national account
Accounting for the value of all transactions that take place within an economy -> gross domestic product (GDP - overall national account of any economy)
GDP
Gross Domestic Product (market value of the final goods & services in an economy over a certain period)
Problems with GDP
- unpaid work not counted
- living standards & labor productivity not seen
What is good about GDP?
Correlates with other welfare measures
National income accounting
system through which economists measures GDP, consumption, investment, and so on in an economy
Basic accounting relation in economics
total production = total income = total spending
National income identity (formula)
Y = C + I + G + (EX - IM)
left side GDP; right side describes various ways this GDP can be used in the economy
Y = GDP (in dollars)
C = consumption
I = investment
G = government purchases
NX = net exports = exports - imports = EX - IM
Production can be measured in two ways, which?
1. Final sale of goods & services count toward GDP
2. Value added; subtract value of intermediate products from revenue generated by each producer (more accurate)
In terms of income what can GDP said to be?
GDP = sum of all income earned in the economy
What is the difference between real and nominal GDP?
Nominal GDP: GDP without any effect of inflation, expressed in terms of current year's prices of goods and services
Real GDP: inflation-adjusted GDP of a country
nominal GDP (formula)
nominal GDP = price level * real GDP
What are the three ways to calculate real GDP?
1. Laspeyres index: initial prices
2. Paasche index: final prices
3. Fisher index/chain weighting:
- compute Laspeyres & Paasche indexes
- calculate average of their growth rates
- can then benchmark it to a certain year
Deflator
Nominal value -> real value
Nominal value/price level = real value -> deflating the nominal value
What are some common deflators?
Consumet Price Index (CPI) and GDP deflator
GDP vs. GNI vs. GNP
GNP, least used, might be deceptive, the rich move their money/wealth offshore
GNI; most accurate reflection of national wealth given today's mobile population and global commerce
GNP and GDP can have different values, large difference between two suggests a great deal of integration into the global economy
- Income from overseas investments by a country's residents counts in GNP, while foreign investment within a country's borders does not. Contrast to GDP measures economic output and income based on location rather than nationality
GNI
Gross National Income; GDP + net factor income from abroad
total income earned by a nation's people and businesses, includes investment income, regardless of where it was earned. Covers money recieved from abroad (foreign investment, economic development aid)
GDP -> GNI, what needs to be added?
1. Foreign income paid to resident employees
2. Foreign income paid to residential property owners and investors
3. Net taxes minus subsidies receivable on production and imports
GNP
Gross National Product; measures output of a country's residents regardless of the location of the actual underlying economic activity
GDP -> GNP, what needs to be added?
GNP = GDP + residents' investment income from overseas investments - foreign residents' investment income earned within a country
GNP = GDP + F
F = CA - NX; net factor income & net transfers
Income (GNP)
GDP + net factor income & net transfers -> GDP + F
Total savings = Private saving + Public saving (härledning)
S = (Y + F - C - T) + (T - G)
S = (C + G + I + NX + F - C - T) + (T - G) <- used Y = C + I + G + NX
S = I + NX + F
=> I = S - NX - F = S + IM - EX - F
=> S - I = NX + F
CA
current account
Current account balance
the amount by which an economy's net foreign asset position changes in a given period of time
- closely related to trade balance
- starts from trade balance + interest payments received based on past foreign lending (or subtracts interest payments paid out based in past foreign borrowing)
trade balance
net exports
- export > imports => trade surplus
- import > export => trade deficit
current accounts formula
CA = NX + F
F = net factor income & net transfers, Jones assumes that F=0
CFA
Capital & Financial Account
capital and financial account formula
CFA = I - S
Balance of payments (CFA)
(Savings - Investment) = (Net export + Net factor inc. & net transfers)
0 = (Invesment - Savings) + (Net export + Net factor inc. & net transfers)
(Invesment - Savings): CFA
(Net export + Net factor inc. & net transfers): CA
=> CFA + CA = 0
-------
Revenue
- Funds flow into the country exports (CA)
- Sales of assets (CFA)
Cost
- Funds flown out of country imports (CA)
- Purchases of assets (CFA)
Net asset flows
Difference between domestic saving and investment
S - I
net flows of international loans = net purchases of assets
S>I
country is a lender
S<I
country is a borrower
How are current account deficits financed?
Sells assets
Net foreign assets formula (over time)
NFA_{t+1} = NFA_t + S_t - I_t = NFA_t + CA_t
Why borrow from abroad?
1. Smooth consumption in periods of temporaty negative shocks
2. Smooth consumption when growth is expected to be high
3. Enable investment leading to future high income
4. Enable investment to take advantage of a young population with many workers
twin deficits
budget and trade deficits
budget balance
the difference between government's sources of funds and its uses of funds (e.g. difference between tax revenues and government spending)
primary deficit or surplus
Primary budget balance does not included interest payments, while total budget balance does.
- Distinction useful when considering government's intertemporal budget constraint (G_t - T_t; primary deficit, G_t - iB_t - T_t: total deficit)
The twin deficits (formula)
CA = S - I
CA = S_{priv} + S_{pub.} - I
CA = S_{priv.} + T - G - I
T - G: budget deficit
the flow version of the gov. budget constraint
G_t + Tr_t + iB_t = T_t + ÎB_{t+1} + ÎM_{t+1}
Uses = Sources
^Assume: 0=0
or
=> B_{t+1} = (1 + i)B_T + G_t - T_t <- G_t - T_t: deficit
G: government spending, uses of funds to purchase goods & services
Tr: transfer payments (assume = 0)
iB_t: pay interest in debt
T: tax revenues
ÎB_{t+1}: amount of new borrowing
ÎM_{t+1}: change in the stock of money
i: nominal interest rate
The intertemporal budget constraint (formula)
G_1 + G_2/(1 + i) + (1 + i)B_1 = T_1 + T_2/(1 + i)
pdv of spending + initial debt = pdv of taxes
pdv: present day value
OR
(T_1 - G_1) + (T_2 - G_2)/(1 + i) = (1 + i)B_1
shows gov. budget must balance not period by period, but in PDV
debt-GDP ratio
the government's debt as a percentage of GDP
- No magic level depends on country
What are potential consequences of the debt-GDP ratio being too high?
Lenders worried about repayment and stop lending -> could force gov. to print money to satisfy budget constaint and could also default on debt
default
failure to fulfill an obligation, e.g. to repay a loan