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Econ 3236 1.1 Testbook

The document discusses national income accounting and defines key terms. It explains that national income accounting calculates Gross National Income (GNI) and Gross Domestic Product (GDP) using value, income, and expenditure approaches. GNI includes domestic production plus net income from abroad, while GDP only includes domestic production. An example shows that a Chinese factory's profits owned by Australians are counted in China's GDP but part of Australia's GNI.

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87 views16 pages

Econ 3236 1.1 Testbook

The document discusses national income accounting and defines key terms. It explains that national income accounting calculates Gross National Income (GNI) and Gross Domestic Product (GDP) using value, income, and expenditure approaches. GNI includes domestic production plus net income from abroad, while GDP only includes domestic production. An example shows that a Chinese factory's profits owned by Australians are counted in China's GDP but part of Australia's GNI.

Uploaded by

blythe sheng
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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

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