Chapter 1.National Income Accounting and The Balance of Payments.pptx

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1. Chapter 1: National Income Accounting and The Balance of Payments 5 September 2023 1

2. Objective This chapter discusses the basic concepts of the national income accounting and the balance of payment 5 September 2023 2

3. Contents National income accounting The National Account Identity The balance of payment Accounting principles BOP accounts 5 September 2023 3

4. 1. National Income Accounting Gross National Product (GNP) GNP of a country is the value of all final goods and services produced by its production factors and sold on the market in a given period of time GNP is calculated by adding up the value (market value) of all expenditures on the final output, that consist of consumption, investment, government consumption and current account balance 5 September 2023 4

5. 1. National Income Accounting Gross National Product (GNP) In the calculation of GNP, it should be noted that: Firstly, the value of production inputs are not counted when you calculate GNP Secondly, the purchase of used goods is not counted in calculating the GNP since it does not represent the final goods and services produced in each period. 5 September 2023 5

6. 1. National Income Accounting National product and National Income In principle, the national product must be equal to the national income since money used to purchase goods and services creates income for the seller. (or every income must be spent in goods and services) Example with services: when you take the haircut, that purchase of service enters GNP and the payment is the income of the barber. Example with goods: when you purchase a motorcycle, the value of the motorcycle enters GNP and the your payment creates incomes for the production factors that produced the motorcycle, including wages for workers, profits for the company’s owner and shareholders, parts and other intermediate inputs used to produced the motorcycle 5 September 2023 6

7. 1. National Income Accounting Depreciation and unilateral transfers GNP must be adjusted for depreciation and unilateral transfers so that the identity between national income and national products is entirely hold in practice. Depreciation: depreciation of capital goods reduces the income of capital owners and must be subtracted from GNP to calculate the net national product (NNP) or national income. Income transfers: unilateral transfers from abroad is part of national income, but not part of national products, and must be added when calculating national income. 5 September 2023 7

8. 1. National Income Accounting Gross Domestic Product GDP GDP is the value of all final goods and services produced in a territory of a country in a given period of time. GDP is equal to GNP minus the net receipt of factor incomes from abroad. Net factor income is the income that a country’s residents earn from the wealth they hold in foreign countries minus the payments they make to foreign residents for the foreign wealth located at home. GDP = GNP – receipts from foreign countries for factors of production + payments to foreign countries for factors of production GDP is a major indicator of economic activity.The movement in GDP and GNP largely go in lie with each other 5 September 2023 8

9. 2. The Current Account, Savings and Investment National income accounting for a closed economy (I) In a closed economy, there are no exports and imports, and all national income must be generated by domestic purchase for consumption, investment and government purchase Consumption is the portion of GNP that the private sector purchases to satisfy their current wants. Investment is the portion of GNP that is used to produce future output. Investment consists of fixed investment and inventory investment. Government consumption is the goods and services purchased by the government for current use, including government spending on health, education, public administration, road repairs, etc. 5 September 2023 9

10. 2. The Current Account, Savings and Investment National income accounting for a closed economy II National Accounting Identity for a closed economy: Y = C + I + G here Y is the national income (GNP), C is the private consumption; I is the investment; and G is the government consumption/purchases 5 September 2023 10

11. 2. The Current Account, Savings and Investment National income accounting for an open economy I In an open economy, there export and import activities. Part of demand for consumption and investment is met by using goods and services produced abroad (imports), Part of domestic output is sold in foreign market (exports) The spending on imported goods and services is not part of a country’s GNP, and must be subtracted in calculation GNP. Domestic goods and services sold in foreign market (exports) must be added up in calculating GNP. 5 September 2023 11

12. 2. The Current Account, Savings and Investment National income accounting for an open economy II National income identity for an open economy: Y = C + I + G + EX - IM here Y is the national income (GNP), C is the private consumption; I is the investment; and G is the government consumption/purchases; EX is exports and IM is imports 5 September 2023 12

