National Income Accounts
ECON3236 International Finance
Girish Bahal
Main reading: Krugman, Obstfeld, and Melitz1 , Ch 13 page 349-356
(National Income Accounting and the Balance of Payments)
1 International
Economics Theory & Policy 11th Global Edition by Paul R. Krugman,
Maurice Obstfeld, and Marc J. Melitz
Background Textbook
International Economics Theory & Policy 11th Global Edition by Paul R. Krugman, Maurice Obstfeld, and
Marc J. Melitz
Structure of the unit
Week 1: National Income Accounting and Balance of Payments
Week 2: Exchange Rates and Financial Derivatives
Week 3: The Foreign Exchange Market
Week 4: The Money Market
Week 5: Money Supply and Exchange Rate
Week 6: Purchasing Power Parity (PPP)
Structure of the unit
Week 7: A Long-run Model of Exchange Rates
Week 8: The Short-run Equilibrium (DD-AA model)
Week 9: Macroeconomic Policy
Week 10: Central Bank Balance Sheet and Fixed exchange rate
Week 11: Macroeconomic Policy under Fixed Exchange rate
Week 12: Revision
Assessments
• Online quizzes (30%)
There will be a total of five quizzes (see LMS for details)
Each quiz: 5 questions; 6 marks in total; all questions are equally weighted
Duration: 30 min
• Assignments (20%)
There will be a total of two assignments (see LMS for details)
Each assignment: one long answer or essay question (10 marks)
• Final exam (50%)
Two hours in duration; two sections
Section A: MCQs
Section B: Subjective questions
Preview
In this lecture we develop precise definitions of:
I National Income Accounting
I Gross National Income
I Gross Domestic Product
Learning Objectives
Understand the meaning of National Income Accounting
Calculate Gross National Income for closed and open economies
Understand the difference b/w Gross National Income and Gross Domestic
Product
National Income Accounting
National income accounting: a bookkeeping system to measure the level of a
country’s economic activity in a given time period
National income accounting calculates two key metrics: Gross National
Income (GNI) and Gross Domestic Product (GDP)
GNI is the monetary value of all final goods and services produced by the
country’s factors of production and sold on the market in a given time period
GDP is the monetary value of all the final goods and services produced within a
country’s borders in a specific time period
National Income Accounting
National income accounting can be done in three equivalent ways:
1) Value based accounting: total value of goods and services produced in the
economy − cost of production
2) Income based accounting: The sum of incomes generated by production of
goods and services
3) Expenditure based accounting: The sum of final expenditure on goods
and services produced + exports − imports
The Tomato Economy
Farmers produce a total of 100 tomatoes (1 tomato = $1)
A firm produces 1 L of tomato ketchup (worth $40)
80 tomatoes are consumed as final product
The ketchup firm uses 20 tomatoes as intermediate input to produce 1L of
ketchup
The Tomato Economy
1) Value based: value of 100 tomatoes ($100) + value of 1L ketchup ($40) –
cost of producing the ketchup ($20) = $120
2) Income based: income of farmers by selling 100 tomatoes ($100) + net
income of the firm owner by selling 1L of ketchup ($20)= $120
3) Expenditure based: total expenditure on tomatoes consumed as final goods
($80) + total expenditure on ketchup consumed as final good ($40) = $120
GNI for a closed economy
In a closed economy, there is no export or import of goods and services
→ GNI is the expenditure on domestic consumption, investment, or government
purchases:
GNI = Consumption (C) + Investment (I) + Government Purchases (G)
GNI for an open economy
Some domestic output is purchased by foreigners while some domestic spending
goes to purchase goods and services produced abroad
→ GNI for an open economy is exp. on consumption, investment, govt.
purchases, and net exports (exports – imports):
GNI = C+ I + G + Exports (EX) - Imports (IM)
A country earns its national income by selling its goods and services to domestic
and foreign residents
Imports from abroad are subtracted as they contribute to foreign countries’ GNI
and not to domestic country’s GNI
GNI versus GDP
GDP is the same as GNI except:
I GDP does not account for depreciation of equipment and machinery
I GDP only calculates the total value of goods and services produced within
a country’s national boundaries.
On the other hand, GNI attributes production to residents irrespective of
where the production occurs in the world
GNI versus GDP: Example
The profits of a Chinese factory with Australian owners are counted in China’s
GDP but are a part of Australia’s GNI
The ‘services’ that Australian capital provides in China are a service export from
Australia
→ above profits are added to Australia’s GDP in calculating Australia’s GNI
At the same time, to estimate China’s GNI, we must subtract from its GDP the
corresponding service import from Australia
Gross National Income (per capita)
Source: OECD. Reported in US dollars/per capita