BALANCE OF PAYMENTS
National Income vs. Domestic Income
GNI
Gross National Income
GDI
Gross Domestic Income
= income earned by
= income created within
national residents
domestic borders.
GNI = GDI +NFI
• Net Factor Income [NFI] is income earned on overseas
work or investments minus income generated
domestically but paid to foreigners.
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Hong Kong Net Factor Income
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
-1.00%
-2.00%
-3.00%
-4.00%
NFI (% of GDP)
Source: United Nations Main Aggregates Database
Compare Macau and the Philippines GDP or
GNP
• Macau produces a lot of profits paid to
overseas owners of casinos.
• Philippines workers earn a lot of income
overseas.
• Which is larger Philippines’ GDP or
Philippines GNP?
• Does Macau have greater GDP or GNP?
NFI Across Countries
NFI/GDP
2009
Chad
-42.68%
Liberia
-20.14%
Ireland
-16.94%
Cambodia
-15.64%
Angola
-13.95%
Chile
-9.69%
Panama
-8.97%
China: Macao SAR
-6.03%
Australia
-4.65%
UN Main Aggregates
Russian Federation
China, People's Republic of
Brazil
India
United States
-3.23%
-2.04%
-2.04%
-0.13%
0.28%
China: Hong Kong SAR
3.12%
Switzerland
4.15%
Haiti
9.62%
Bangladesh
11.00%
Philippines
14.73%
Bermuda
23.62%
Lesotho
35.17%
Source: United Nations Main Aggregates Database
Current Account
Balance
• Current Account: NX +NFI
Census and Statistics Department
• NFI = Primary Income (Overseas Wage & Investment
Income) + Secondary Income (Transfers)
Current Account (CA) (Hong Kong)
Current Account: Credit (Hong Kong)
Current Account: Debit (Hong Kong)
Goods (Hong Kong)
Goods: Credit (Hong Kong)
Goods: Debit (Hong Kong)
Services (Hong Kong)
Services: Credit (Hong Kong)
Services: Debit (Hong Kong)
Primary Income (PInc) (Hong Kong)
Investment: Credit (Hong Kong)
Investment: Debit (Hong Kong)
Compensation of Employees: Credit (Hong Kong)
Compensation of Employees: Debit (Hong Kong)
Secondary Income (SInc) (Hong Kong)
110,086
5,199,130
-5,089,044
-71,087
3,411,260
-3,482,347
148,138
721,661
-573,523
52,826
1,056,615
-1,002,210
2,737
-4,315
-19,791
Global Imbalances
Link
World Current Account equals zero!
International Capital Flows
• Capital Outflows: domestic acquisition of foreign
assets.
• Capital Inflows: foreign acquisition of domestic assets
Net Capital Outflows = Capital Outflows – Capital Inflows
Money is an asset. Most international financial transaction
are swaps of one asset for another and have zero net effect
on capital flows. Only net trade of foreign assets for goods
or services creates opportunity for net capital flows.
Current Account = Net Capital Outflows
Savings & Current Account
• Gross National Savings: GNS
• GNS = GNI – Consumption (PCE + GCE)
• GNI = GDP + NFI
• GDP = Consumption + Gross Capital Formation + Net
Exports (Exports – Imports)
• GNS – GCF = NX + NFI = Current Account
Capital & Financial Account
• Current Account is net capital outflows (i.e. national
savings less national investment).
• Capital & Financial Account measures the allocation of
net inflows.
• Capital Account: Transfer of Real Assets
• Financial Account: Transfer of Financial Assets
• Non-reserve Assets
• Direct Investment: (Taking Controlling Stakes in Foreign Entities)
• Portfolio Investment: (Stocks, Bonds)
• Financial Derivatives (Futures, Swaps)
• Other (Mostly Bank Loans and Deposits)
Capital &
Financial
Account 2011
Increases in
financial assets,
and decreases in
liabilities should
be shown as
debits.
Decreases in
financial assets,
and increases in
liabilities should
be shown as
credits.
Salient Feature of Balance of Payments
Capital & Financial Account (CFA) (Hong Kong)
Capital Account (Hong Kong)
Financial Account (FA) (Hong Kong)
Financial Non Reserve Assets (Hong Kong)
Direct Investment (DI) (Hong Kong)
-113,242
-2,021
-111,220
-24,437
1,868
Assets (AS) (Hong Kong)
Liabilities (LB) (Hong Kong)
Portfolio Investment (PI) (Hong Kong)
Assets (AS) (Hong Kong)
Liabilities (LB) (Hong Kong)
Financial Derivatives (FD) (Hong Kong)
Assets (Hong Kong)
Liabilities (Hong Kong)
Other investment (OI) (Hong Kong)
Assets (Hong Kong)
Liabilities (Hong Kong)
Reserve Assets (Hong Kong)
Net Errors and Omissions (Hong Kong)
Overall Balance (Hong Kong)
-746,372
748,240
-10,979
-155,818
144,839
20,884
359,707
-338,823
-36,210
-780,960
744,749
-86,783
3,156
86,783
Balance of Payments
Foreign Currency Received
(Credit)
Foreign Currency Paid (Debit)
Exports (+)
Imports (-)
Income Receipts (+)
Income Payments (-)
{Non reserve} Capital Inflows (+) {Non reserve} Capital Outflows (-)
Credits – Debits = Increase in Reserves
Link
Overall Balance = Current Account + Capital & Financial
Account
Learning Outcomes
Students should be able to:
• Explain the different methods of calculating GDP
• Calculate simple real aggregates like real GDP.
• Use price indices to calculate inflation rates.
• Adjust nominal series for inflation.
• Define and calculate real ex post and ex ante real interest rates.
• Define the elements of the Balance of Payments Tables
Math Review
• Review: Constrained optimization other advanced math.
• 1:30-3:00 pm on Wednesday, Sept. 24th, 2014.
• The venue is 4620 main academic building.