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intl econ midterm... current account (GPCO 403/ spr 2019)
Terms in this set (60)
Gross Domestic Product (GDP)
The market value of all final goods and services produced within a country in a given time period
What are the three ways of computing GDP?
1. Value of final products
2. Total Expenditure
What makes up the value of final products when computing GDP? (think super simple, no ntnl. accounting here)
Final Goods or Value added
* Basically if our final goods generate revenue-costs > 0 => we have value added
What's the formula for computing GDP using the value of final products?
GDP = ∑ _i (P_i*Q_i)
What's the formula for computing GDP using total expenditure?
GNE = C + I + G
C = goods and services consumed by the private sector now
I = goods set aside now to produce more goods in future periods
G = purchases by the government
Is social security and welfare transfers included in G (government purchases) for the GNE formula? ?
No. Not included in G
bc welfare transfers != govt expenditures
What's the formula for computing GDP using total income?
GNI = rK + wL
T or F: In a closed economy the value of final products, total expenditure, and income are all equal to each other.
Write the ntnl accounting formulas showing how in a closed economy, the value of final products, total expenditure, and income are all equal to each other.
∑ _i (P_i*Q_i) = C + I + G = capital income + labor income
GDP = GNE = GNI
Why does GNE and GDP differ once the economy opens up?
GNE is NATIONAL expenditure!!
Whereas GDP includes all production of the country.... including things sold to foreigners!
When we open up an economy, how does the formula for GDP change? (think of the formula and how it relates to GNE)
GDP = C+I+G+(EX-IM)
GDP = GNE + NX
Why do we subtract imports from GDP?
Because imports count as a source of expenditure, and are counted in C, I, or G
What is net factor income from abroad?
It is the value of factor service exports minus value of factor service imports
We defined net factor income from abroad as the value of factor service exports minus factor service imports. What do we mean by a factor? What is a factor ?
A factor is simply Capital or Labor
Give an example of net factor income from abroad coming from the factor labor.
Ex: When I worked in Malaysia, my salary was part of US NFIA.
When we open up an economy, and since income can now cross borders, how does the formula for GNI change?
GNI now includes net factor income from abroad:
GNI = GDP + NFIA
Gross National Income represents income earned by domestic factors
In an open economy, what final step does the professor say we need to determine disposable income?
We need to account for nonmarket transfers. I.e. gifts and remittances
What are Net Unilateral Transfers (NUT)?
Unilateral transfers received from other countries minus unilateral transfers sent to other countries.
Explain why NUT is added to GNI to get GNDI, and describe why this can be confusing think about (this is a personal point of confusion).
* can be confusing because we normally look at an export/flow out of the country minus import-flow into the country to calculate "net __"
*Just remember that NUT is comprised of unilateral transfers IN minus unilateral transfers OUT
=> Why we add NUT to GNI to get GNDI
Are Net Unilateral Transfers important for developed countries?
They are not important for developed countries, but they are important for developing countries.
What is GNDI? What is the formula for it?
GNDI = Gross National Disposable Income
GNDI = GNI + NUT
What does GNDI measure?
Measures the income available to domestic factors
To recap what happens in an open economy, how can we express GNDI of a given country? (ntnl accounting formula)
GNDI = GNE + NX + NFIA + NUT
What's the way to think about GNDI in terms of domestic factor payments
GNDI = payments by domestic factors +net payments to domestic factors from abroad
With an open economy, what is the formula for the Current Account?
Current Account = NX +NFIA + NUT
The Current account shows us whether the home country is spending more than its income... how? (basically... write the formula for CA and answer the question)
CA = Y - (C+I+G) = Y - C - I - G
Basically, if Y > (C+I+G) then the country is NOT spending more than its income
When is the Current Account positive? negative?
Positive when income > expenditure: Y > (C+I+G)
Negative when income < expenditure: Y < (C+I+G)
Formula for total savings:
Formula for private savings:
S_p = Y-T-C
formula for public savings:
S_g = T-G
S = (Y-T-C) + (T-G)
From the equation for GNDI hat is the formula for CA that includes private savings?
CA = S_p - I +(T-G)
Asset sales and asset transfers are examples of additional resources available to a country. They impact which two accounts?
Financial Account & Capital Account
What is the financial account? capital account?
Financial account: net sales (exports) of assets to foreigners
capital account: net transfers of capital to foreigners
The financial account has two parts:
US-owned assets abroad
Foreign owned assets in the US (ex: a foreign business with a bank account in the US)
Taking into account asset sales and transfers, we now think about the financial account and capital account. How does this affect the formula for gross national expenditure?
