gnp = expenditure on a country’s goods and services y = c d + i d + g d + ex = (c-c f ) + (i-i f )...
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![Page 1: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/1.jpg)
GNP = Expenditure on a Country’s Goods and Services
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
Absorption (expenditure by domestic individuals and institutions)
Net expenditure by foreign individuals and institutions
expenditureon domestic production
value of domesticproduction
![Page 2: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/2.jpg)
Components of US GDP
![Page 3: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/3.jpg)
Current Account Identities
CA = Y – (C + I + G )
current account = income - absorption
CA = (Y – C – G ) – I
= S – I
current account = national saving – investment
current account = net foreign investment
• A country that imports more than it exports has low national saving relative to investment.
![Page 4: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/4.jpg)
US Current Account
![Page 5: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/5.jpg)
US: CA/GDP
16-5
![Page 6: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/6.jpg)
Euro Area Current Account (%GDP)
Source: ECB 16-6
![Page 7: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/7.jpg)
Net International Investment Position
• Foreign assets held by the US have grown since 1980, but US liabilities (our debt held by foreigners) have grown more quickly. The US current account deficit in 2006 was $811
billion dollars: US net foreign wealth continued to decrease.
• The US has the most negative net foreign wealth in the world, and so is therefore the world's largest debtor nation. By the end of 2006, the US international
investment position was -$2.54 trillion dollars.
![Page 8: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/8.jpg)
US International Investment Position
![Page 9: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/9.jpg)
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-9
Fig. 12-2: U.S. Current Account and Net Foreign Wealth, 1976–2006
Source: U.S. Department of Commerce, Bureau of Economic Analysis, June 2007 release
![Page 10: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/10.jpg)
Copyright © 2009 Pearson Addison-Wesley. All rights reserved.12-10
Fig. 12-3: U.S. Gross Foreign Assets and Liabilities, 1976-2006
Source: U.S. Department of Commerce, Bureau of Economic Analysis, June 2007
![Page 11: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/11.jpg)
Income Account: Payments and Receipts
![Page 12: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/12.jpg)
Investment Income
• In 2006, the US ran a surplus on Investment Income. Income receipts were about $650 billion. Income payments were about $614 billion.
• How can the US NIIP be so negative, yet we have this surplus? Mismeasurement of the NIIP? (But still ... !) Differing rates of return on assets and liabilities.
• Relative return: Higgins (2005) argues that our FDI has a much higher rate of return.
• Portfolio composition: our accumulated net FDI position is very positive.
![Page 13: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/13.jpg)
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 16-13
Determinants of Consumption
• Determinants of consumption expenditure include:
Disposable income: income from production (Y) minus taxes (T).
More disposable income means more consumption expenditure, but consumption typically increases less than the amount that disposable income increases.
Real interest rates may influence the amount of saving and spending on consumption goods, but we assume that they are relatively unimportant here.
Wealth may also influence consumption expenditure, but we assume that it is relatively unimportant here.
![Page 14: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/14.jpg)
16-14
Rise in Current Output Increases Saving
![Page 15: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/15.jpg)
16-15
Determinants of the Current Account
real depreciation: ↑EP*/P increased relative price of foreign products
expenditure on domestic products rises, and expenditure on foreign products falls.
real appreciation: ↓EP*/P decreased relative price of foreign products
expenditure on foreign products rises, and expenditure on domestic products falls.
• Changes in disposable income: Y-T when disposable income rises we spend more
on foreign commodities (imports)
![Page 16: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/16.jpg)
16-16
Real Depreciation and the Current Account
• CA = EX – IM
the value of exports relative to the value of imports
• Real depreciation: ↑q (i.e., ↑ EP*/P)
prices of foreign products rise relative to the prices of domestic products.
1. The volume of exports that are bought by foreigners rises.
2. The volume of imports that are bought by domestic residents falls.
3. The value of any given amount of imports in terms of domestic products rises (i.e., the relative price of imports rises, foreign products becomes relatively expensive)
![Page 17: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/17.jpg)
Marshall-Lerner Condition
• Real current account: CA = Ex - q Im measured in domestic goods
• Conflicting volume and valuation effects
• Condition for improvement: volume responses large enough
εX + εM > 1
![Page 18: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/18.jpg)
Value Effect, Volume Effect and the J-curve
• Suppose the volume of imports and exports is fixed in the short run. Then a depreciation of the domestic currency
does not affect the volume of imports or exports,
increases the value/price of imports in domestic currency and therefor decrease the current account: CA ≈ EX – IM..
