Sin título 1

Gross National Product “the value of all final goods and services produced by the country’s factors of production and sold in the market in any given period” (Krugman, 2015) We want to measure the output of a country, for that reason we add up the market value of all that has been produced. Gross National Product Avoid double accounting? Not accounting for intermediate goods. If we are selling a pen for 1€, and we have paid 30cts for the ink, the ink is not part of the GNP since in the 1€ is already included its contribution to the value of national output. The machine used won’t be an intermediate good, it’s an investment.Gross National Product and National Income GNP must equal national income, i.e. the income earned by the factors of production. That means that what we spend on purchasing products is earned by someone as salaries or benefits. Every euro spent in the purchase of a good or service would eventually end in the bank account of someone. Gross National Product and National Income However for that equality to be correct we need to adjust GNP in two ways. – Include depreciation. Machinery wears out and loses value with time. GNP – depreciation = Net National Product (NNP) – Include unilateral transfers. Transfers sent to a country without any compensation. For example money sent to retirees living abroad or foreign aid. Unilateral transfers are part of the national income but not part of its product. National Income = GNP – depreciation + Unilateral Transfers Following Krugman’s thoughts, due to its insignificant difference, we would use interchangeably both terms.What about GDP? What’s the difference? International Economic Environment While GDP measures the volume of production within a country’s borders – everything that has been produced in a country no matter the origin of the factor of production; GNP is measuring the production of the national factors of production within the country or abroad. GNP = GDP + net receipts of the factor income from the rest of the world. GNP corrects for the portion of countries’ production carried out using services provided by foreign-owned capital and labour. Consumption; the portion of GNP purchased by private households. It is what you, as a citizen, buy to fulfill your needs and wants. For example in consumption we find what you spend on food, a laptop or in a dinner in a restaurant. – Investment. This is the portion of production consumed by private companies to produce their own output. Be careful not to confuse it with the meaning we give at home: as the purchase of stocks or funds for individuals. We can think about the consulting services, the facilities built . – Government purchases. All the consumption and investment of local and national authorities. From the construction of a hospital to the money spent on education. Transfer payments, those in which the recipient does not provide anything on return, are not considered. For example unemployment insurance payments.The fourth element, Current Account (CA): Reality is that in our economies not everything that has been produced in the country is purchased within the borders, and not everything that has been purchased within the borders has been produced in the country. CA = EX – IM Current Account is the difference between the exports and imports.Y = C + I + G + EX – IM Rationale behind. Let’s just consider an economy with only private consumption. If we are producing only 100 € worth outcome, but we are consuming 105€, that extra 5 € worth consumption is coming form outside. When a country is importing more than it is exporting, we say has a current account deficit. If it is exporting more than it is importing, it has a current account surplus. We can think how China as one of the world’s largest exporters has a current account surplus. Whereas US has a current account deficit. If a country is incurring in a CA deficit it has to fund it somehow. If we are importing more than what we are exporting, we need to borrow money and thus increase our foreign debt. That means that at some point in the future we will have to export more than what we import. Having a long and sustained current account deficit can lead to a large foreign debt and a negative net international investment position (IIP), the difference between nation’s claims on foreigners and its liabilities to them. Balance of payments In order to understand and keep track of the composition of the current account balance and the transactions that finance it, we use the balance of payments that records country’s payments and receipts from foreigners. These transactions can be classified in three types: • Export/Import of goods and services. Current Account • Purchase or sale of financial assets (money, stock, factories…) Financial Account. • Transfers of wealth. Mostly from non market assets or intangible assets. Capital Account. (Copyrights, forgiven Debt) International Economic Environment Balance of payments Every transaction has a double entry in the balance, and this always is compensated. There is no such thing as a deficit in the balance of payments, as sometimes we have heard in the media.