2. National Income Accounting & Balance of Payment

3. Review of Macroeconomics To ensure the world’s scarce productive resources (factors) to be fully employed. 1.Unemployment (no idle) 2.Saving (equal to income) 3.Trade imbalances (export = import; wealth) 4.Money and the price level(medium; spill over)

4. What can be induced? Equilibrium vs. Balance (Condition) EquilibriumEquilibrium: a condition that all influences are canceled by others, resulting in a stable, balanced, or unchanging system. BalanceBalance: a state of equilibrium or parity

5. Y: National Income Y=GNP – depreciation + net unilateral transfer – indirect business taxes (GNP = GDP + net receipts of factor income from rest of world) (closed economy) Imports from abroad add to foreign countries’GNPs, but do not add directly to domestic GNP

6. Open Economy A country with current account deficit is importing present consumption and exporting future consumption.

7. U.S.A. became a net debtor to foreigners

8. Saving=Private S+Government S G-T=government budget deficit

9. Government Budget Deficit worsen the Current Account

10. Balance of Payment Any transactions: A Payment go foreigners (outflow of money) A Receipt from foreigners (inflow of money) Debit (--) Purchase of assets (capital account) = importing Credit (+) Sales of assets (capital account) = exporting

11. Double-entry bookkeeping rules Every international transaction automatically enters the balance of payment twice: once as a credit and once as a debit. (i.e., you pay a foreigner for goods you buy; then the foreigner spend or store the amount you paid.)

12. Example 1: domesticChinese firm exports wheat paid for by transfer to domestic bank account: Current Account[+] entry in “Exports” of Current Account Capital Account[- ] entry in Non-Official Portfolio Investment in Capital Account.

13. Example 2: sharesUS Fund buys RMB 100 million Haier shares using Chinese bank deposits. In this case there are no goods/services flows so there is no entry in the current account Two capital account transactions: [+] entry in Portfolio Investment [- ] entry in Portfolio Investment

14. IMF’s category of BOP.1 between an economyBalance of Payment is a statistical statement for a given period showing :(a) transactions in goods, services, and income between an economy and the rest of the world;(b) changes of ownership and other changes in that economy’s monetary gold, special drawing rights (SDRs) and claims on and liabilities to the rest of the world;

15. IMF’s category of BOP.2 and (c) unrequited transfers and counterpart entries that are needed to balance, in the accounting sense, any entries for the foregoing transactions and changes which are not mutually offsetting. ---- adapted from Balance of Payment Statistics Yearbook 1989, IMF

16. Krugman: foreign assets domestic assetsA country’s balance of payments is net purchases of foreign assets by the home central bank less net purchases of domestic assets by the foreign central banks.assets

17. BOP has the following elements: -It is a statistical statement -of all economic transactions -between the residents and non-residents

18. The distinction between accounts CurrentCurrent : Flows of goods and services (international trade flows)Current CapitalCapital : Records asset changes (payments or receipts for trade flows)Capital Balancing AccountBalancing Account :Balancing Account Balancing Account

19. U.S. Balance of Payments Account for 1991 CreditsDebits Current account (1) Exports+704.9 Of which: Merchandise+416.0 Investment income received +125.3 Other service+163.6

20. (2) Imports-716.6 Of which: Merchandise-489.4 Investment income paid -108.9 Other services-118.3 (3) Net unilateral transfers+8.0 Balance on current account -3.7 [(1) + (2) + (3)] Capital account (4) U.S. assets held abroad-62.2 (increase —) Of which:

21. Official reserve assets+5.8 Other assets-68.0 (5) Foreign assets held in U.S.+67.0 (increase +) Of which: Official reserve assets+18.4 Other assets+48.6 Balance on capital account+4.8 [(4) + (5)] Statistical discrepancy-1.1 [sum of (1) through (5) with sign reversed

22. Calculation Practice 中国国际收支结构

23. 国际收支平衡表的恒等式 THE BALANCE-OF-PAYMENTS IDENTITY BCA + BKA + BRA = 0 BCA + BKA + BRA = 0 (BOPI) Where: BCA = balance on the current account BKA = balance on the capital account BRA = balance on the reserves account BCA + BKA = - BRA

24. BCA = -BKA

25. The U.S.’s Balance-of-Payments Trend: 1980-1995

26. Crux BCA + BKA = - BRA (fixed)BCA + BKA = - BRA (fixed) BCA = -BKA (flexible) U.S. >strong dollar>deficit in BCA

27. Discrepancy (page 318-321) …different sources …Customs inspectors vs. check to bank …coverage, accuracy, and timing …rounding error

28. The Mystery of the Missing Surplus closed economythe world is a closed economy, world saving must equal world investment; world spending must equal world output… current account deficitthe world as a whole is running a substantial current account deficit. interest income flows ① the systematic misreporting of international interest income flows. Interest payment earned abroad are often not reported to government authorities in the recipient’s home country.

29. Such interest payments are credited directly to a foreign bank account and do not even cross national borders. merchant shipping fleet ② Much of the world’s merchant shipping fleet is registered in countries that do not report maritime freight earnings to the IMF. Error and Omission in China’s case Error and Omission in China’s caseError and Omission in China’s case Error and Omission in China’s case.