Balance of Payments-1

Balance of Payments-1 - Balance of Payments National Income...

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Balance of Payments
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National Income Accounting (Mankiw 7.1) Basic National Income Identity Y = C + I + G + (EX - IM) Nat'l Income = Consumption + Investment + Government + Net Exports (Exports – Imports) NX = Y – (C + I + G) Net exports = Output – Domestic spending If output exceeds domestic spending, we export the difference: NX>0 If output falls short of domestic spending, we import the difference: NX<0
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Net Foreign Investment and the Trade Balance Re-write the national income identity: Y = C + I + G + NX by subtracting C and G from both sides: Y – C – G = I + NX National savings S = (Y-T-C) + (T-G) = Private savings + Government savings = Y – C – G S – I = NX Net foreign investment: excess of domestic savings over domestic investment Equals the amount that domestic residents are ―lending‖ abroad minus the amount that foreigners are ―lending‖ to us Net foreign investment = Net exports (―trade balance‖)
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Net Foreign Investment = Trade Balance The international flow of funds to finance capital accumulation and the international flow of goods and services are two sides of the same coin. When we run a trade deficit, foreigners must be willing to acquire domestically issued debt or to acquire domestic assets (claims on the future returns to domestic capital) When we run a trade surplus, we must be willing to acquire foreign debt/assets
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Balance of Payments IMF definition: ―statistical statement that summarizes transactions between residents and nonresidents during a period‖ 2 aspects to think about: The residential criterion can be ambiguous in an increasingly globalized economy ―Balance‖ is misleading: record of transactions dealing with flows instead of stocks Moving picture rather than a snapshot ERP: Table B103 ―US international transactions‖
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From Transactions to BOP 3 principal types of transactions: Barter (Ricardian Model) Purchases and sales of physical goods and services (imports and exports in the int’l context) Purchases and sales of securities (bonds, stocks, short- term instruments) Current account : barter, buying and selling of goods and services, and the income from investments All security transactions comprise the capital account (the IMF splits what economists call the capital account into ―capital‖ and ―financial‖ account)
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The Current Account The current account is the net change in current assets from trade in goods and services (balance of trade) net factor income (such as dividends and interest payments from abroad) net unilateral transfers from abroad (such as foreign aid, grants, gifts, etc).
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The Capital Account IMF Capital account "records the international flows of transfer payments relating to capital items". Examples of capital goods could be factories or heavy machinery transferred to or from abroad IMF Financial account net change in foreign ownership of investment assets
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This note was uploaded on 10/21/2010 for the course ECON 1530 taught by Professor Ohly during the Spring '10 term at Dartmouth.

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Balance of Payments-1 - Balance of Payments National Income...

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