PreviewNational Income AccountsNational Income Accounts: GNPNational Income Accounts: GNP (cont.)PowerPoint PresentationSlide 6Slide 7Slide 8National Income Accounts (cont.)GNP = Expenditure on a Country’s Goods and ServicesCurrent Account BalanceExpenditure and Production in an Open EconomyUS Current Account As a Percentage of GDP, 1960–2004US Current Account, 1960–2004US Current Account and Net Foreign Wealth, 1977–2003Saving and the Current AccountHow Is the Current Account Related to National Saving?How Is the Current Account Related to National Saving? (cont.)Slide 19Inverse Relationship Between Public Saving and Current Account?Balance of Payments AccountsBalance of Payments Accounts (cont.)Example of Balance of Payment AccountingExample of Balance of Payment Accounting (cont.)Slide 25Slide 26How Do the Balance of Payments Accounts Balance?US Balance of Payments Accounts, 2003 in Billions of DollarsUS Balance of Payments Accounts, 2003 in Billions of Dollars (cont.)Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36US Balance of Payments AccountsUS Balance of Payments Accounts (cont.)Slide 39Copyright © 2006 Pearson Addison-Wesley. All rights reserved.12-1Preview•National income accountsmeasures of national incomemeasures of value of productionmeasures of value of expenditure•National saving, investment and the current account•Balance of payments accountsCopyright © 2006 Pearson Addison-Wesley. All rights reserved.12-2National Income Accounts•Records the value of national income that results from production and expenditure.Producers earn income from buyers who spend money on goods and services.The amount of expenditure by buyers = the amount of income for sellers = the value of production.National income is often defined to be the income earned by a nation’s factors of production.Copyright © 2006 Pearson Addison-Wesley. All rights reserved.12-3National Income Accounts: GNP•Gross national product (GNP) is the value of all final goods and services produced by a nation’s factors of production in a given time period.What are factors of production? workers (labor), physical capital (like factories and equipment), natural resources and other factors that are used to produce goods and services.The value of final goods and services produced by US labor, capital and natural resources are counted as US GNP.Copyright © 2006 Pearson Addison-Wesley. All rights reserved.12-4National Income Accounts: GNP (cont.)•GNP is calculated by adding the value of expenditure on final goods and services produced. •There are 4 types of expenditure:1. Consumption: expenditure by domestic residents 2. Investment: expenditure by firms on plants & equipment 3. Government purchases: expenditure by governments on goods and services4. Current account balance (exports minus imports): net expenditure by foreigners on domestic goods and servicesCopyright © 2006 Pearson Addison-Wesley. All rights reserved.12-5Copyright © 2006 Pearson Addison-Wesley. All rights reserved.12-6National Income Accounts: GNP (cont.)U.S. Investment and its components, 1970-2002-2500250500750100012501500175020001970 1975 1980 1985 1990 1995 2000Billions of 1996 dollarsTotalBusiness fixed investmentResidential investmentChange in inventoriesPTPT PTPTPslide 7Copyright © 2006 Pearson Addison-Wesley. All rights reserved.12-8National Income Accounts•GNP is one measure of national income, but a more precise measure of national income is GNP adjusted for following:1. Depreciation of capital results in a loss of income to capital owners, so the amount of depreciation is subtracted from GNP. 2. Indirect business taxes reduce income to businesses, so the amount of these taxes is subtracted from GNP.Copyright © 2006 Pearson Addison-Wesley. All rights reserved.12-9National Income Accounts (cont.)•Another approximate measure of national income is gross domestic product (GDP):•Gross domestic product measures the final value of all goods and services that are produced within a country in a given time period.•GDP = GNP – factor payments from foreign countries + factor payments to foreign countriesCopyright © 2006 Pearson Addison-Wesley. All rights reserved.12-10GNP = Expenditure on a Country’s Goods and Services Y = Cd + Id + Gd + EX= (C-Cf) + (I-If) + (G-Gf) + EX= C + I + G + EX – (Cf + If +Gf)= C + I + G + EX – IM = C + I + G + CA Domestic expenditureNet expenditureby foreignersexpenditureon productionNational income = value ofproductionCopyright © 2006 Pearson Addison-Wesley. All rights reserved.12-11Current Account Balance•Current Account (CA) records exports and imports and international receipts or paymentsCA = EX – IM + RWhere R is net foreign income receipts•Why is the concept of CA economically important?It reflects changes in a country’s net international investment position (or NFA)  CA =  NFAA negative (positive) NFA  a debtor (creditor) to the rest of the worldCopyright © 2006 Pearson Addison-Wesley. All rights reserved.12-12Expenditure and Productionin an Open EconomyCA = EX – IM = Y – (C + I + G )•When production > domestic expenditure, exports > imports: current account > 0, trade balance > 0when a country exports more than it imports, it earns more income from exports than it spends on importsnet foreign wealth is increasing•When production < domestic expenditure, exports < imports: current account < 0, trade balance < 0when a country exports less than it imports, it earns less income from exports than it spends on importsnet foreign wealth is decreasingCopyright © 2006 Pearson Addison-Wesley. All rights reserved.12-13US Current Account As a Percentage of GDP, 1960–2004deficitsurplusCopyright © 2006 Pearson Addison-Wesley. All rights reserved.12-14US Current Account, 1960–2004Copyright © 2006 Pearson Addison-Wesley. All rights reserved.12-15US Current Account and Net Foreign Wealth, 1977–2003Copyright © 2006 Pearson Addison-Wesley. All rights reserved.12-16Saving and the Current Account•National saving (S) = national income (Y) that is not spent on consumption (C) or government purchases (G).•Y – C – G •(Y – C – T) + (T – G) •Sp + Sg = SCopyright © 2006 Pearson Addison-Wesley. All rights reserved.12-17How Is the Current Account Related to National Saving?CA = Y – (C + I + G )implies CA = (Y – C – G ) – I = S – Icurrent account = national saving –