Chapter_13_Balance_of_Payments

A country exports factor services and receive factor

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A country exports factor services and receive factor income in return. Factor income includes payments for labor services (wages or salaries), payments on income from assets (dividends or interest).
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From GDP to GNI: Trade in Factor Services Some home GDP might be produced using “imported” foreign factors and some foreign GDP might be produced using “exported” home factors. International payments result (e.g., wages, rents). We must subtract factor service imports (IMFS) and add factor service exports (EXFS) to GDP to calculate the income received by the home nation. GNI = GDP + (EXFS – IMFS) GDP is income paid to all factors of production. GNI is income earned by home factors only: add receipts from the rest of the world (ROW), subtract payments to ROW. The difference between GNI and GDP is net factor income from abroad: NFIA = EXFS – IMFS
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Celtic Tiger or Tortoise? Trade in factor services explains differences between a country’s GNI and GDP: GNI = GDP + NFIA NFIA = EXFS – IMFS Ireland’s rapid economic growth. In the early 1970s, Ireland was one of the poorer countries in Europe. Between 1975 and 2005, real GDP per person grew at 4.4% per year, an exceptional growth rate compared with other rich countries in the European Union. Who reaped the benefits?
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Figure 16.3 A Paper Tiger? Trends in GDP, GNI and NFIA in Ireland from 1980 to 2008, where NFIA (Net Factor Income from Abroad) = EXFS – IMFS
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Celtic Tiger or Tortoise? GDP versus GNI. A sizable portion of this increase in real GDP can be attributed to net factor income from abroad. While GDP measures Ireland’s production, GNI is the income earned by Ireland. Interpreting Ireland’s experience. Countries can rely on factor services from abroad to achieve growth in GDP without growth in GNI. During this period, Irish GNI per person grew by 3.7%, quite a bit less than the 4.4% growth in GDP per person. By 2004, Ireland ranked 4th in the OECD by GDP per person, only 17th by GNI per person.
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From GNI to GNDI: Transfers of Income Transfers of income: Country’s disposable income may differ from income earned due to unilateral transfers paid to (UTOUT) and received from abroad (UTIN). e.g. foreign aid, charitable gifts, income remittances by migrants to families back home. Net unilateral transfers (NUT= UTIN – UTOUT) is the net amount the country receives from the rest of the world. Gross national disposable income (GNDI) is income available including transfers. GNDI = GNI + (UTIN – UTOUT)
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Figure 16.4 Major Transfer Recipients
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Flow of Payments in an Open Economy Income is not the only resource by which an open economy can finance expenditure. The economy can increase/decrease its spending power by exporting/importing assets internationally.
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