Peter Zhang

EC 182

Chapter Notes

Chapter 13

Macroeconomic analysis considers underemployment, saving, trade imbalances, and money/price level. To measure these factors, economists use national income accounting to record expenditures and balance of payments accounting to track indebtedness to foreigners and export/import competition.

A country’s gross national product (GNP) is the value of all goods sold on the market in a time period. It includes goods like bread and books and services like stock brokerages and plumbing. GNP is divded into four possible uses:

  • Consumption: Private households fulfill current wants, usually between 62 and 70 percent of GNP.
  • Investment: Private firms to produce future outputs, including purchases of inventories; usually between 11 and 22 percent of GNP.
  • Government purchases: Goods and services purchased by federal, state, and local govenrments, usually around 17 percent of GNP.
  • Current account balance: The balance of domestic goods purchased by foreigners and foreign goods consumed by citizens.
\[Y = C + I + G + CA, CA = EX - IM\]

GNP is equal to the national income because every dollar used to purchase goods or services is paid to someone else. To avoid double counting, GNP only considers the sale of final good and services. This also excludes used textbooks.

GNP doesn’t account for depreciation the wearing of machinery and structures. GNP less depreciation is net national product (NNP). The income can include unilateral transfers from countries abroad, such as reparations, foreign aid, or pension payments. National income is GNP less depreciation plus net unilateral transfers.

GNP is equal to GDP plus net factor income from the rest of the world. GDP doesn’t correct for the portion of production carried out using foreign-owned capital and labor. Usually, the difference is small.

If imports exceed exports, a country has a current account deficit; the converse describes a current account surplus. A country with an account deficit must borrow the difference from foreigners.

In an open economy, savings can contribute to either investment or the current account \(S = I + CA\).

Private saving is the part of disposable income saved rather than consumed. If we let \(T\) denote net taxes collected from households and firms, we can show: \(S = Y - C -G = (Y - T - C) + (T - G) = S^p + S^g\) The balance of payments account comprises credits (receipts from foreigners) and debits (payments to foreigners). The three types of trannsactions are:

  1. Transactions arising directly from the export and import of foods and services.
  2. Financial account balance or net financial flows. An asset is a form of wealth, such as money, stocks, factories, and government debt. The financial account records all purchases or sales of financial assets. A sale of assets to foreigners enteres the account as a credit.
  3. Other activities recorded in the capital account. They often result from nonmarket activities, e.g. debt forgiveness.

Chapter 14

Built with Jekyll on the Swiss theme.