Economics 1021A/B Study Guide - Quiz Guide: Finance, Capital Account, Debt Relief
20 Jun 2020
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Open-Economy Macroeconomics
The National Income Accounts
Gross national Product (GNP) is the value of all financial goods and services produced by a nation’s
factors of production in a certain time period.
What are factors of production? Factors that are used to produce goods and services: workers (labor
services), physical capital (buildings and equipment), natural resources and others.
The value of final goods and services produced by US-owned factors of production are counted as US
GNP.
GNP (Y) is calculated by adding the value of expenditure on final goods and services produced:
1. Consumption (C): Expenditure by domestic consumers
2. Investment (I): expenditure by firms on buildings and equipment
3. Government purchases (G): expenditure by governments on goods and services
4. Current account balance (exports (EX) minus imports (IM)=CA): net expenditure by foreigners
on domestic goods and services
US GNP and its Components
National Income accounting for an Open Economy
The national income identity for an open economy is:
CA = EX -IM = Y – (C + I + G)
When production > domestic expenditure, exports > imports: current account>0 and trade balance>0
• When a country exports more than it imports, it earns more income from exports than it
spends on imports
• Net foreign wealth is increasing
When production < domestic expenditure, exports < imports: current account<0 and trade balance<0
• When a country exports less than it imports, it earns less income from exports than it spends
on imports
• Net foreign wealth is decreasing
National income Accounts for Agraria, an open economy:
Saving and the current account
National Saving (S) = national income (Y) that is not spent on consumption (C) or Government
purchases (G).
S = Y – C – G = I
An open economy can save by building up its capital stock or by acquiring foreign wealth.
S = I + CA
The US Current Account and Net International investment position
A string of current
account deficits starting
in the early 1980s
reduced America’s net
foreign wealth until, by
the early 21st Century,
the country had
accumulated a
substantial net foreign
debt.
Balance of Payments accounts
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ECON 1021A/B Full Course Notes
Verified Note
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