Balance of payments 2 national income accounts 3 the

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Unformatted text preview: nal income accounts 3. The trilemma of international finance 1/27/2014 Page: 18 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 9 2. National income accounts A useful equation x m Savings Investments E ports I ports Taxes Government (private sector) X-M S- I = T -G + Private surplus Current Account expenditure Public surplus (~net exports) Intuition: LHS: LHS: if the current account is in the red 1/27/2014 RHS: RHS: It must be because either the private sector or the government (or both) are in the red to a corresponding degree GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 Page: 19 2. National income accounts The circular flow of money Income (Y) Households Firms Domestic consumption = Consumption (C) - Imports (M) Taxes (T) Expenditures (G) Government Investments (I) Savings (S) Banks Imports (M) 1/27/2014 Overseas Page: 20 Exports (X) GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 10 2. National income accounts GDP: all money flowing out from households Income (Y) Households Firms Domestic consumption = Consumption (C) - Imports (M) Taxes (T) Expenditures (G) Y=C+T+S Government Investments (I) Savings (S) Banks Imports (M) 1/27/2014 Exports (X) Overseas GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 Page: 21 2. National income accounts GDP: all money flowing into firms Income (Y) Households Firms Domestic consumption = Consumption (C) - Imports (M) Taxes (T) Expenditures (G) Y = C + G + I + (X-M) Government Investments (I) Savings (S) Banks Imports (M) 1/27/2014 Overseas Page: 22 Exports (X) GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 11 2. National income accounts Combining the previous two equations Households’ view of GDP: Firms’ view of GDP: Consumptions + Taxes + Savings Consumption + Government + Investment + Exports - Imports Y= C + T + S Equation 1 Y= C + G + I + X - M Equation 1 = Equation 2 Equation 2 C+G+I+X–M=C+T+S X–M=C+T+S–C–G–I X – M = (S – I) + (T - G) + (C – C) X-M = (~net exports) Page: 23 T -G + Private surplus/deficit Current Account 1/27/2014 S- I Public surplus/deficit GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 2. National income accounts Current account deficit results when X-M = Current Account (~net exports) S- I + Private surplus/deficit T -G Public surplus/deficit • It invests more than it saves (S – I < 0) • Excess private sector demand forces the economy to be a net demander of goods and services from abroad • The government runs a budget deficit (T – G < 0) • Excess government spending not covered by taxes must be funded from abroad 1/27/2014 Page: 24 GUY SHANI , 2014 - STRATEGY 310 - THE WORLD ECONOMY - SESSION 04 12 2. National income accounts How can governments “manage” this equation?...
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This note was uploaded on 04/02/2014 for the course STRATEGY 310 taught by Professor Staff during the Winter '08 term at University of Michigan.

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