Chapter 2A

National Income Accounting and the Balance of Payments

National income accounts measure;

  • national income

  • value of production

  • and value of expenditure


GDP vs GNP

There are two approximate measures of national income;

Gross national product (GNP) is the value of all final goods + services produced by a nation’s factors of production in a given time period.

  • a country’s GNP is roughly equal to the income received by its factors of production.

    • e.g. the value of final goods + services produced by U.S.-owned factors of production are counted as U.S. GNP.

GNP does not account for:

1. Depreciation of physical capital which results in loss of income to capital owners.

2. Unilateral transfers to and from other countries which can change national income.


In an open economy, GNP is calculated by adding the value of expenditure on final goods + services produced:

1. Consumption: expenditure by domestic consumers

2. Investment: expenditure by firms on buildings and equipment

3. Government purchases: expenditure by governments on goods + services

4. Current account balance (exports minus imports): net expenditure by foreigners on domestic goods + services


Gross domestic product (GDP) measures the final value of all goods + services produced within a country’s borders in a given time period.

  • GDP = GNP — net income from foreign countries for factors of production



Balance of Payments Accounts

A country’s BoP accounts for payments to and receipts from foreigners.

  • An international transaction involves two parties, and each transaction enters the accounts twice: once as a credit(+) and once as a debit(-)

    • exports = credit (+)

    • imports = debit (-)


  • current account + financial account + capital account = 0


The BoP account is separated into three accounts:

  • current account: accounts for imports and exports

    • 1. merchandise (goods like importing food)
      2. services (e.g. shipping services, tourist meals, etc.)
      3. income receipts (interest and dividend payments, earnings of firms operating in foreign countries)

      4. net unilateral transfers (gifts, transfers, foreign aid, etc.)


  • financial account: accounts for flows of financial assets

    • the difference between sales of domestic assets to foreigners and purchases of foreign assets by domestic citizens

    • financial inflow: domestic assets sold to foreigners are a credit(+) because domestic economy gains money during transaction.

    • financial outflow: foreign assets purchased by domestic citizens are a debit(-) because money leaves domestic economy


    • financial account has at least three subcategories:

      • 1. official (international) reserve assets
        2. all other assets
        3. statistical discrepancy


    • statistical discrepancy:

      • data from a transaction may come from different sources that differ in coverage, accuracy, and timing.

      • therefore, the BoP accounts rarely balance in practice.

      • this is the account added to or subtracted from the financial account to make it balance with the current account and capital account.


  • capital account: flows of special categories of assets (capital): usually non-market, non-produced, or intangible assets like debt forgiveness, remittance, copyrights, and trademarks.


Central banks often buy or sell international reserves in private asset markets to affect macroeconomic conditions in their economies.

  • They inject money into the economy or withdraw it from circulation in official transactions called official foreign exchange intervention.

  • Official (international) reserve assets: foreign assets held by central banks to cushion against financial instability.

    • assets include govt bonds, currency, gold, and accounts at the IMF

    • official reserve assets owned by (sold to) foreign CB are a credit (+) because the domestic central bank can spend more money to cushion against instability.

    • official reserve assets owned by (purchased by) the domestic CB are a debit (-).


The negative value of the official reserve assets is called the official settlements balance or “balance of payments”.

  • It’s the sum of the current account, the capital account, the non-reserve portion of the financial account, and the statistical discrepancy.

  • negative official settlements balance may indicate that a country;
    â–Ş is depleting its official international reserve assets, or
    â–Ş may be incurring large debts to foreign CB so that the domestic CB can spend a lot to protect against financial instability.

Balance of Payments