Comprehensive Guide to GNP, GDP, and Balance of Payments

What is GNP

) is the value of all final goods and services produc

What counts as US GNP

The value of final goods and services produced by US-owned factors of production are counted as US GNP

What makes up GNP

Consumption: expenditure by domestic consumers • Investment: expenditure by firms on buildings and equipment • Government purchases: expenditure by governments on goods and services • Current account balance (expors minus imports): net expenditure by foreigners on domestic goods and services

What iS GNP a measue of + defintion

• One of the objectives of national income accounts is to have a measure of national income • National income is often defined to be the income earned by a nation's factors of production • Producers earn income from buyers who spend money on goods and services Expenditure by buyers = Income for sellers = = Value of production

how to avoid double counting in GNP?

Only the sale of final goods and services enter into the definition of GNP (avoids double counting)

WHat is GDP, relative to GNP

GDP measures the final value of all goods and services that are produced within a country in a given time period GDP = GNP−

How does GDP differ from GNP

GDP does not correct, as GNP does, for the portion of countries' production carried out using services by foreign-owned capital and labor • The profits of a Spanish factory with British owners are counted in Spain's GDP but are part of Britain's GNP • Movements in GNP and GDP usually do not differ greatl

what is the equation for national income identity

• The national income identity for an open economy is Y = C + I + G + EX − IM = C + I + G | {z } Exp. by domestics + CA |{z} Net exp. by foreigners

net froegin wealth

When production > domestic expenditure, exports > imports: current account > 0 and trade balance > 0 • When a country exports more than it imports, it earns more income from exports than it spends on imports • Net foreign wealth is increasing • When production < domestic expenditure, exports < imports: current account < 0 and trade balance < 0 • When a country exports less than it imports, it earns less income from exports than it spends on imports • Net foreign wealth is decreasing

what is national saving

• National saving (S) = national income (Y) that is not spent on consumption (C) or government purchases (G) S = Y − C − G

An open economy can save by building up its capital stock or by acquiring foreign wealth S = I + CA

private saving

g is the part of disposable income (national income, Y , minus taxes, T) that is saved rather than consumed S p = Y − T − C

government saving

is the net tax revenue, T, minus government purchases, G S g = T − G

national saving

• Private and government saving add up to national saving S = (Y − T − C) + (T − G) = S p + S g

more equations

S = S p + S g = I + CA ⇒ S p = I + CA − S g = I + CA − (T − G) = I + CA + (G − T)

how does private savings manifest itself

Private savings can take three forms: investment in domestic capital (I), purchases of wealth from foreigners (CA), and purchases of the domestic government's newly issued debt (G − T)

what accounts make up the balance of payments

• Current account: accounts for flows of goods and services (imports and exports) • Financial account: accounts for flows of financial assets (financial capital) • An asset is any one of the forms in which wealth can be held, such as money, stocks, factories, or government debt • The difference between a country's purchases and sales of foreign assets is called its financial account balance, or its net financial flows • Capital account: flows of special categories of assets (capital) - typically nonmarket, non-produced, or intangible assets like debt forgiveness, copyrights and trademarks

what amkes up current account

imports and exports of merch, services, income receipts,

net unilateral trasnfers

financial account workings

• Financial inflow • Foreigners loan to domestic citizens by buying domestic assets • Domestic assets sold to foreigners are a credit because the domestic economy acquires money during the transaction • Financial outflow • Domestic citizens loan to foreigners by buying foreign assets • Foreign assets purchased by domestic citizens are a debit because the domestic economy gives up money during the transaction

FA makeup

Official (international) reserve assets 2. All other assets 3. Statistical discrepancy

what is statistical discrepancy

Data from transaction may come from different sources that differ in coverage, accuracy, and timing • The balance of payments accounts therefore seldom balance in practice • The statistical discrepancy is the account added to or subtracted from the financial account to make it balance with the current account and capital account

calc net foreign wealth of a country

NFWt = NFWt−1 ∗ VAt + CAt

how currency aprpeciation affects foriegn liabilities ad assets

• Changes in the exchange rate influence value of net foreign wealth (gross foreign assets minus gross foreign liabilities) • Appreciation of the value of foreign currencies makes foreign assets held by the U.S. more valuable, but does not change the dollar value of dollar-denominated debt for the U.S.

example

• Consider the following example • Suppose 70% of the US foreign assets are denominated in foreign currencies • Because in 2019 U.S. GDP was around $21.5 trillion, a 10 percent depreciation of the dollar would leave U.S. liabilities unchanged but would increase U.S. assets (measured in dollars) by 0.1x0.7x1.37=9.6 percent of GDP, or about $2 trillion • This number is approximately 4.3 times the U.S. current account deficit of 2019 • Indeed, due to sharp movements in exchange rates and stock prices, the U.S. economy lost about $800 billion in this way between 2007 and 2008 and gained a comparable amount between 2008 and 2009