1. National accounts + 2. Income Accounting

national account

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 + ΔB_{t+1} + ΔM_{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
ΔB_{t+1}: amount of new borrowing
ΔM_{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