13. 2. The Current Account, Savings and Investment Current account balance The current account balance is the difference between a country’s exports of goods and services and that country’s import of goods and services CA = EX - IM Surplus: if exports are greater than imports, a country has a surplus in the current account Deficit: a country is said to have a deficit in the current account if its imports of goods and services exceeds its export of goods and services 5 September 2023 13

14. 2. The Current Account, Savings and Investment Vietnam’s GDP and Uses (1000 billion VND) 14

15. 2. The Current Account, Savings and Investment Vietnam’s GDP and Uses (%) 15

16. 2. The Current Account, Savings and Investment Current account and indebtedness A deficit in the current account often leads to the increase in indebtedness. By contrast, a current account surplus reduces a country’s debt When a country experiences a deficit in the current account, it must finance the deficit by borrowing from foreign countries. When a country has a surplus in the current account, it is lending to its trading partners The country’s current account balance is equal to the change in its net foreign wealth 5 September 2023 16

17. 2. The Current Account, Savings and Investment Current account and savings I National savings is the portion of national income that is not used for private and government consumption In a closed economy, national savings is equal to national income minus household consumption and government consumption S = Y – C - G In a closed economy, national savings must be equal to national investment S = I (Y = C+ I + G) 5 September 2023 17

18. 2. The Current Account, Savings and Investment Current account and savings II Different from a closed economy, an open economy can invest by using its own savings (national savings) or by acquiring foreign wealth (foreign savings) Y = C + I + G + EX – IM S = Y – C – G = I + EX – IM S = I + CA or I = S – CA A deficit in the current account is often referred to as net foreign investment inflows or foreign savings. By contrast, a surplus in the current account is often referred to as net investment abroad 5 September 2023 18

19. 2. The Current Account, Savings and Investment Private savings and government savings I Domestic savings consist of private savings and government savings Private savings is a portion of household income that is not used for household consumption. Household disposable income (Y d ) is the total national income (Y) minus tax payment (T) to the government Yd = Y-T S P = Y d - C = Y – T - C ; 5 September 2023 19

20. 2. The Current Account, Savings and Investment Private savings and government savings II Government savings is the difference between the government revenue and its consumption S g = T - G Total national savings consist of private savings and government savings S = S p + S g 5 September 2023 20

21. 2. The Current Account, Savings and Investment Private savings and government savings II Linkage between private savings, budget deficits, and current account S p = I + CA + (G - T) This identity shows that private savings can be used to finance domestic investment and government deficit, and to purchase foreign assets. We can also write: CA = (S p – I) + (T - G) 5 September 2023 21

22. 2. The Current Account, Savings and Investment Currenct Account and budget deficits 5 September 2023 22

23. 2. The Current Account, Savings and Investment Currenct Account and budget deficits 5 September 2023 23 Ricardian Equivalence of taxes and government deficits: when the government cut taxes and raises deficits, consumer will raise savings in the anticipation of the increase in future taxes. When the government raises taxes and reduces deficits, the private sector will lower its own savings. The change in the budget deficit is offset by the change in private savings. In the late 1990s, the decrease in European countries’ budget deficits was largely offset by the increase in the private savings.

24. 3. The Balance of Payment Balance of payment and economic transactions The balance of payment is a record of all economic and financial transactions between resident organizations and individuals of a country and its non-residents during a given period of time. 5 September 2023 24

25. 3. The Balance of Payment International Transactions International transactions can be classified into different categories: Exchange of goods and services for other goods and services Exchange of goods and services for financial assets Exchange of financial assets for other financial assets Unilateral transfers of goods and services and unilateral transfers of financial assets 5 September 2023 25

