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KC3002 International Finance/International Macroeconomics

Hideyuki IWAMURA

Spring 2016

Faculty of International Studies

Lecture 4 National Income Accounting

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Liquidity preference Yen interest rate

Money stockPrice level

Income?

� How is the aggregate income determined?� How do the real side and financial side of an

economy interact with each other? � What is the national aggregate income? � How can we measure the level of overall economic

activity?

Big picture of economy as a whole

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House-holds Firms Government Foreign

Residents

Goods / Services

LaborCapital

produce useuse

useuse

Three approaches to measuring economy1. Production Approach

How many goods and services are produced within an economy in a given time period?

2. Expenditure ApproachHow are goods and services produced put into various uses –for consumption or investment use?

3. Income ApproachHow is the value created allocated among the contributors to the production – the owners of labor and capital?

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Production approach

Gross Domestic Product, GDPis the total value of final goods and services produced within a country in a given time period, conventionally a year. Why final goods and services alone? What about intermediate inputs like raw materials? Does a firm which produces, e.g., car parts, make no contribution?

How many goods and services are produced within an economy in a given time period?

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Production approach

GDP

GDP

WheatFarmer Value added by farmer

¥100 million

FlourMiller Value added by miller

50¥150 million

BreadBaker Value added by baker

40¥190 million

Total value of final goods

Sum of the value added at each stage

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GDP is the total “value added” at each stage of production, which is exactly equal to the total value of “final” goods and services.

100 50 40

Expenditure approachHow are the goods and services domestically produced allocated among alternative uses?

1. Consumption ( ) 消費消費消費消費

Some goods are bought by households and consumed. 2. Investment ( ) 投資投資投資投資

Some goods are bought by firms for future use or production. 3. Government purchases ( ) 政府支出政府支出政府支出政府支出

Government also buys goods produced by private sector.4. Trade Balance ( ) 貿易貿易貿易貿易収支収支収支収支

Some domestically produced goods are bought and used by foreign residents.

C

I

G

TB

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Expenditure approach

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Because all the goods and services are purchased by someone, the sum of all the value of purchases of final output is equal to GDP.

Expenditure by households ---Expenditure by firms ---Expenditure by government ---Expenditure by foreign residents (export) ---

C

I

G

EX

, , include purchases of foreign goods (import), which are not part of our GDP. The import should be subtracted. C I G

Expenditure approachGDP can also be calculated by adding up the market value of all the expenditures on final goods minus import, instead of adding up the market value of all the final output.

GDPIMEXGIC =−+++

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Expenditure on final output domestically produced

Domestic production

The difference between payments received for exports and payments made for imports is called “trade balance” ( ).

TBIMEX =−

TB

Expenditure approach

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The identity can be viewed as showing (1) how GDP can be calculated, (2)how output (GDP) is allocated among alternative uses, and (3) how the production is motivated by alternative types of demand.

GDPTBGIC =+++

Example70,50,150,300 ==== TBGIC

How much is this economy’s GDP?

570

7050150300

=

+++=

+++= TBGICGDP

(¥trillion)

Note on investmentSome of the goods are left unsold, and no money is spent on them. Is the total expenditure smaller than the actual output, when some of the outputs are left unsold? Does adding up the market value of all expenditures sometimes fail to yield GDP? The unsold goods are regarded as being bought by firms themselves, as part of their inventories. Because inventories are goods put aside for future sales, purchases of inventories are classified as investment.

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All the final output is sold by definition, and the total expenditure is always equal to output.

Numerical example

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Household ( ) … 300Firm (intended) ( ) … 50Government ( ) … 50Foreign residents ( ) … 50

50 are left unsold. Firms “purchase” them for stock of inventories.

Household ( ) … 300Firm (intended + unintended) ( ) … 100Government ( ) … 50Foreign residents ( ) … 50

GDP = 500Output

Expenditures

Total expenditure equals output.

C

I

G

TB

TB

G

I

C

Income approachFarmer

Miller

Baker

Payment on the bread (final good) = GDP

labor/capitalintermediate goods

intermediate labor/capital

labor/capital

The payment on the bread is ultimately distributed among workers and capital owners. Therefore, the total income of owners of factors is equal to GDP. 13

GDP accounting at work: Japan 2014

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Private Consumption民間最終消費支出

293,216.6Government Consumption政府最終消費支出

100,954.0Gross Fixed Capital Formation総固定資本形成

106,515.4Change in Private Inventories在庫品増加

282.4Exports 88,350.5Imports(-) 99,695.5GDP 489,623.4

*¥billion*Cabinet Office, Government of Japan, www.esri.cao.go.jp.

