BALANCE OF PAYMENTS

National Income vs. Domestic Income Net Factor Income [NFI] is income earned on overseas work or investments minus income generated domestically but paid to foreigners. GNIGDI Gross National IncomeGross Domestic Income = income earned by national residents = income created within domestic borders. GNI = GDI +NFI

Source: United Nations Main Aggregates DatabaseUnited Nations Main Aggregates Database

Compare Macau and the Philippines GDP or GNP Macau produces a lot of profits paid to overseas owners of casinos. Philippines workers earn a lot of income overseas. Which is larger Philippines’ GDP or Philippines GNP? Does Macau have greater GDP or GNP?

NFI Across Countries Source: United Nations Main Aggregates DatabaseUnited Nations Main Aggregates Database

Current Account Balance Current Account: NX +NFI NFI = Primary Income (Overseas Wage & Investment Income) + Secondary Income (Transfers) Census and Statistics Department

Global Imbalances Link World Current Account equals zero!

International Capital Flows Capital Outflows: domestic acquisition of foreign assets. Capital Inflows: foreign acquisition of domestic assets Net Capital Outflows = Capital Outflows – Capital Inflows Money is an asset. Most international financial transaction are swaps of one asset for another and have zero net effect on capital flows. Only net trade of foreign assets for goods or services creates opportunity for net capital flows. Current Account = Net Capital Outflows

Savings & Current Account Gross National Savings: GNS GNS = GNI – Consumption (PCE + GCE) GNI = GDP + NFI GDP = Consumption + Gross Capital Formation + Net Exports (Exports – Imports) GNS – GCF = NX + NFI = Current Account

Capital & Financial Account Current Account is net capital outflows (i.e. national savings less national investment). Capital & Financial Account measures the allocation of net inflows. Capital Account: Transfer of Real Assets Financial Account: Transfer of Financial Assets Non-reserve Assets Direct Investment: (Taking Controlling Stakes in Foreign Entities) Portfolio Investment: (Stocks, Bonds) Financial Derivatives (Futures, Swaps) Other (Mostly Bank Loans and Deposits)

Capital & Financial Account 2011 Increases in financial assets, and decreases in liabilities should be shown as debits. Decreases in financial assets, and increases in liabilities should be shown as credits. Salient Feature of Balance of Payments

Balance of Payments Foreign Currency Received (Credit) Foreign Currency Paid (Debit) Exports (+) Income Receipts (+) {Non reserve} Capital Inflows (+) Imports (-) Income Payments (-) {Non reserve} Capital Outflows (-) Overall Balance = Current Account + Capital & Financial Account Credits – Debits = Increase in Reserves Link

Learning Outcomes Students should be able to: Explain the different methods of calculating GDP Calculate simple real aggregates like real GDP. Use price indices to calculate inflation rates. Adjust nominal series for inflation. Define and calculate real ex post and ex ante real interest rates. Define the elements of the Balance of Payments Tables

Math Review Review: Constrained optimization other advanced math. 1:30-3:00 pm on Wednesday, Sept. 24th, The venue is 4620 main academic building.