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Macroeconomics 2 for ECO (30L107-B-6) summary
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A summary of all the chapters discussed throughout the course. Images of graphs and the discussed models from the book are also included.
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Summary of Macroeconomics 2B: International money
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Summary International Trade Theory Lectures ('21 - '22)
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Samenvatting: Internationale Economie KUL 2024 (18/20)
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Voorbeeld van de inhoud
Chapter 13: National income accounting and the balance ofpayments
Macroeconomics:
• the branch of economics that studies how economies’ overall levels of employment,
production and growth are determined
• it studies the behaviour of an economy as a whole
• macroeconomic analysis emphasizes four aspects of economic life:
1. Unemployment: macroeconomics studies the factors that cause unemployment
and the steps governments can take to prevent it
2. Saving: households can put aside part of their income to provide for the future, or
they can borrow temporarily to spend more than they earn. A countries saving or
borrowing behaviour influences domestic employment and future levels of
national wealth. From the standpoint of an international economy as a whole, the
world saving rate determines how quickly the world stock of productive capital
can grow
3. Trade imbalances: a perfect trade balance is rarely attained in reality. Trade
imbalances redistribute wealth among countries and are a main channel through
which one country’s macroeconomic policies affect its trading partners
4. Money and the price level: fluctuations in the supply of money and the demand of
it can affect both output and employment. Monetary change in one country can
have effects in other countries. Stability in money price levels is an important goal
of international macroeconomic policy.
To get a complete picture of the macro economic linkages among economies that engage in
international trade, we have to master two related and essential tools:
1. National income accounting records all the expenditure that contribute to a country’s
income and output
2. Balance of payments accounting helps us to keep track of both changes in a
country’s indebtedness to foreigners and the fortunes of its export and import-
competing industries
The national income accounts:
Gross national product (GNP):
• the value of all final goods and services produced by a country’s factors of production
and sold on the market in a given period of time
• is calculated by adding up the market value of all expenditures on final output
• As output cannot be produced without the aid of factor inputs, the expenditures that
make up GNP are closely linked to employment of labor, capital and other factors of
production
• GNP is divided among four possible uses and is called the national income accounts
because an economy’s income equals its output
1. Consumption: the amount consumed by private domestic residents
, 2. Investment: the amount put aside by private firms to build new plant and equipment
for the future
3. Government purchases: the amount used by the government
4. The current account balance: the amount of net exports of goods and services to
foreigners
• GNP is divided into four levels so that it easier to understand possible causes of a
particular recession or boom as each level can be inspected individually and
compared to previous data
National product and national income:
• The GNP a country creates equals national income
• This is because every dollar used to purchase goods or services ends up in
somebody’s pocket
• Only the sale of final goods and services is counted in the GNP
• Only the initial sale of goods or services is counted in the GNP (reselling an old book
would not count in GNP)
Capital depreciation and international transfers:
• GNP does not take into account the economic loss due to the tendency of machinery
and structures to wear out as they are used. This loss, called depreciation, reduces the
income of capital owners.
• So, to calculate national income we must subtract from GNP the depreciation of
capital that occurs over a specific period → GNP less depreciation of capital is called
the net national product (NNP)
• A country’s income may include gifts from residents of foreign countries called
unilateral transfers. An example of unilateral transfers may be pensions payed to
citizens living abroad
• Net unilateral transfers are part of national income but not part of national product
and thus they must be added to NNP in calculations of national income
→ national income equals GNP – depreciation + net unilateral transfers
Gross Domestic product (GDP):
• Measures the volume of production within a country’s borders
• GDP does not correct for the portion of a countries’ production carried out using
services provided by foreign owned capital and labor
• As an example: the profits of a Spanish factory with British owners are counted in
Spain’s GDP but are part of Britain’s GNP. The services British capital provides in
Spain are a service export form Britain and are therefore added to the British GDP in
calculating British GNP. At the same time, we must subtract from Spain’s GDP the
corresponding service import from Britain
,National income accounting for an open economy:
• Saving and investment are not necessarily equal in an open economy as they are in a
closed economy → this occurs because countries can save in the form of foreign
wealth by exporting more than they import and they can dissave- that is reduce their
foreign wealth by exporting less than they import
• Consumption: the portion of GNP purchased by private households to fulfil current
wants. It usually is the largest component of GNP
• Investment: the part of output used by private firms to produce future output. It may
be viewed as the portion of GNP used to increase nation’s stock of capital. It is
usually more variable than consumption
• Government purchases: any goods and services purchased by federal, state or local
government. They include investment and consumption purchases. Transfer payments
such as unemployment benefits don’t require the recipient to give the government and
goods or services back, so they don’t count in government purchases
• The national income identity for an open economy:
→ for a closed economy any final good or service not purchased by households or the
government must be used by firms to produce new plant, equipment, and inventories.
