Chapter 1

National Income
Accounting and The
Balance of Payments

Lê Minh Tuấn, Msc

Faculty of International Economics
and Business, UEB-VNU
 2

This chapter discusses the basic

Objective concepts of the national income
accounting and the balance of payment
 3

 National income accounting

The National Account Identity
Content


 The balance of payment

Accounting principles
BOP accounts
 4
Gross National Product (GNP)
GNP is the value of all final goods and
1. National


services produced by its production

Income factors and sold on the market in a
Accounting given period of time
 GNP is calculated by adding up the
value (market value) of all expenditure
on the final output, that consist of
consumption, investment, government
consumption and current account
 5
National product and National Income
In the calculation of GNP, it should be
1. National noted that:
Income
Firstly, the value of production inputs
Accounting


are not counted when you calculate

GNP
 Secondly, the purchase of used goods
is not counted in calculating the GNP
since it does not represent the final
goods and services produced in each
period.
 National product and National Income
6
 In principle, the national product must be equal to the
national income since money used to purchase goods
and services creates income for the seller. (or every
1. National income must be spend in goods and services, example
Income with good and services)

Accounting  Example with services: when you take the haircut,

that purchase of service enters GNP and the payment
is the income of the barber.
 Example with goods: when you purchase a
motorcycle, the value of the motorcycle enters GNP
and the your payment enters the production factors
that produced the motorcycle, including wages for
workers, profits for the company’s owner and
shareholders, parts and other intermediate inputs used
to produced the motorcycle
 Depreciation and unilateral transfers
7
 GNP must be adjusted for depreciation and
unilateral transfers so that the identity between
1. National national income and national products is entirely
hold in practice.
Income  Depreciation: depreciation of capital goods
Accounting reduces the income of capital owners and must
be subtracted from GNP to calculate the net
national product (NNP)
 Income transfers: unilateral transfers from
abroad is part of national income, but not part of
national products, and must be added when
calculating national income.
 Gross Domestic Product GDP
8
 GDP is the value of all final goods and services
produced in a territory of a country in a given period of
time.
1. National  GDP is equal to GNP minus the net receipt of factor
Income incomes from abroad.
Accounting  Net factor income is the income that a country’s
residents earn from the wealth they hold in foreign
countries minus the payments they make to foreign
residents for the foreign wealth located at home.
 GDP = GNP – payments from foreign countries for
factors of production + payments to foreign countries for
factors of production
 GDP is a major indicator of economic [Link]
movement in GDP and GNP largely go in lie with each
other
 US GNP and its components
9

1. National
Income
Accounting
 Vietnam GDP
10
Sử dụng GDP, 2015 (Tỷ đồng)
4500000

1. National 4000000

Income 3500000

Accounting
3000000

2500000

2000000

1500000

1000000

500000

0
GDP Đầu tư TD nhà nước TD cá nhân Xuất khẩu ròng Sai số
-500000
 National income accounting for a closed
economy 11

 National Accounting Identity for a closed

2. The Current economy:
Account,
Savings and  Y=C+I+G
Investment  here Y is the national income (GNP), C
is the private consumption; I is the
investment; and G is the government
consumption/purchases
 National income accounting for an open
economy 12

 In an open economy, there export and import

2. The Current activities.
Account,  Part of demand for consumption and investment is
Savings and met by using goods and services produced abroad
Investment (imports),
 Part of domestic output is sold in foreign market
(exports)
 The spending on imported goods and services is
not part of a country’s GNP, and must be subtracted
in calculation GNP.
 Domestic goods and services sold in foreign market
(exports) must be added up in calculating GNP.
 National income accounting for an open
economy 13

 National income identity for an open

2. The Current economy:
Account,
Savings and  Y = C + I + G + EX - IM
Investment  here Y is the national income (GNP), C
is the private consumption; I is the
investment; and G is the government
consumption/purchases; EX is exports and
IM is imports
 Current account balance
14
 The current account balance is the
difference between a country’s exports of
2. The Current goods and services and that country’s
Account, import of goods and services
Savings and
Investment CA = EX - IM
 Surplus: if exports are greater than
imports, a country has a surplus in the
current account
 Deficit: a country is said to have a deficit in
the current account if its imports of goods
and services exceeds its export of goods
and services
 Current account and indebtedness
15
 A deficit in the current account often leads
to the increase in indebtedness. By
2. The Current contrast, a current account surplus reduces
Account, a country’s debt
Savings and
 When a country experiences a deficit in the
Investment current account, it must finance the deficit by
borrowing from foreign countries.
 When a country has a surplus in the current

account, it is lending to its trading partners

 The country’s current account balance is
equal to the change in its net foreign
wealth
 VIETNAM’S CURRENT ACCOUNT BALANCE
16
CA (%GDP)
10.0

