1. National Income, Saving, & the Balance of Payments
CHAPTER 12

2. Questions to be Answered
What Information is Provided by Items in:
► National Income and Product Accounts
► Balance of Payments Accounts

3. National Income Account Entries
GDP
Y GNP
C Consumption
I Investment
G Government Purchases
EX Exports
IM Imports
T Tax Receipts

4. Related Quantities S Saving CA Current Account Balance
G-T Budget Deficit
Y-T Disposable Income

5. Balance of Payments Account Entries
CA Current Account Balance
EX Exports
IM Imports
FA Financial Account Balance
changes in US Assets Held Abroad
changes in Foreign Assets Held in US

6. GNP (Y) GNP  Output  Income  Spending
Value of output = Income (compensation)
One person’s spending is another’s income, hence total spending = total income
Per capita income = GNP/population & measures the standard of living.

7. 2000 GNP (Billions of U.S. $’s)
1 U.S France
2 China Russia
3 Japan Italy
4 India Brazil
5 Germany Mexico
6 U.K Canada

8. 2000 Population (Millions)
1 U.S France
2 China Russia
3 Japan Italy
4 India Brazil
5 Germany Mexico
6 U.K Canada

9. GNP per Capita (U.S. $’s) 1 U.S. 36000 7 France 24000
2 China Russia
3 Japan Italy
4 India Brazil
5 Germany Mexico
6 U.K Canada

10. GNP versus GDP
GNP – ownership, production by US capital & labor, both here & abroad
GDP – location, production within US borders by both US & foreign owned capital & labor
GNP = GDP + NFI
For US, GNP  GDP
Production by US factors abroad  production by foreign factors in US

11. GNP versus GDP

12. GNP versus GDP

13. GNP versus GDP

14. Demand for Goods in a Closed Economy
Demand for goods is Y = C + I + G
C – consumption spending by households on durables, nondurables, & services
I – investment, purchases of physical investment goods: new houses, buildings, machinery, & inventories.
G – government purchases of goods & services

15. Demand for Goods in a Closed Economy
Investment
(according to the American Heritage College Dictionary)
The act of investing.
An amount invested.
A property or possession acquired for future financial benefit.
A commitment, as of time.
A military siege.

16. The National Income Accounts
Figure 12-1: U.S. GNP and Its Components, 2000

17. United States (billions of $’s)
C %
I %
G %
EX %
IM %
⇛Y %

18. Japan (trillions of ¥’s)
C %
I %
G %
EX %
IM %
Y %

19. Closed Economy Saving & Investment
Importance of Saving (S) & Investment (I)
If S & I , capital formation , productivity , & per capita income 

20. Closed Economy Saving & Investment
Saving is the supply of investment financing, S = SP - (G - T)
Private saving (SP) is the initial source of financing
SP = (Y - T) - C
The government budget deficit (G – T) is the financing used by the government
The remainder is available to finance (physical) investment

21. Closed Economy Saving & Investment
Saving is also the supply of investment goods, S = Y - (C + G)
Y is production
C + G is the goods used by households & government.
The remaining goods are available for use as investment goods.

22. Closed Economy Saving & Investment
Algebraically, the supply of investment financing is equal to the supply of investment goods S = SP - (G - T) = (Y - T - C) - (G -T) = Y - C - G
In a closed economy, S & I are equal.
Y = C + I + G & S = Y – C – G, hence S = I

25. The National Income Accounts
Figure 12-1: U.S. GNP and Its Components, 2000

26. United States (billions of $’s)
C %
I %
G %
EX %
IM %
⇛Y %

27. Japan (trillions of ¥’s)
C %
I %
G %
EX %
IM %
Y %

28. Demand for Goods in an Open Economy
Demand for goods is Y = C + I + G + NX
C+I+G is domestic demand for goods (spending)
Net exports (NX) = exports - imports
If NX > 0, we run a trade surplus & international trade  demand
If NX < 0, we run a trade deficit & international trade  demand

29. Current Account Balance (CA)
CA  NX = Y – (C + I + G)
= (Y – C – G) – I
= S – I
CA is goods production less domestic demand
CA is the excess supply of domestic financing

30. Current Account (CA)
CA surplus implies an outflow of goods, an outflow of financing, & an  in net foreign assets
CA deficit implies an inflow of goods, an inflow of financing, & a  in net foreign assets

