ECO230Y1 Lecture Notes - Lecture 14: Foreign Direct Investment, Capital Good, Final Good

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Published on 30 Apr 2016
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NATIONAL ACCOUNTING AND THE BALANCE OF PAYMENTS
Chapter 13
MACROECONOMIC APPROACH
Macroeconomic objective: Stable and fast growing economy with fully employed
resources (production factors), and stable prices.
- You do not want to over-produce (increase output capacity)  you will
have to resort to slowing down economy - this is difficult to understand if
you don’t understand macroeconomics
- If output increase is due to increase in output capacity this is good
- Movement in price level is not different from stability
- Over capacity production  inflation
- Under capacity production  deflation
Macroeconomic Variables:
1. Output/income/expenditure  national accounting has three different
chapters
2. Saving and Investment  equal
3. Unemployment
a. People’s welfare dependent on income and employment
b. Directly affects people’s welfare
4. Money, Price, and Inflation
5. Trade Balance
Macroeconomic Tools:
1. National Income Accounts:
Measuring output, income, expenditure, and their components
2. Balance of Payments Accounts:
Showing the status of foreign debts (assets), import/export, and relation
between foreign transactions and national economy.
MEASURING OUTPUT/INCOME:
GNP (Gross National Product):
The market value of all final goods and services produced by the nationals of a
country in a given period of time
- Market value: The price at which the good is transacted, not the one it
should be, or believed to be fair
oPi Qi
- Of all:  the good must be commercialized  the good must be legal
- Final: Not intermediate goods (three types of goods)
oConsumption goods: goods, which are consumed in short period of
time. Ex. Bread  FINAL GOOD
Capital goods: Goods whose services are used for long period of
time in production of other goods, you do not consume capital but
you use the services it can provide, must be durable and last a long
time. Ex. Airplane  FINAL GOOD
oIntermediate goods: Goods that are used up and disappear in
production of other goods. Ex. Fuel (Value of intermediate good is
already absorbed by the price of final good  no need for double
accounting)
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NATIONAL ACCOUNTING AND THE BALANCE OF PAYMENTS
Chapter 13
- Goods and services : Tangible and intangible goods
-Produced : not resold
- By the nationals of a country: Gross Domestic Product (GDP): The
market value of all final goods and services, produced within a country, in
a given period of time. GDP = GNP + NFP (Net Factor Payments) to
foreigners
oNet Factor Payments = + Payments to foreigners for their
productions factors/ - Payments from foreigners for domestic
production factors
oGNP is a citizenship concept
oGDP is a territorial concept
- In a given period of time: in a year, quarter, or month
GNP CALCULATION: Expenditure approach:
GNP = Y = C+I+G+CA
Y= Demand/ Expenditure
C= Private consumption: Durable goods (consumed after 2 years or more), semi-
durable goods (goods consumed within 2 years), non-durable goods (consumed
within 1 year), services (60%-70% of GNP)
I= Investments: Inventories (unplanned investment), fixed investment (machines,
buildings  residential/non-residential) (15%-18% of GNP)
G= Government Expenditure (not including transfers  Ex. Subsidy) : Federal,
Provincial, Local (including government consumption and investment) (15%-22%
of GNP)
CA=Current Account: Export – Import  CA<0 =deficit/CA>0 = surplus/ CA = 0 
Balanced CA (+/- 5% of GNP)
The Current Account and Indebtedness
Expenditure Approach: Y = C+I+G+CA
 CA = Y – (C+G+I)
- Output/ Income
- Domestic Expenditure
- CA = EX-IM
Domestic expenditure > income/ouput
 Current account deficit (CA <0)
 Import > Export
 Borrowing from foreigners or selling assets to foreigners  increasing
foreign debt
oSelling assets = borrowing
 Net foreign wealth decreases (or net foreign debt increases)
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Document Summary

Macroeconomic objective: stable and fast growing economy with fully employed resources (production factors), and stable prices. You do not want to over-produce (increase output capacity) you will have to resort to slowing down economy - this is difficult to understand if you don"t understand macroeconomics. If output increase is due to increase in output capacity this is good. Movement in price level is not different from stability. Macroeconomic variables: output/income/expenditure national accounting has three different chapters, saving and investment equal, unemployment, people"s welfare dependent on income and employment, directly affects people"s welfare, money, price, and inflation, trade balance. Measuring output, income, expenditure, and their components: balance of payments accounts: Showing the status of foreign debts (assets), import/export, and relation between foreign transactions and national economy. The market value of all final goods and services produced by the nationals of a country in a given period of time.

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