumption expenditures C (“Consumption”).
Total household spending on final goods and services.
Gross private domestic investment I (“Investment”)
Total spending by firms and households on final goods and services that add to
the nation’s capital stock.
Government consumption expenditures and gross investment G
Government spending on final goods and services, including additions to the
capital stock.
GNE = C + I +G
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Flow of Payments in a Closed Economy
• Where does expenditure go?
• Total spending (GNE) is total payments for final
goods and services in the market.
In a closed economy, this 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.
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Flow of Payments in a Closed Economy
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Flow of Payments in a Closed Economy
• Value added of a firm: what is leftover once intermediate
purchases are deducted from total sales
• Value added is the “true” measure of production and can
be added across firms.
Value added avoid double-counting
• The sum of value added across all firms is domestic
production: called Gross Domestic Product (GDP)
Σ value added = GDP
GNE=GDP
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Flow of Payments in a Closed Economy
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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, such as wages and
salaries to labor, dividends and interest to capital, and rent to
landowners.
• The latter is value added
• Gross national income (GNI) is the sum of factor income
payments received by national entities.
GDP=GNI
• These income resources are the only resources available
from which the closed economy can finance expenditure.
The income flow GNI is spent as the expenditure flow GNE.
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Flow of Payments in a Closed Economy
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The Circular Flow in a Closed Economy
GNE = GDP = GNI
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Flow of Payments in an Open Economy
• 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.
The macroeconomic plumbing is more complicated.
Modifications are needed at five points (not all equally
important).
First: a quick summary. Later: the details.
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Flow of Payments in an Open Economy
• Point 1:
Some home spending is on foreign goods; and some
foreign spending is on home goods.
We must deduct imports (IM) and adds exports (EX)
to GNE to calculate the total payments received by
home firms.
Total spending on home-produced final goods and
services is the sum of GNE and the trade balance
(TB).
GNE + TB = GDP
TB = EX – IM
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Flow of Payments in an Open Economy
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Flow of Payments in an Open Economy
• Point 2:
Some home GDP is paid as income to foreigners, and
some foreign GDP is paid as income to residents.
International payments result.
We must subtract factor service imports (IMFS) and
add factor service exports (EXFS) to GDP to calculate
the income received by the home nation.
The difference between factor service exports and
imports is net factor income from abroad (NFIA).
GDP + NFIA = GNI
NFIA = EXFS – IMFS
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Flow of Payments in an Open Economy
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Flow of Payments in an Open Economy
• Point 3 (less important):
Country’s disposable income may differ from income
earned due to unilateral transfers paid to (UTOUT) and
received from abroad (UTIN), e.g. aid.
Net unilateral transfers (NUT) is the net amount the
country receives from the rest of the world.
Gross national disposable income (GNDI) is income
available including transfers.
GNI + NUT = GNDI
NUT = UTIN – UTOUT
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Flow of Payments in an Open Economy
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Flow of Payments in an Open Economy
• Point 4:
Income is not the only resource by which an open
economy can finance expenditure.
The economy can increase/decrease its spending
power by exporting/importing assets internationally.
These transactions are recorded on the financial
account (FA).
The financial account is equal to asset exports (EXA)
less asset imports (IMA).
FA = EXA – IMA
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Flow of Payments in an Open Economy
• Point 5 (less important):
A country may transfer/receive assets as gifts.
Like income transfers, these must be recorded
properly.
Asset imports which are gifts (KAIN) do not reduce resources,
so we must add those.
Asset exports which are gifts (KAOUT) do not increase
resources, so we must subtract those.
These transfers of assets are recorded in the capital
account (KA).
KA = KAIN – KAOUT
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Flow of Payments in an Open Economy
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The Circular Flow in a Closed Economy
GNE = GDP = GNI
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The Big Picture: from closed to open economy
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The U.S. accounts
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2. National Accounts: Product, Expenditure, Income
• Present the three approaches to measuring
economic activity:
Expenditure Æ GNE,
Production Æ GDP,
Income Æ GNI.
• Define the current account and trade balance.
Analyze the relationship between the current
account, investment, and national savings.
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Three Approaches to
Measuring Economic Activity
Expenditure approach: GNE = C + I + G
Demand for goods and services
GNE = total expenditure on all final goods and services.
Product approach: GDP
Supply of goods and services
GDP = value of all goods and services produced by firms, less
intermediate goods purchased.
Income approach: GNI
Payments to factors of production
GNI = value of all payments earned by factor residents in the
economy.
Now we review the links between the three approaches
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From GNE to GDP: Trade in Goods & Services
• GDP and GNE differ because of trade in goods and
services
• GDP identity
The trade balance (TB) is also known as net exports.
This can be positive or negative.
TB > 0 Trade surplus.
TB < 0 Trade deficit.
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A subtlety: trade between firms
• Exports and imports include the trade of
intermediate inputs between firms
• Globalization and outsourcing Æ trade in
intermediate goods increasingly important
• Example: the iPod. The iPod is a U.S. product,
but producing and selling an iPod to an American
consumer generates a lot of trade.
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Who Makes the iPod?