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Compensation of Employee雇用者報酬

252381.3Operating Surplus or Mixed Income企業余剰・混合所得

91015.8Consumption of Fixed Capital固定資本減耗

103699Taxes on Production and Imports 47863Subsidies(-) 2853.8Statistical discrepancy -2481.9GDP 489,623.4

*¥billion*Cabinet Office, Government of Japan, www.esri.cao.go.jp.

Income approach: GNI

FSFS IM EXGDP GNI −+=Foreign payments

to domestic factorsDomestic payments

to foreign factors

GDP is not a proper measure of a nation’s income because (1) it includes the value created by foreign owned factors operating within a home country (= part of a foreign nation’s income), and (2) it excludes the value created by home owned factors operating abroad (= part of our nation’s income).

Gross national income, GNI, is a more appropriate measure.

FSEX

FSIM

Export of Factor Services

Import of Factor Services16

Income approach: GNDI

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We sometimes receive a non-market transfer of goods, services, and income from abroad, and sometimes make a non-market transfer to abroad.

e.g. Foreign aid by governmentsPrivate charitable gifts to foreign recipientsIncome remittances(送金) to relatives in other countries

If a country receives transfers, it expands the resources available to the country’s households, and thus should be counted to calculate the nation’s income.

INUT

OUTUT

Unilateral Transfers receivedUnilateral Transfers given

Income approach: GNDIINUT OUTUTGNDI GNI= + −

GNDI = GDP + INUT − OUTUT+ FSEX FSIM−

GNDI = + FSEX − FSIM + INUT− OUTUTGIC ++ EX−IM+

Trade balance Net factor income from

abroad

Net unilateral transfers

Current Account（経常収支）

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National income identity

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Y = CAGIC +++

National Income Identity

( ) ( ) ( )( ) ( )OUTFSINFS

OUTINFSFS

UTIMIMUTEXEX

UTUTIMEXIMEXCA

++−++=

−+−+−=

Payments received from

abroad

Payments made to abroad

(GNDI)

Current account : absorption approach

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Policymakers are often concerned about their countries’ current account balances. This is because a country’s current account shows how much the country spends relative to its income. A current account deficit implies that the country spends more than it earns and lives beyond its means.

Why?

A current account surplus implies that the country spends less than it earns and lives within its means.

Current account : absorption approach

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Assume that there is no international factor payment.

This implies that the domestic goods are produced only by domestically owned factors.

All the value domestically created is distributed among domestically owned factors.

The domestic output (GDP) and a nation’s income (GNI) are exactly equal.

(1)Without international factor payment and (2)without international transfer, domestic output (GDP) and national income (GNDI) are equal.

Current account : absorption approach

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Assume also that there is no international non-market transfer. There is no additional income resource to GNI. Therefore, with no international transfer, a country’s GNI and GNDI(Y) are exactly equal.

Under these assumptions, we could use GDP(output) and GNDI(income) interchangeably, and denote both by .

GDP

No international factor payment

GNI GNDI

No international transfer

= =output income

Y

Current account : absorption approach

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When a country uses more goods than its output (i.e., income),it necessarily imports more from foreign countries than it exports.

EX(100)

IM(180)

Output(Income) = 500

Expenditure = 580

CA deficit

When a country imports more than it exports, it runs a current account deficit by definition.

Current account : absorption approach

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Therefore, when a country spends more than it earns and lives beyond its means, it necessarily runs a current account deficit.

Current account is the difference between payments received from abroad and made to abroad, and at the same time, the difference between a country’s income and expenditure or absorption.

In contrast, when a country spends less than it earns and lives within its means, it necessarily runs a current account surplus.

Suppose , and the country spends more than it earns.

Current account : numerical example

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50,100,150,300,500 ===== EXGICY

100

50100150300500

=

−+++=

IM

IM

YGIC =>=++ 500550

By national income identity,

By GDP identity, 10015050 −=−=−= IMEXCA

A country which spends more than its income runs a current account deficit.

Current account : some recent trends

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United States

*Feenstra & Taylor, International Economics, 3rd ed., p.584. *Source: IMF, World Economic Outlook

Current account : some recent trends

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Japan

Current account : some recent trends

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Euro Area

Current account : some recent trends

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Other Industrial