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ECON 332
Sharif Khan

INTERNATIONAL FINANCE ECONOMICS 332 Ingrid Liu ABSTRACT An analysis of the main issues in international finance. Topics include international borrowing and lending, intertemporal gains from trade, current account and balance of trade movements, the determination of exchange rates and foreign exchange markets. CHAPTER 13 NATIONAL INCOME ACCOUNTING AND THE BALANCE OF PAYMENTS Four aspects of international economics I. Unemployment II. Saving III. Trade imbalances IV. Money and price level Two tools in international trade I. National Income Accounting Records all expenditures that contribute to country’s income and output II. Balance of Payments Accounting Keeps track of changes in country’s indebtedness to foreigners Keeps change of fortunes of its export and import-competing industries Shows connection between foreign transactions and national money supplies THE NATIONAL INCOME ACCOUNTS Gross National Product (GNP) Value of all final G&S produced by the country’s factors of production and sold on market in a given time period Different expenditures that make up GNP I. Consumption: amount consumed by private domestic residents II. Investment: amount put aside by private firms to build new plant and equipment for future use III. Government Purchases: amount used by government IV. Current Account Balance: amount of net exports of G&S to foreigners Nation’s income = Nation’s output National Product and National Income GNP over a time period must equal its national income (income earned in period by factors of production) One person’s output is another person’s income Capital Depreciation and International Transfers More accurate measure of national income is GNP adjusted with: I. Depreciation (economic loss due to tendency of machinery and structures to wear out as they are used) subtracted from GNP GNP – Depreciation = Net National Product (NNP) II. Unilateral transfers changes national income (to and from other countries – ex. Foreign aid sent to expatriate countries) National Income = GNP – Depreciation + Net Unilateral Transfers Gross Domestic Product Gross Domestic Product (GDP) Volume of production within a country’s borders GNP = GDP + net receipts of factor income from rest of world NATIONAL INCOME ACCOUNTING FOR AN OPEN ECONOMY Consumption Portion of GNP purchased by private households to fulfill current wants Investment Part of output used by private firms to produce future output Government Purchases Any goods and services purchased by federal, state, or local governments National Income Identity for an Open Economy For CLOSED ECONOMY, all output must be consumed, invested, or bought by government. Y = C + I + G where C consumption I investment G government purchases For OPEN ECONOMY, residents can spend on imports and exports. Y = C + I + G + EX – IMwhere EX exports IM imports The Current Account and Foreign Indebtedness Current Account Balance (CA) – difference between exports and imports of G&S CA = EX – IM IM > EX Current Account Deficit EX > IM Current Account Surplus A country’s current account balance = change in its net foreign wealth Y – (C + I + G) = CA Saving and the Current Account National Saving: portion of output, Y, that is not devoted to consumption (C),
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