• The current account could immediately decrease after a currency depreciation, then increase gradually as the volume effect begins to dominate the value effect.
• for most countries the volume effect dominates the value effect after one year or less.
![Page 19: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/19.jpg)
Source: KO 2007
J-Curve
J-curve: valueeffect dominatesvolume effect
volume effect dominatesvalue effect
Immediateeffect of real depreciationon the CA
![Page 20: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/20.jpg)
J-curve and Pass Through
• Pass through rate: the percentage by which import prices change when the value of the domestic currency changes by 1%.
• In our basic model, the pass through rate is 100%: import prices in domestic currency exactly match a
depreciation of the domestic currency.
• In reality, pass through may be less than 100% due to price discrimination in different countries. firms that set prices may decide not to match changes in the
exchange rate with changes in prices of foreign products denominated in domestic currency.
![Page 21: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/21.jpg)
J-curve and Pass Through (cont.)
• Suppose a pass through rate less than 100%, then
the value of imports will not rise as much after a domestic currency depreciation, and the current account will not fall as much
volume of imports and exports will not adjust much over time since domestic currency prices do not change much.
• Pass through of less than 100% dampens the effect of depreciation or appreciation on the current account.
![Page 22: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/22.jpg)
Table 16A2-1: Estimated Price Elasticities for International Trade in Manufactured Goods
![Page 23: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/23.jpg)
Exchange Rates andReal Exchange Rates
• Nov 10, 2007 59.92 Icelandic króna per USD
• Nov 10, 2008 128.78 Icelandic króna per USD
• Depreciation over the period: 114.92%
• Inflation over the period: 15.90%
• HUGE real depreciation: 99.02%
![Page 24: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/24.jpg)
Depreciation in Iceland
![Page 25: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/25.jpg)
Determinants of Aggregate Demand
• Determinants of the current account include:
Real exchange rate: an increase in the real exchange rate increases the current account.
Disposable income: an increase in the disposable income decreases the current account.
![Page 26: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/26.jpg)
Determinants of Aggregate Demand
• Aggregate demand is therefore expressed as:D = C(Y – T) + I + G + CA(EP*/P, Y – T)
• Or more simply:
AD = AD(EP*/P, Y – T, I, G)
Investment expenditure andgovernment purchases(exogenous)
Current account depend on the realexchange rate and disposable income.
Consumptionexpenditure respondes todisposableincome
![Page 27: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/27.jpg)
Short Run Equilibrium in the Goods Mkt
• Equilibrium is achieved when the value of production (output) Y equals the value of aggregate demand AD.
Y = AD(EP*/P, Y – T, I, G)
![Page 28: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/28.jpg)
Permanent Fiscal Expansion
• Permanent change in fiscal stance increase in G or decrease in T
Changes aggregate demand• subject to usual qualifications
![Page 29: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/29.jpg)
Permanent Fiscal Expansion
• SR effects does up demand -> up Y?
No: E appreciates -> real E appreciates• Ee appreciates (permanent shock)
How much does E appreciate?• Enough to restore D=Yf
(to see, think LR)
![Page 30: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/30.jpg)
Permanent Fiscal Expansion (LR)
• LR same as SR M=M0, Y = Yf, R=R*
• so P is unchanged!
• But then AD(EP*/P,Y-T,I,G)=Yf up G must "crowd out" private demand
• through CA!
• Twin deficits once again
![Page 31: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/31.jpg)
Bond yields (missing part of our story)
Source: IMF 2009, Global Financial Stability Report16-31
![Page 32: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/32.jpg)
US: Debt and Debt/GDP
Source: Wikipedia 16-32
![Page 33: GNP = Expenditure on a Country’s Goods and Services Y = C d + I d + G d + EX = (C-C f ) + (I-I f ) + (G-G f ) + EX = C + I + G + EX – (C f + I f +G f )](https://reader035.vdocuments.mx/reader035/viewer/2022062320/56649d6d5503460f94a4ce5a/html5/thumbnails/33.jpg)
Eurozone: Debt/GDP
Source: ECB 16-33