GNE = GNDI + FA + KA
GNE = GNE+ CA + FA + KA
What is the Balance of Payments?
It is simply an accounting of a country's international transactions for a particular time period.
What is the formula for BoP?
BoP = CA + FA + KA =0
If CA < 0, then FA+KA > 0.... why?
Recall that BoP = CA + FA + KA = 0
Therefore, if we have a negative current account, the sum of our foreign and capital accounts MUST be positive or else the identity would not hold.
The Balance of Payments divides international transactions into three accounts:
BoP = CA + KA + FA
The three accounts that make up the BoP can be confusing. Give simple definitions for each of the three accounts.
CA: trade balance and income from abroad
KA: capital transfers
=> FDI, debt forgiveness, foreign aid
FA: sales of assets (two types: US owned assets abroad and Foreign owned assets in the US)
What does Ireland's GDP/GNI ratio of 120% mean?
Means that although GDP is increasing because of foreign factors, this does NOT reflect true benefits of irish nationals!!
The Irish nationals do not have as high of spending power as GDP calculations would suggest.
BoP example: A U.S. citizen buys a pair of German headphones using an American Express credit card
=> Current account goes down (import of good => net exports decreases, CA decreases)
=> financial account goes up because american express now owes the German headphone company money. This is thereby an increase in the U.S. assets (in this case, AMex's promise to pay back) owned by foreigners
BoP example: A US citizen buys $500 of stock in Sony stocks using a check from their Bank of America checking account
=> Financial account goes down: U.S. citizen now owns the foreign asset (import of a financial asset)
=> Financial account goes up: the foreign seller of the stock now has the citizen's check; this is an increase in the U.S. assets owned by foreigners (export of a financial asset).
BoP example: US bank forgives argentinian debt
Capital account goes down for the US: debt relief to argentina
Financial account goes up: the argentinian bank account increases (export of US financial asset)
BoP example: U.S. grants food aid to south sudan
Current account goes up: export of food leads to increase in NX
Current account goes down: NUT goes down because we are sending a unilateral transfer rather than receiving it
NFAP stands for..? what does it mean?
Net Foreign Asset Position
NFAP is a country's "net worth" or external wealth with respect to the world.
What's the formula for NFAP?
NFAP = Assets-Liabilities
According to NFAP, when is a country a net creditor? net debtor?
NFAP > 0 => net creditor
NFAP < 0 => net debtor
You can measure NFAP in two ways: (think BoP)
ΔNFAP_t+j = NFAP_t + ΣCA_t
ΔNFAP_t+j = NFAP_t + ΣFA_t
*t+1 below sigma and j at top of the sigma
what are some examples of U.S. FDI?
* U.S. company invests in a business that operates in a different country
* U.S. citizen buys real estate in a different country
Is EuroDisney an example of FDI? How does it affect the financial account?
Yes! Disney created eurodisney at the cost of $100 million, borrowed at 5%. Since opening for operation, eurodisney yields $20 million per year.
financial account goes down: $100 million
financial account goes up: big amounts until eurodisney closes basically. These yields do not show up in the current account because we haven't paid dividends to shareholders.
How much foreign currency can 1 dollar buy? (write general form for exchange rate)
How many $ can one unit of a foreign currency buy?
If e_(£/$) increases, what happens to the USD? what about the foreign currency?
=> if the the amount of foreign currency one dollar can buy goes up, then the USD is higher in value
The foreign currency depreciates because now it takes more foreign currency to buy 1 USD
what are some causes of LOOP Deviations?
Development => presence of non-traded inputs (e.g. labor) in production
Govt. Regulations (e.g. VAT)
Trade Costs and Trade Barriers => non tradable goods
Other factors => market power("pricing to market"); quality....
PPP exchange rate is the exchange rate that..... (fill in/ definition)
makes each country's currency have the same purchasing power.
when you see "PPP adjusted" what does this imply for what has been controlled for?
It means that we've controlled for the possibility that prices for certain goods can be lower/higher in other countries
Thinking about the computer example and infant industry protection example in class, fill in the blank: "The computer industry at Home needs protection till it can achieve an opportunity cost as (low/high) as in Foreign"
as low as
state two ways of calculating NFAP(net foreign asset position)
accumulate CA balances or accumulate FA balances (look at slide 16 of Bop Lecture)
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