HEADLINES
The retail value of the iPod is
$299 (2007).
Where does it go?
$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)
© Reuters/CORBIS
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Who Makes the iPod?
HEADLINES
•Most expensive component: $73 -
hard disk from Toshiba, which
manufactures the hard disk in the
Philippines and China.
•Even if production were integrated
in same firm, it would generate
trade.
•Chine exports is not a measure of
Chinese value added
© Reuters/CORBIS
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From GDP to GNI: Trade in Factor Services
• Trade in factor services occurs when one country
is paid income by another, in compensation for
labor, capital, and land.
A country exports factor services and receive factor
income in return.
Factor income includes payments for labor services
(wages or salaries), payments on income from assets
(dividends or interest).
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From GDP to GNI: Trade in Factor Services
• GDP is income paid to all factors of production.
• GNI is income earned by home factors only.
Add receipts from ROW, subtract payments to ROW.
• This leads to the GNI identity
Or:
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Celtic Tiger or Tortoise?
APPLICATION
• The difference between GNI and GDP may be
important to assess a country’s welfare.
• Example: Ireland
In the early 1970s, Ireland was one of the poorer
countries in Europe.
Between 1975 and 2005, real GDP per person grew
at 4.4% per year, an exceptional growth rate
compared with other rich countries in the European
Union: “Celtic Tiger”.
Who reaped the benefits?
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Celtic Tiger or Tortoise?
APPLICATION
•75% of Ireland’s industrial
GDP originated in foreign-
owned plants in 2004
•Ireland is 4th richest
economy in OECD in terms
of GDP per capita, but 17th
in terms of GNI per capita
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From GNI to GNDI: Transfers in Income
• International non-market transactions affect
income available for spending.
Foreign aid, charitable gifts, income remittances.
• Gross National Disposable Income
Income earned by domestic factors of production
plus net unilateral transfers received.
Correct measure of national income: corresponds
to resources available to households, firms, and the
government.
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From GNI to GNDI: Transfers in Income
• In some countries
NUT can be a
significant fraction
of GNDI
Sometimes this is
largely due to
foreign aid.
In other cases due
to migrant
remittances.
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Are Rich Countries “Stingy”?
HEADLINES
• Background
Following the December 26, 2004 tsunami in Asia,
UN undersecretary for humanitarian affairs and
emergency relief, Jan Egeland, stated “It is beyond
me why we are so stingy.”
This was in response to relatively low levels of official
development assistance (ODA) given by rich
countries, e.g., the U.S., at levels which fell below the
UN’s goal of 0.7% of GNI.
How stingy is the U.S.?
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Are Rich Countries “Stingy”?
HEADLINES
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Are Rich Countries “Stingy”?
HEADLINES
• In 2003, the U.S. gave double the official development assistance
(ODA) of the second largest donor, Japan, in dollar terms.
• But the U.S. is big. Relative to income, U.S. is at the bottom of the
list, officially granting 0.15% of GNI as ODA (13 cents per day, per
person). Norway is at 0.92% of GNI.
• Still, ODA may be misleading. Private giving in the U.S. is relatively
high (accounts for 60% of giving from the U.S.) Æ total 72 cents per
day, per person.
• But not enough to put the U.S. at the top of the list of donors.
Norway: total $ 1.26 per day per person.
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What National Economic Aggregates Tell Us
• From the derivations above, we arrive at three key
expressions for the open economy
GDP = GNE + TB
GNI = GDP + NFIA
GNDI = GNI + NUT
• Can see why the three measures differ in an open
economy, but not in a closed economy.
In a closed economy, TB = NFIA = NUT = 0
Hence, GNE = GDP = GNI = GNDI.
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The current account
• The national income identity
Adding up the three expressions allows us to see how
international transactions break the link between
income and expenditure:
The sum of TB, NFIA and NUT is important: it is the
difference between expenditure and income.
It is called the current account CA.
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Understanding the Data
for the National Economic Aggregates
• Example: U.S. data for 2006
TB < 0: GNE > GDP Expenditure > Production
NFIA > 0: GNI > GDP Income > Production
NUT < 0: GNI > GNDI Income > Disposable Income
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Understanding the Data
for the National Economic Aggregates
• U.S. trends for Gross National Income (GNE)
Consumption (70%), government consumption
(15%), and investment (15%).
Investment fluctuates more than other components.
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What the Current Account Tells Us
• National income identity:
GNDI = GNE + CA
• From this expression:
GNDI > GNE if and only if CA > 0
This situation is one of current account surplus
GNDI < GNE if and only if CA < 0
This situation is one of current account deficit
• Definition of current account
CA=TB+NFIA+NUT
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Understanding the Data
for the National Economic Aggregates
• U.S. trends for Current Account and Income
U.S. current account deficits have grown time.
Trade balance largest share (–%6 of GNI).
NFIA and NUT are very small in comparison.
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Current Account Identity
• National income identity:
Y = C + I + G + CA
Subtracting C and G from both sides, we obtain an
expression for national saving (S = Y – C – G):
S = I + CA
This is the current account identity
Current account surplus means saving exceeds investment
Current account deficit means saving falls short of investment
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