26. 3. The Balance of Payment Domestic and Foreign Residents Individuals and organizations are considered as residents of a country when they live/operate in that country for a given period of time and have income generated in that country. Citizenship and residents are not necessarily the same. Diplomats, military personnel, tourists, and temporary migrants: these persons remain the residents of the country where they hold a citizenship Foreign branches and subsidiaries of TNCs are considered as the residents of the nation where they are located International organization such as the IMF, WTO or the World Bank are not the residents of the nation where they are located. 5 September 2023 26

27. 3. The Balance of Payment Credits and debits Credit transactions: The receipt of payments from foreign residents are recorded as credits, which are entered with a positive sign in the balance of payments The credit transactions include: Exports of goods and services Receipts of factor incomes (profits, dividends and employee compensation) Transfers from foreigners Inflow of foreign capital

28. 3. The Balance of Payment Credits and debits Debit transactions: The payment to foreigners (non-residents) is recorded as debits Debits is entered with a negative sign in the balance of payments The debit transaction include Imports of goods and services Payment of factor incomes (profits, dividends and employee compensation) Transfers made to foreigners Outflows of capital involve payments to foreigners

29. 3. The Balance of Payment Capital inflows and outflows Capital inflows can take two forms: an increase in foreign assets in a nation or a reduction in the nation’s assets abroad. Capital inflows take place when there is a purchasing of domestic assets by foreigners (asset exports) or a selling of foreign assets by domestic residents Examples ?

30. 3. The Balance of Payment Capital inflows and outflows Capital outflows can results from an increase in a nation’s assets abroad or a reduction in the foreign ownership of the national assets Capital outflows occur when there is a selling of domestic assets by foreigners or a purchasing of foreign assets by domestic residents  Examples?

31. 3. The Balance of Payment Double-Entry Bookkeeping The double-entry bookkeeping: each international transaction is recorded twice in the balance of payments, once as a credit and once as a debit of equal value. International payments have two sides: receipts and payments. Crediting shows where the incomes come from. And debiting shows how the incomes are used for.

32. 3. Double-entry bookkeeping Examples of double-entry bookkeeping Example 1: A U.S company exports 1000 dollars of goods. The payment will be made after 3 months In the U.S.’s Balance of Payments  

33. 3. The Balance of Payment Example of Double entry bookkeeping Example 2: A US resident buys a typewriter from an Italian company and pays for it using check. The Italian company deposits the receipt at a US bank. The price of the typewriter is 1000 USD 5 September 2023 33

34. 3. The Balance of Payment Example of Double entry bookkeeping Example 3: A US resident buys a share of BP (British company) with a price of 95 USD. He makes the payment using his money account at a stock broker. The British company deposits the receipt from selling the stock at a US bank. 5 September 2023 34

35. 3. The Balance of Payment The BOP accounts The content of the balance of payments: t he balance of payments consist of three accounts: the current account the capital accounts The financial account 5 September 2023 35

36. 4. The Balance of Payment Accounts The current account The current account involve transactions in trade in goods and services, the receipts and payments of factor incomes and unilateral income transactions Trade in goods: exports and imports of goods Trade in services: exports and imports of services Receipts and payments of factor incomes (primary incomes): the receipt and payments of profits, dividends, and employee compensations) Unilateral transfers (secondary incomes): remittances and official grants 5 September 2023 36

37. 3. The Balance of Payment The current account The current account Trade balance (balance of trade in goods): trade balance is the difference between exports and goods and imports of goods. A country may have a surplus or deficit in the trade balance Current account balance: the CA balance is the difference between the receipt from non-residents (exports of goods and services, investment incomes and income from unilateral transfers) and the payments made to foreign non-residents (imports of goods and services, payment of profits, dividends and rents to abroad, and unilateral transfers to foreigners) 5 September 2023 37

38. 3. The Balance of Payment Capital accounts Capital account The capital account keeps track of the transactions on special asset ans capital Special assets consist of non-financial and unproduced assets, such as natural resources or marketing assets Other capital transfers consist of debt forgiveness, investment grants, or assets that move with migrants. The capital account balance is the difference between the inflows of capital and outflows of capital 5 September 2023 38

