ni accounting & the bop

7/31/2019 NI Accounting & the BOP

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Prologue

Macroeconomics is the branch of economics thatstudies how economies overall level of

employment, production, and growth are

determined.

Whereas, microeconomics focuses on the

economic decision of individual persons, firms

and industries

Both the theoretical branches are concerned with

the effective use of scarce resources.

The study of international macroeconomics helps

us understand as how the interactions of national

economies influences the world wide pattern ofmacroeconomic activit


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four aspects of Macroeconomic life

Unemployment: problem of ensuring full employment

open to international trade Saving: from the perspective of international

macroeconomics, the world saving rate determines

how quickly world stock of productive capital grow

Trade imbalances: This plays a vital role inredistributing income among countries and it can

become a source of international discord


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Continue

Money and Price level: internationalmacroeconomics takes into account that every

country uses a currency and that a monetary

change in one country (a change in money

supply) can have effects that spills across itsborders to other countries. Therefore, monetary

stability is vital

Today discussion is about the two accounting

concepts which economist use to describe

countrys level of production and its international

transactions


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The National Income Accounts

Basic concern is GNP

Closely linked with the factors of production

It is also composed of four different types ofexpenditures

Consumption, Investment, Government and the

current a/c balance

National income accounts is classifying eachtransaction contributing to national income

according to the type of expenditure


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Continue.

Reason for expenditure classification is to knowthe type of spending change is causing boom or

recession

Hence do not know the relevant policy response

It also explain the reason behind the wealth of a

nation


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,Taxes

GNP does not include the tendency of machineand structure to

Wear out

A countrys income includes gifts from residentsof foreign countries called unilateral transfers, for

example, foreign aid, and pension of retired

citizen living abroad.

Unilateral payments are income of a country butare not products so should be added to the NNP


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Continue

National income depends upon the prices whichproducer receive and not what consumer pays

Therefore indirect taxes should be removed

The difference between the two is very little,therefore, the word GNP and NI is

interchangeably used


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Gross Domestic Product(GDP)

It measure the volume of production activitieswithin the boarders of the country

GNP track national income more closely then

GDP


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Open Economy

The main lesson from this discussion can be ashow saving, investment and trade imbalances are

related. Unlike the closed economy, Savings and

Investments are not necessary equal because

certain countries can save more by exportingmore than they import or conversely can dissave

Consumption

Investment

Government purchases

Y=C+I+G (closed Economy)


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Continue

Y=C+I+G+(EX-IM)

A Hypothetical Examle


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Indebtness

In accounting terms balance of Payment isalways in balance

However, in reality this is very rare

The difference is known as CA balance

CA= EX-IM

CA is important because it is related with output

and employment


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Also it measure the size and the direction ofborrowing

A country with deficit becomes indebted

A country with surplus can lend the same amount

to partners

Therefore, countrys current account balance

equals the change in its net foreign wealth

CA also is equal to difference between NI anddomestic resident spending


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Continue.

CA= Y-(C+I+G)

The equation shows that a deficit arises because

a country consumes more than it produces

This is also intertemporal

Deficit also means importing present consumption

and exporting future one.


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Saving & the Current Account

National savings the portion of output Y which isnot devoted to consumption or government

expenditure

S= Y- C G

Closed Economy national savings = Investment

Since Y = C+I+G or

I= Y- C G

Therefore S=I Closed economies can increase wealth by

acquiring more capital


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Continue However, in open economies this may not hold Since S= Y- C G and CA= EX- IM

Therefore, S= I+CA

Open economies can save/ increase wealth by

Building more capital stock or acquiring foreignwealth

Open economies, investment can increasewithout an increase in Saving.

Funds available in the international market canincrease investment, at the same time creating acurrent account deficit, thus leaving the savingsunchanged.

Intertemporal choices of socities


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Private and Government Saving For simplicity so far we havent differentiated

between

Private Saving and Government Saving

Private Saving (Sp) = Y - T C

Government Saving (Sg) = T- G Government Savings unlike the private saving

depends upon the national output andunemployment statistics

S= Sp+Sg, alternatively S= (Y CG) +(T G), we can deduce that

S= Sp+Sg = I+CA or

Sp = I + CA Sg = I +CA +(G-T)


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ni accounting & the bop

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