National Income Accounting and the balance of payments

GDP

Gross Domestic Product - the total value of goods and services produced within a country

GNP

Gross National Product - the value of all goods and services produced by factors of production belonging to the country.

GDP formula

Y = C + I + G + NX

GDP = Consumption + Investment + Government Spending + Net Exports

GNP Formula

GNP = Y + Z

where Z is the net factor income from abroad

if it’s positive → there was a net gain from income coming from abroad than paying out income

If it’s negative → there was a net loss from paying income abroad than income coming from abroad

GDP vs GNP

GDP measure production within the borders of your country while GNP measures the income earned by the nationals of your country.

What’s the national income?

National Income = GNP (how much you country earned) - depreciation + net unilateral transfers

We remove the depreciation because it was used up in the process that won’t count as new income for consumers to save or invest

net unilateral transfers are just payments you give or receive without receiving a good/service in return.

Net Domestic Product

what’s the net value of domestic output after accounting for the capital wear and tear?

That’s just the GDP - depreciation

Net National Product or also National Income

The net value of output produced by a nation’s residents after accounting for the capital wear and tear. GNP - depreciation

Personal Income

Represents total income received by individuals.

National Income - Profits - income tax - social security + transfer payments

profits are retained by the business rather than paid to individuals

taxes goes to the government instead to the hands of the people

social security contributions are also handed to the government

transfer payments are added because many individuals receive benefits from the govt.

Disposable Income

That’s just Personal income - personal direct taxes

what’s left for the consumer to spend on goods and services

Per Capita Income

Take the national income / total population

Balance of Payments

The accounts of a country’s economic and financial relations with the rest of the world

Current Account

(X - M) in the national account is called the current account.

So: Y = C + I + G + (X - M)

• Or, Y - (C + I + G) = CA

The difference between what you produce (Y) and the amount you consume or spend (C + I + G) as a country is covered by the CA balance.

• If CA is positive, that means that you produce more than you consume

• If CA is negative, that means that you consume more than you produce

Flows vs Stocks

A flow is the movement of goods, services, and/or money. Examples are GDP so consumption, investment, government spending, CA trades.

A stock is the total accumulation of a good service, or financial asset. Example: your bank balance.

But how can a country consume more than it produces?

Either by borrowing money and/ or used savings and at a country level

• A country can borrow from abroad or draw down accumulated reserves/assets

• when there’s a current account deficit, spending is higher than production so it must be financed from somewhere. Foreigners may lend money to the US or buy US assets