39. 3. The Balance of Payment Financial accounts The financial account records all the transactions involving financial assets. Financial inflows (capital inflows): the sale of assets to foreigners is recorded as credits in the financial account. Financial outflows: (capital outflows): the purchase of assets located abroad is recorded as debits in the financial account. 5 September 2023 39

40. 3. The Balance of Payment Financial accounts The financial account consist of two components: Reserve assets: the asset held by monetary authorities for intervention in the foreign exchange market (accommodating items). All other financial investments: transactions arising from trade and investment activities (autonomous items) 5 September 2023 40

41. 3. The Balance of Payment Financial accounts All other financial Investments Other financial investments involve the transaction on other assets not included in the reserve assets or capital account Foreign direct investment: inward or outward Portfolio investment: stocks and bonds Financial derivatives: futures, options, forward contracts Other investments: bank deposits and loans, currencies 5 September 2023 41

42. 3. The Balance of Payment The BOP Identity The balance of payment identity Due to the double-entry bookkeeping of each transaction, the balance of payments accounts will balance by the following equation: current account + financial account + capital account = 0 5 September 2023 42

43. 3. The Balance of Payment The BOP Indentity Errors and Omissions In practice, discrepancies are often observed between the BOP accounts. These inconsistencies arise for several reasons: the under-recording of economic transactions, time inconsistencies, under-reporting and smuggling… The difference between the capital account, the financial account, the current account is considered as statistical errors 5 September 2023 43

44. 3. The Balance of Payment The Official settlement balance The official settlement balance (the balance of payment) is the sum of the current account balance, capital account balance and the financial account balance excluding the changes in reserve assets. The overall balance may have surplus or deficits. The balance of payment is said to have a surplus if the overall balance has a positive sign and vice versa. The deficit in the balance of payment must be financed through the central bank’s international reserves or central bank borrowing The surplus in the balance of payment would results in the accumulation of the central bank’s international reserve 5 September 2023 44

45. 3. The Balance of Payment The US Balance of Payments 2003 I 5 September 2023 45

46. 3. The Balance of Payment The US Balance of Payments 2003 II 5 September 2023 46

47. 4. The Balance of Payment Account Vietnam International Transactions 2019-2020 (Million dollars) 5 September 2023 47   2019 2020   2019 2020 A. Current Account 12168 12529 Other invetsments: Assets -7789 -8699 Exports of Goods F.O.B 264189 282655 of which cash and deposits -8081 -8710 Imports of goods F.O.B -242968 -251930 Other invetsment: Liabilities 8092 2540 Balance of Trade in goods 21221 30725 Cash and deposits 2875 180 Export of services 19920 6290 Borrowing and repayment of foreign debts 5217 2360 Imports of services -21421 -18325 Short-term debts 286 4 Balance of trade in services -1501 -12035 Debts 18385 26925 Primary incomes: Receipts 2237 1428 Amortization -18099 -26921 Primary income: payment -19032 -17045 Long-term 4931 2356 Net receipts of primary incomes -16795 -15617 Debts 13030 11480 Secondary income: receipts 11609 11427 Government 2350 2015 Secondary incomes: payments -2366 -1971 Private 10680 9465 Net receipts of secondary incomes 9243 9456 Amortization -8099 -9125 B. Capital Accounts Government -1764 -1826 C. Financial accounts (Excl. the transaction of reserves assets) 18971 8215 Private -6335 -7298 FDI abroad: Assets -450 -380 Net other investments 303 -6159 FDI in Vietnam: Liabilities 16120 15800 D. Errors and Omissions -7885 -4111 Net FDI Inflows 15670 15420 E. Overall balance 23254 16632 Portfolio Investment abroad: Assets 3 4 F. Reserve assets -23254 -16632 Portfolio investment in Vietnam: Liabilities 2995 -1050   Net portfolio inflows 2998 -1046