Comprehensive summary of the lectures for the course International Monetary Economics. Suitable for students Business Economics. Given by L. Van Hove at the Vrije Universiteit Brussel in the academic year .
The summary is in English because this is the language in which the course was given.
,Practical information:
The exam will be written, and will be composed of theoretical questions and applications.
Old exam questions will be solved during the practical sessions. Any time in this work
that we use a superscript F next to a variable this is to indicate that it is a foreign country
its variable, the graphs sometimes use superscript * to indicate this. Caution, the
superscript F or f next to Y indicated a level of full employment, not a foreign variable.
1. Chapter 2: National income accounting and the balance of
payments
1.1. MODULE B: GDP, NATIONAL INCOME, GNP
• National income identity: NI = GNP
o National income (NI)
o National product (GNP)
• National income records the value of national income that results from production
and expenditure.
o Income earned by a nation’s factors of production
• Analysing the National Income Identity
o Producers earn income from buyers who spend money on goods and
services
▪ Expenditure by buyers
= amount of income for sellers
= value of production
• Gross national product (GNP) is the value of all final goods and services produced
by a nation’s factors of production in a given time period.
o Only final goods and services, no intermediate goods
o Factors of production
▪ Workers
▪ Capital
▪ Natural resources
▪ Produced by a specific nation’s owned factors of production
▪ Only goods sold for the first time, no used goods.
• GNP is calculated by adding the value of expenditure on final goods and services
produced
o Consumption: expenditure by domestic consumers
o Investment: expenditure by firms (buildings & equipment)
o Government purchases: expenditures by governments
o Current account balance (exports minus imports):
net expenditure by foreigners on domestic goods and services
PAGE 1
,Lets have a look at an example.
Here we see America’s gross
national product (GNP) for Q1 2016.
It can be broken down into the four
components previously shown.
It is useful to divide GNP to analyze
the results in more detail. Dividing
in these 4 categories is also useful
when comparing different
countries.
• National Income = National Product
• ! Only correct if GNP is adjusted !
o Unilateral transfers (Gift from/to foreigners)
NI = GNP – depreciation ± NET TRANSFERS
▪ Example: Belgium gifts 1 million euros to one of its former colonies
Congo as part of a development aid program. Both the sending and
receiving countries have to adjust for this.
o Sales taxes
NI = GNP – depreciation ± net transfers – INDIRECT BUSINESS TAXES
▪ Example: Not all customer expenditure counts as income for the
producer, a certain percentage goes to the government as tax. We
have to adjust for this difference.
o The distinction is of little importance for macroeconomic analysis, we will
be using the two terms interchangeably.
• Difference between GNP and GDP
o GNP is value of all final goods and services produced by a country’s factors
of production in a given time period
o GDP is volume of production within a country’s borders
o Example: Imagine an American company based in Brussels with its capital
and labour (expats) 100% American.
▪ The value added produced by this company is part of the Belgian
GDP, because its happened within our borders
▪ The value added produced by this company is part of the US’s GNP,
because their factor’s of production are American.
o GNP = GDP – ‘domestic’ income earned by foreigners + ‘foreign’ income
earned by domestic residents
o GNP = GDP + net receipts of factor income from rest of the world (ROW)
PAGE 2
, 1.2. MODULE C: BREAKING DOWN GDP
1.2.1. Europe (France & Germany) in 2004
We are going to have a look at another example where it is useful to break down GDP in
its 4 components. In this graph you can clearly compare all 4 components of 2 countries.
The difference with the previously shown graph regarding the GPD of the US is that here
we are using growth rates and not absolute values.
What do we see?
• France had
o substantial growth in consumer spending
and government spending
(domestic engines of economic growth)
o hardly any growth in investments
o a substantial negative growth in net exports
• Germany had
o hardly any growth in consumer spending
o a substantial negative growth in investment
o a small increase in government spending
o a substantial growth in net exports
Both economies have an entirely different situation and economic landscape. There isn’t a
best situation to be in, but it is dangerous to rely only on net exports as this can be
volatile. It is best for a country to be in balanced growth, where it has multiple engines of
economic growth.
1.2.2. Europe from 2012 to 2015
Next we are going to take a look at another example that shows us the contribution of
several countries to the growth of the euro-area. Not only does this graph give us
information regarding the relative importance of the 4 components of GDP, but also
information about the relevance of countries.
What do we see?
• Germany is as the top of the graph, it is good for more then half of the growth
in the euro-area.
• Net export demand was important for all core companies and periphery
countries (southern euro-area countries)
PAGE 3
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