National Income Accounting and the Current Account Surplus and Deficits

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National Income Accounting and the Current
Account Surplus and Deficits

• J.D. Han,
• Kings University College

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Review of Intermediate Macroeconomics

• National income accounts
• measures of National Income (Y) Income
• measures of value of Aggregate Output (S Pi Qi)
  Supply
• measures of value of Aggregate Expenditure(AE)
  Demand AE C I G EX - IM
• Disposal of National Income Y T C S

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Ex-post, Supply Demand P E Y

• Records the value of national income that results
  from production and expenditure.
• Producers earn income from buyers who spend money
  on goods and services.
• The amount of expenditure by buyers (E) the
  amount of income for sellers (Y) the value of
  production(P).
• National income is often defined to be the income
  earned by a nations factors of production.

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Y S Pi Qi Supply Side NI GNP

• Y What are factors of production? workers
  (labor), physical capital (like factories and
  equipment), natural resources and other factors
  that are used to produce goods and services.
• S Pi Qi The value of final goods and services
  produced by labor, capital and natural resources,
  which belong to the Canadian nationals, are
  counted as Canadian GNP.
• National Income and the total value of aggregate
  products are always equal to each other at ll
  times.

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AE Demand Side NI GNE

• GNE is calculated by adding the value of
  expenditure on final goods and services produced.
  
• There are 4 types of expenditure
• Consumption expenditure by domestic residents
• Investment expenditure by firms on plants
  equipment
• Government purchases expenditure by governments
  on goods and services
• Exports expenditures by foreigners on domestic
  goods and services
• AE Cd Id Gd EX

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• Y P at all times Supply Side
• E Demand Side
• At equilibrium, Supply Demand
• Y ( P ) E at equilibrium
• Y Cd Id Gd EX

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• However, for statistical convenience,
  consumption, investment, and government
  expenditures are all inclusive of expenditures on
  domestic and foreign goods.
• - Noone is always checking and classifying where
  the product he spends on is made!
• C Cd Cf I Id If G Gd Gf

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• Y Cd Id Gd EX
• (C-Cf) (I-If) (G-Gf) EX
• C I G EX (Cf If Gf)
• C I G EX IM
• C I G CA surplus

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Now Incorporating Y C I G X-M and Y C
S T

• There are 2 ways of doing so
• Method 1
• C I G EX IM C S T
• EX IM S I T - G

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Method 2 From Y C I G EX - IM

• EX- IM
• (current account surplus)
• Y (C I G )
• Trick is to put T and T so that Y CST is
  incorporated.
• (Y C T) (T G) I
• SPrivate SGovernment- I
• SN I

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Savings

• (1) SPrivate the saving of the private sector
  or the households.
• Y C SPrivate T
• SPrivate Y C - T
• (2) SGovernment It is equal to government budget
  surplus.
• SGovernment T G
• (3) National Savings SN SP SG

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• If National Savingsgt Investment, then CA
• If National Savingslt Investment, then CA -

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CA deficits are in fact Savings or Investment
(supplemented) by Foreigners for this country

• I SN CA surplus
• SN CA deficits
• I SNational SForeign
• Countries can finance investment either by
  national savings or by acquiring foreign funds
  equal to the current account deficit, which is in
  fact savings by foreigners (non-residents) for
  this economy.
• When national S lt I, then CA lt 0, financial
  capital inflows for the domestic economy.
• A current account deficit implies a financial
  capital inflow or negative net foreign
  investment( positive net investment by
  foreigners net negative foreign investment by
  Canadians.

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In the short-run, Sp does not change very much,
but Sg does Government Deficits are the major
determinant of Current Account

• CA Sp Sg I
• Sp government deficit I
• Government deficit is negative government saving
• equal to G T
• A high government deficit causes a negative
  current account balance, all other things equal.

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Relationship Between Government Deficits and
Current Account Illustrated

Source Congressional Budget Office, US
Department of Commerce
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We can derive the same equation in an
alternative way

• Equilibrium National Income Condition was
• Sprivate T IM I G EX
• IM EX Current Account Deficits
• I Sprivate ( G T)
• I SPrivate SGovernment
• I SNational