4 aspects of macroeconomic analysis
1. Unemployment
2. Saving
3. Trade imbalances
4. Money and the price level
National income accounting
records all the expenditures that contribute to a country's income and output
balance of payments accounting
helps keep track of both changes in a country's indebtedness to foreigners and and the fortunes of its export and import-competing industries
GNP
the value of all FINAL goods and services produced by the country''f factors of production and sold on the market ina given time period (usually a year)
4 possible uses a country's output (GNP) is divided into
1. Investment
2. consumption
3. government purchases
4. Current account balance
National income
the income earned in that period by its factors of production
National Income
GNP - Depreciation + Unilateral transfers
Difference between GDP and GNP
GDP measures the volume of production within a country's borders whereas GNP equals GDP plus net receipts of factor income from ROW
Fundamental identity for closed economies
Y= C + I + G
Fundamental identity for open economies
Y = C + I + G + Exports - Imports
Current account balance
The difference between exports of goods and services AND imports of goods and services
CA + EX - IM
Current Account deficit
imports exceed exports
current account surplus
exports exceed imports
How can a country have a current account deficit?
It is only by borrowing abroad that a country can have a current account deficit (import more than it exports)
net international investment position (or IIP)
the difference between its claims on foreigners and its liabilities to them
National saving
the portion of output, Y, that is not devoted to household consumption, C, or government purchases, G. IN A CLOSED ECONOMY, NATIONAL SAVINGS ALWAYS EQUALS INVESTMENT
Savings in a closed economy
S = I
Savings in open economy
S = I + CA
Credit
Any transaction resulting in a receipt from foreigners is entered in the balance of payment account as credit
debit
Any transaction resulting in a payment to foreigners is entered as debit
types of international transactions
1. transactions that arise from the export or import of goods and services and therefore enter directly into the current account
2. Transactions that arise from the purchase or sale of financial assets
3. certain other activities resulting in transfer of
financial account
the financial account of the balance of payment records all international purchases or sales of financial assets
Capital account
Record of other activities resulting in transfers of wealth between countries
Simple rule of double entry bookkeeping
Every international transaction automatically enters the balance of payments twice, once as a credit and once as a debit
the fundamental Balance of Payments Identity
Current account + capital account = financial account
The balance of payments accounts divide exports and imports into what 3 categories?
1. goods trade: imports and exports of merchandise
2. services: items such as payments for legal assistance, tourists' expenditures and shipping fees
3. income: made up mostly of international interest and dividend payments and the earnings of domesticall
financial derivatives
class of assets that are more complicated and ordinary than stocks and bonds but have values that can depend on stock and bond values
Net errors and omissions
Happens due to data from different sources may differ in coverage accuracy and timing and the balance of payments account seldom balance in practice as they must in theory
Central Bank
the institution responsible for managing the supply of money eg. the federal reserve in the US
Official international reserves
foreign assets held by central banks as a cushion against national economic misfortune
official foreign exchange intervention
Central banks often buy or sell international reserves in private asset markets to affect macroeconomic conditions in their economies which are referred to as official foreign exchange intervention
Official settlements balance or "balance of payments
This balance is the sum of the current account and the capital account balance minus the non-reserve portion of the financial account balance, and it indicates the payments gap that official reserve transactions need to cover.