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Chapter_13_Balance_of_Payments

Trade in financial assets trade in financial assets

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Trade in financial assets Trade in financial assets means the cross-border movement in ownership of a financial claim. Example: If foreigners buy some domestic stocks, bonds, or real estate, they pay the domestic seller of those assets. These transactions are recorded on the financial account (FA). The financial account is equal to asset exports (EXA) less asset imports (IMA). FA = EXA – IMA
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Flow of Payments in an Open Economy Transfers of assets A country may transfer/receive assets as gifts. Like income transfers, these must be recorded properly. Asset imports which are gifts (KAIN) can increase resources available for expenditure, so we must add those. Asset exports which are gifts (KAOUT) can reduce resources available for expenditure, so we must subtract those. These transfers of assets are recorded in the capital account (KA). KA = KAIN – KAOUT
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Figure 16.2 The Open Economy
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Flow of Payments: Quick Summary International transactions appear in two places In the National Income & Product Accounts Because they account for the differences between measures of expenditure, product, and income. In the Balance of Payments Accounts Where they are broken down by concept and presented in much more detail. Transactions in goods & services, factor services, and income transfers go in the current account (CA). Transactions in assets are recorded elsewhere. The financial account (FA) records trade in asset. The capital account (KA) records transfers of assets.
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What National Economic Aggregates Tell Us The national income identity Adding up the three expressions allows us to see how international transactions break the link between income and expenditure : The sum of TB, NFIA and NUT is the difference between expenditure and income. It is called the current account CA.
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Understanding the Data for the National Economic Aggregates Example: U.S. data for 2006 TB < 0: GNE > GDP Expenditure > Production NFIA > 0: GNI > GDP Income > Production NUT < 0: GNI > GNDI Income > Disposable Income
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Understanding the Data for the National Economic Aggregates U.S. trends for C, I, and G Consumption (70%), government consumption (15%), and investment (15%). Investment fluctuates more than other components.
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Understanding the Data for the National Economic Aggregates U.S. trends for Current Account and Income U.S. current account deficits have grown time. Trade balance largest share (–%6 of GNI).
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What the Current Account Tells Us National income identity: GNDI = (C + I + G) + CA Gross National Disposal income (GNDI) is income available including unilateral transfers paid to and received from abroad. National income (GNDI) is equal to gross national expenditure (GNE=C+I+G) plus the current account (CA).
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