31. Recession 2001?
GDP
2000 III
2000 IV
2001 I
2001 II
2001 III
2001 IV
2002 I

32. Recession 2001 nominal real GDP GDP 2000 III 9875 9219
2000 IV
2001 I
2001 II
2001 III
2001 IV
2002 I

34. Recession 2001 2000 IV 2001 III C 6289 I 1755 G 1593 NX -419Y

35. Recession 2001 2000 IV 2001 III C 6289 6371 I 1755 G 1593 NX -419Y

36. Recession 2001 2000 IV 2001 III C 6289 6371 I 1755 1563 G 1593 NX -419Y

37. Recession 2001
2000 IV III C I G NX Y

38. Recession 2001
2000 IV III C I G NX Y

39. REVIEW Closed Economy: Open Economy: GNP = Spending = Output = Income
Spending = C + I + G
Output = C + I + G + NX (= GDP)
Income = C + I + G + NX + NFI (= GNP)
= C + I + G + CA (= GNP = Y)

40. Current Account for B-land
Spending for Mr. & Mrs. B
$100,000 = C; I = G = 0
Combined wages for Mr. & Mrs. B
$90000 = Exports
C = Imports; NX = -$10000
⇛ Output = C + I + G + NX
(GDP) = $ $ = $90000

41. Current Account for B-land
Interest and Dividends for Mr. & Mrs. B:
$13000
Interest Payments for Mr. & Mrs. B:
$ 1000
⇛ Net Factor Income = $ $1000
= $12000

42. Current Account for B-land
Current Account Balance = NX + NFI
= -$ $12000
= $2000
GNP = GDP + NFI = C + I + G + CA
= $ $12000 = $102000
= $ $2000 = $ (=Y)

43. Financial Account for B-land
Option 1 Add $2000 to Checking Account
⇛ “Foreign” Assets increase by $2000
⇛ Financial Account Balance = -$2000
CA + FA = $ $2000 = 0

44. Financial Account for B-land
Option 2 Reduce Visa Balance by $2000
⇛ “Foreign” Liabilities decrease by $2000
⇛ Financial Account Balance = -$2000
CA + FA = $ $2000 = 0

45. Financial Account for B-land
Option 3 Put $2000 under bed
⇛ “Foreign” Assets increase by $2000
⇛ Financial Account Balance = -$2000
CA + FA = $ $2000 = 0

47. The Balance of Payments Accounts
Table 12-2: U.S. Balance of Payments Accounts for 2000

48. National Income Accounting for an Open Economy
Figure 12-2
U.S. CA & Net Foreign Wealth Position,

49. Is the US the World’s Largest Debtor?
Yes, in 1997 net debt was close to $900 billion, the world’s largest
However, US net debt was 11% of GNP.
Argentine net debt is $120 Billion
But this is 40% of GNP (interest is 4% of GNP)

50. Twin Deficits US Trade Deficits in the 1980’s

51. Twin Deficits US Trade Deficits in the 1980’s
1980’s - our trade deficits  to 3.5% of GDP due to government budget deficits.
In the 1980’s, taxes  & government spending 
Thus the demand for goods  & we imported foreign goods
Also the demand for financing  & we borrowed from foreigners

53. Financial Account Gives details of ’s in net foreign assets
Financial account balance = sales of US assets to foreigners – purchase of foreign assets by US
Mirror image of the CA balance, CA + FA = 0

54. The Balance of Payments Accounts
Table 12-2: Continued
credits debits

55. Current Account Transactions Examples
The US buys a $50 sweater from the British, & the British use the $50 to buy a US computer game. (The US trades goods for goods.) Effect on CA? CA = NX + net investment income + net transfers
= in net foreign assets

56. Current Account Transactions Examples
A US investor trades a British investor a $50 US bond for a British bond of equivalent value. (The US trades assets for assets.) Effect on CA? CA = NX + net investment income + net transfers
= in net foreign assets

57. Current Account Transactions Examples
The US buys a $50 sweater from the British, & the British use the $50 to buy a US government bond. (The US trades assets for goods.) Effect on CA? CA = NX + net investment income + net transfers
= in net foreign assets

58. Current Account Transactions Examples
A British tourists sells a US bond & uses the proceeds on a trip to Disney World. (The US trades services for assets.) Effect on CA? CA = NX + net investment income + net transfers
= in net foreign assets

59. Current Account Transactions Examples
A US plant in Britain earns 50 pounds & deposits these profits in a London bank (The US trades services for assets.) Effect on CA? CA = NX + net investment income + net transfers
= in net foreign assets

60. Current Account Transactions Examples
US gives Israel $5 million in foreign aid, & Israel uses the 5 million to buy US military goods.
Effect on CA? CA = NX + net investment income + net transfers
=  in net foreign assets