1. GROSS NATIONAL INCOME AND THE BALANCE OF PAYMENTS

Transcription

1 1. GROSS NATIONAL INCOME AND THE BALANCE OF PAYMENTS Gross National Income... 3 Investment, Savings and the Current Account... 6 U.S. Savings and Current Account Experience... 7 The Balance of Payments Overview Balance of Payments Accounting The Current Account The Basic Balance The Financial Account The Official Settlements Balance Errors and Omissions and the Reserves Transaction Balance Central Bank Reserves The Impact of the Balance of Payments on the Domestic Economy The BOP, Investment, and GNI The BOP and Money Supply Resource Allocation and Central Bank Intervention U.S. Balance of Payments Experience Conclusion References GNI-BOP Trade-Offs Figure 1 U.S. GNI and gni... 4 U.S. GNI Accounts... 4 Figure 2 U.S. Investment and Savings Figure 3 U.S. Exports and Imports U.S. Trade, Services, Current, and Financial Accounts, GNI, U.S. SF Rate Differential, and $/SDR Figure 4 U.S. Balance of Payments Table 1 Representative U.S. Balance of Payments Account Transactions Table 2 U.S. Balance of Payments Table 3 Illustrative Balance of Payments Transactions for the U.S J. Bodurtha, 1989, 1992, 2010, 2012, 2016, 2018 All Rights Reserved.

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3 GROSS NATIONAL INCOME AND THE BALANCE OF PAYMENTS At the country-aggregate level, the factors that affect output, interest rates, and currency prices can largely be classified by two accounting identities: Gross National Income (GNI) and the balance of payments (BOP). The Gross National Income (GNI) account provides information on the aggregate level of output and the allocation of this output. Output is allocated to current consumption of goods and services and to savings and investment across private, public, and foreign sectors. This allocation largely determines the trade-off between current and future output levels, which, in turn, determines interest rate levels. The balance of payments (BOP) account provides information on a country's demand for foreign country goods and services (imports), the demand for a country s goods and services by foreigners (exports), as well as cross-country investment. Relative import, export and investment demands across countries set currency values. Together, the GNI and BOP accounts paint a picture of crosscountry economic activity. The accounts also indicate relative international competitiveness. The links between the GNI and BOP accounts and competitiveness are direct. Our discussion will highlight three aspects of these links. First, the consumption-savings-investment allocation determines the concentration of output in the consumption goods and services sector relative to the investment-capital goods sector. Second, associated currency values and international competitiveness determine the output levels of export and import-competing industries relative to industries that are little affected by trade. Third, current consumption-savings and export-import decisions impact future resource allocation, output, interest rates, and currency prices. GNI and BOP Accounts- 1

4 As an introduction to our GNI and BOP discussions, we use an example to illustrate the three highlighted links: 1) A country with relatively high private and/or public consumption and low savings and investment should, all else equal, have high interest rates. Consumption goods producers will be doing well, while capital goods producers will be hurting. When domestic interest rates are relatively high, domestic long-term investment is, relatively, low. 2) The relatively high level of interest rates implies that some relatively productive domestic investment opportunities are not financed. However, these investments will be attractive to foreign investors. Foreigners will buy the domestic currency to make these investments, thus bidding up the value of the home currency relative to other currencies. The rising (or stabilized) currency value makes foreign goods less expensive domestically, and imports increase (beyond the level caused by the initial increase in consumption). Domestic firms, and especially those that export or compete directly with foreign importers, are less competitive at the relatively high exchange rate. 3) Increased domestic investments by foreigners will necessitate increased future payments of dividends, interest, and principal to foreigners. Due to the declining level of domestic savings and investment, this repayment to foreign investors will be more difficult. Sooner or later, the domestic currency value must, all else equal, fall to generate more competitive goods and service exports. This example indicates how the GNI and BOP accounts link international economies and business. Specifically, the example country is stable, but faces potential trouble. Unless productivity increases or savings accumulate to a relatively high level compared to current consumption, future consumption will fall. Gaining an understanding of the GNI-BOP links provides a means to understand the current business environment. More importantly, this understanding provides an integrated perspective for evaluating output, rate and currency outlooks. These outlooks help define current business and political trade-offs, as well as potential outcomes. GNI and BOP Accounts- 2

5 Gross National Income Gross domestic product (GDP) is broken out into consumption (C), government spending (G), investments (I), exports (EX) and imports (IM). Therefore, the GDP identity is the following: GDP = C + G + I + EX - IM The total value of all goods produced domestically plus the net amount earned from investment abroad is nominal Gross National Income (GNI). The largest component of GNI is gross domestic product (GDP). The smaller component, net income from foreign investments (interest and dividends), and similar payments earned out of the country, is called net foreign income (NFI). GNI= GDP + NFI = C + G + I + EX - IM + NFI We see that increases in consumption, government spending, investment, exports and net foreign investment income all raise current output. Higher imports lower output. 1 Nominal U.S. GNI and real U.S. gni are plotted in the first panel of Figure 1. As a convention, capital letters are used to abbreviate nominal quantities. Lower case letters are used to abbreviate real quantities. Nominal quantities are stated in domestic currency. The difference between nominal and real quantities are associated measures of accumulated inflaltion. Stated alternatively, nominal quantities are inflated above real quantities by general price level increases. Real quantity values are dollar values less inflation. Therefore, the cumulative difference of GNI and gni is accumulated inflation (as indicated in Figure 1). 1 Gross National Expenditure (GNE=C+I+G) is all national expenditure, and GDP = GNE + EX IM. GNP=GDP+NFP, NFP is net production income payments from the rest of the world. GNP-GNIas=NFP- NFI. GNI=GNP-statistical discrepancy. Concepts of the U.S. National Income and Product Accounts, BEA, Dept. of Commerce, November GNI is reported by the IMF-International Financial Statistics. GNI and BOP Accounts- 3

6 Figure 1 GNI and BOP Accounts- 4