If consumption goods are not sold immediately to consumers or the government,
firms add them to existing inventories, thereby increasing their investment →thus the
identity for a closed economy is: Y=C+I+G, so in a closed economy all output is
consumed or invested
→ for an open economy, trade is possible: imports (IM) from abroad add to foreign
countries’ GNP but not to domestic GNP, similarly the goods and services sold to
foreigners make up the country’s exports (EX) → thus the national income identity
for an open economy is: Y= C+I+G+EX-IM
Current account balance:
• difference between exports of goods and services and imports of goods and
services→ CA= EX-IM, when the imports exceed exports, there is a current account
deficit and a current account surplus occurs when exports exceed imports
• Changes in the current account balance can be associated with changes in output and
thus, employment
• It also measures the direction of international borrowing: when there is a current
account deficit then this deficit needs to be financed and this is done by borrowing
from foreigners, thus net foreign debts increase the more is borrowed and the larger
this deficit gets → In the same manner, if a country has a trade surplus then it can
lend to foreigners to finance their trade deficit
• A country’s current account balance equals the change in its net foreign wealth
• The current account balance is also equal to difference between national income and
domestic residents’ total spending: Y-(C+I+G)=CA
• Net international investment position (IIP): the difference between claims on
foreigners and liabilities to them
, Saving and current account:
• National saving (S): the portion of output Y, that is not devoted to household
consumption C, or government purchases G
• In a closed economy national saving equals investment→this tells us that the closed
economy can increase its wealth only by accumulating new capital
• S = Y- C- G and since the closed economy identity is written as I = Y- C- G → S = I
• In an open economy S = I + CA, this shows that an open economy can accumulate
wealth by increasing their capital stock or by acquiring foreign wealth
• It is possible to raise investment and foreign borrowing at the same time without
changing saving, but for that to happen the foreign country from which is borrowed
and from which is imported, its residents need to be willing to save more so that the
resources needed are freed for the domestic use
Private and government saving:
• Private saving: part of disposable income that is saved rather than consumed
• Disposable income is national income Y, less the net taxes collected from households
and firms by the government
• Private saving Sp = Y – T - C
• Government saving: the governments income is the net tax revenue T, while its
consumption is government purchases G, → Sg = T – G
• Adding private and government saving, we get national saving: Sp + Sg= I+ CA
• National income identity: I + CA + (G – T)
• (G-T) is the government budget deficit
The Balance of Payments Accounts
A countries’ balance of payments account:
• Keeps track of both its payments to and its receipts from foreigners
• Any transaction resulting in a receipt from foreigners is entered in the balance of
payments account as a credit
• Any transaction resulting in a payment to foreigners is entered is entered as a debit
• Three types of international transactions are recorded in the balance of payments
1. Transactions that arise from the export or import of goods or services and
therefore enter directly into the current account (when a French person imports
American jeans, the transaction enters the American balance of payments account
as a credit on the current account)
2. Transactions that arise from the purchase or sale of financial assets. An asset is
any one of the forms in which wealth can be held such as money stocks or
factories or government debt. The financial account records all international
purchases or sales of financial assets (if an American company buys a French
factory, the transaction enters the US balance of payments as a debit in the
financial account, it is a debit because the transaction requires a payment from the
US to foreigners) the difference between a country’s purchases and sales of
foreign assets is called the financial account balance or net financial flows
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