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Chapter 13: National Income and Accounting and the Balance of Payments -…
Chapter 13: National Income and Accounting and the Balance of Payments
National income reflects the value of what is produced and spent in an economy:
Production = Expenditure = Income.
Gross National Product (GNP) measures the value of all final goods and services produced by a nation’s factors of production, regardless of location.
GNP is calculated by summing
Consumption
Investment
Government purchases
Net exports (exports - imports)
To refine GNP into national income
Subtract depreciation (loss of value of capital)
Adjust for net unilateral transfers (e.g. remittances, foreign aid)
Gross Domestic Product (GDP) differs from GNP as it measures production within a country, regardless of who owns the production factors:
GDP = GNP - net income from abroad.
The Balance of Payments records a country’s economic transactions with the rest of the world, including payments to and receipts from foreigners.
Every transaction is recorded twice
Credit (+): inflow of money (e.g., export income, capital inflow)
Debit (-): outflow of money (e.g., import spending, capital outflow)
BoP is divided into three main accounts
Current Account: records trade in goods and services, income, and transfers (e.g., exports/imports).
Financial Account: records financial asset flows like investments, stocks, bonds, and loans.
Capital Account: includes non-produced or intangible assets (e.g., debt forgiveness, trademarks, patents).
The Balance of Payments always balances due to double-entry accounting:
Current Account + Financial Account + Capital Account = 0
If a country runs a current account deficit, it must be offset by a surplus in the financial and/or capital account, and vice versa.
The central bank manages the money supply and can influence the BoP through official foreign exchange interventions (buying/selling international reserves).
These interventions can affect the economy by injecting or withdrawing money, thus influencing exchange rates, inflation, or interest rates.