Chapter 13 Global Editon National Income Accounting and the Balance of Payments International Economics THEORY & POLICY Ninth Editon Paul R. Krugman Maurice Obstfeld Marc J. Melltz PEARSON PEARSON Copyright 2012 Pearson Education. All rights reserved
Copyright © 2012 Pearson Education. All rights reserved. Chapter 13 National Income Accounting and the Balance of Payments
Preview 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 accounts Copyright 2012 Pearson Education. All rights reserved 13-2
Copyright © 2012 Pearson Education. All rights reserved. 13-2 Preview • 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 accounts
National Income accounts e 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 2012 Pearson Education. All rights reserve 13-3
Copyright © 2012 Pearson Education. All rights reserved. 13-3 National 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
National Income Accounts: nP Gross national product (GNP)is the value of all final goods and services produced by a nations factors of production in a given time period What are factors of production Factors that are used to produce goods and services: workers (labor services) physical capital (like buildings and equipment,natura resources and others The value of final goods and services produced by Us- owned factors of production are counted as US gNP. Copyright 2012 Pearson Education. All rights reserved 13-4
Copyright © 2012 Pearson Education. All rights reserved. 13-4 National 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? Factors that are used to produce goods and services: workers (labor services), physical capital (like buildings and equipment), natural resources and others. – The value of final goods and services produced by USowned factors of production are counted as US GNP
Math Description Final goods sector: produce Y using capital kl labor n1, and materials m, with prices: r, W, p. The production function isY=f(ki, n,m), all the revenue is distributed to capital owners, workers and material producers, i. e. Y=rk +wn,+pm Material goods sector: produce m using capital k2 and labor n2: m=g(k2, n2). The total revenue is distributed to capital owners and workers, pm=rk,+wn, The gnp y is the value of final goods since it already records the value of intermediate goods m. Y is the total income of the nation Y=r(k,+)+w(n,+n, Copyright 2012 Pearson Education. All rights reserved 13-5
Copyright © 2012 Pearson Education. All rights reserved. Math Description • Final goods sector: produce Y using capital k1 , labor n1 , and materials m, with prices: r, w, p. The production function is all the revenue is distributed to capital owners, workers and material producers, i.e., • Material goods sector : produce m using capital k2 and labor n2 : The total revenue is distributed to capital owners and workers, • The GNP Y is the value of final goods, since it already records the value of intermediate goods m. Y is the total income of the nation: 13-5 Y f k n m = ( 1 1 , , ,) 1 1 Y rk wn pm = + + . m g k n = ( 2 2 , .) 2 2 pm rk wn = + . Y r k k w n n = + + + ( 1 2 1 2 ) ( )
National Income Accounts: GNP(cont) GNP is calculated by adding the value of expenditure on final goods and services produced 1. Consumption expenditure by domestic consumers 2. Investment: expenditure by firms on buildings equipment 3. Government purchases: expenditure by governments on goods and services 4. Current account balance (exports minus imports ) net expenditure by foreigners on domestic goods and services Copyright 2012 Pearson Education. All rights reserved 13-6
Copyright © 2012 Pearson Education. All rights reserved. 13-6 National Income Accounts: GNP (cont.) • GNP is calculated by adding the value of expenditure on final goods and services produced: 1. Consumption: expenditure by domestic consumers 2. Investment: expenditure by firms on buildings & equipment 3. Government purchases: expenditure by governments on goods and services 4. Current account balance (exports minus imports): net expenditure by foreigners on domestic goods and services
Fig. 13-1: U.S. GNP and Its Components Billions of dollars 16000 GN 14000 12000 Consumption 10000 8000 6000 4000 purchases Investment 0 Current -2000 account Source: U.S. Department of Commerce, Bureau of Economic Analysis Copyright 2012 Pearson Education. All rights reserved 13-7
Copyright © 2012 Pearson Education. All rights reserved. 13-7 Fig. 13-1: U.S. GNP and Its Components Source: U.S. Department of Commerce, Bureau of Economic Analysis
China's GNP and Its components 600,000 0.6 500,000.00 0.5 400,000.00 0.4 0.3 300,000.00 0.2 200,000.00 0.1 100,000.00 0 GNP C Copyright 2012 Pearson Education. All rights reserve
Copyright © 2012 Pearson Education. All rights reserved. China’s GNP and Its Components 4 0.00 100,000.00 200,000.00 300,000.00 400,000.00 500,000.00 600,000.00 GNP C I G NX 0 0.1 0.2 0.3 0.4 0.5 0.6 C I G NX
National 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 physical capital results in a loss of income to capital owners, so the amount of depreciation is subtracted from gNp 2 Unilateral transfers to and from other countries can change national income payments of expatriate workers sent to their home countries, foreign aid and pension payments sent to expatriate retirees Copyright 2012 Pearson Education. All rights reserved 13-9
Copyright © 2012 Pearson Education. All rights reserved. 13-9 National 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 physical capital results in a loss of income to capital owners, so the amount of depreciation is subtracted from GNP. 2. Unilateral transfers to and from other countries can change national income: payments of expatriate workers sent to their home countries, foreign aid and pension payments sent to expatriate retirees
National 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- payments from foreign countries for factors of production payments to foreign countries for factors of production Copyright 2012 Pearson Education. All rights reserved 13-10
Copyright © 2012 Pearson Education. All rights reserved. 13-10 National 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 – payments from foreign countries for factors of production + payments to foreign countries for factors of production