2. The Current
Account, 5.0

Savings and
Investment 0.0
2005 2006 2007 2008 2009 2010 2011 2012
CA (%GDP)

-5.0

-10.0

-15.0
 Current account and savings
17
 National savings is the portion of national
income that is not used for private and
2. The Current government consumption
Account,
Savings and  In a closed economy, national savings is
Investment equal to national income minus household
consumption and government consumption
S=Y–C-G
 In a closed economy, national savings
must be equal to national investment
S=I
 Current account and savings
18
 Different from a closed economy, an open
economy can invest by using its own
2. The Current savings (national savings) or by acquiring
Account, foreign wealth (foreign savings)
Savings and
Investment  S = I + CA or I = S – CA
 A deficit in the current account is often
referred to as net foreign investment
inflows or foreign savings. By contrast, a
surplus in the current account is often
referred to as net investment abroad
 Private savings and government savings
19
 Domestic savings consist of private
2. The Current savings and government savings
Account,  Private savings is a portion of
Savings and household income that is not used
Investment for household consumption.
Household disposable income is the
total national income (Yd) minus tax
payment (T) to the government
 Sp = Yd - C = Y – T - C
 Private savings and government savings
20
 Government savings is the
2. The Current difference between the government
Account, revenue and its consumption
Savings and  Sg = T - G
Investment
 Total national savings consist of
private savings and government
savings
 S = Sp + Sg
 Private savings and government savings
21
 Linkage between private savings,
2. The Current budget deficits, and current account
Account,  Sp = I + CA + (G - T)
Savings and
 This identity shows that private
Investment
savings can be used to finance
domestic investment and
government deficit, and to purchase
foreign assets
 Currenct Account and budget deficits
22

US current account and public saving relative to GDP,

2. The Current 1960-2004
Account, 4%
Savings and 2%
Investment 0%
Percent of GDP

-2%
-4%
-6%
-8%
1960 1965 1970 1975 1980 1985 1990 1995 2000
current account public saving
 Currenct Account and budget deficits
23
 Ricardian Equivalence of taxes and
government deficits: when the government cut
2. The Current taxes and raises deficits, consumer will raise
Account, savings in the anticipation of the increase in
Savings and future taxes.
Investment When the government raises taxes and reduces
deficits, the private sector will lower its own savings.
The change in the budget deficit is offset by the
change in private savings.
 In the late 1990s, the decrease in European
countries’ budget deficits was largely offset by
the increase in the private savings.
 24
• The balance of payments is the summary statement
which records all the transactions between the
3. The Balance countries (non-resident) during a given period of
residents of a country and the residents of other

of Payment time.
 The balance of payments is often reported on yearly or
quarterly basis.
• The balance of payment is often recorded using the
currency of the country in consideration.
 But for country with weak currencies, the balance of
payment is measured in dollars or other strong currencies.
 25
International transactions
• A voluntary exchange of ownership of goods or services or
financial assets between residents and non-residents

3. The Balance • International transactions can be classified into different

of Payment categories:
 Exchange of goods and services for other goods and services
 Exchange of goods and services for financial assets
 Exchange of financial assets for other financial assets
 Unilateral transfers of goods and services and unilateral
transfers of financial asset

Note: Gifts and unilateral transfer (transactions that don't require payment)
are still included in the balance of payments
 Domestic and Foreign Residents
 Individuals and organizations are considered 26 as
residents of a country when they live/operate in that
country for a given period of time and have income
generated in that country.
3. The Balance
 Citizenship and residents are not necessarily the same.
of Payment
 Foreign branches and subsidiaries of TNCs are
considered as the residents of the nation where they
are located
 Diplomats, military personels, tourists, and temporary
migrants: these persons remain the residents of the
country where they hold a citizenship
 International organization such as the IMF, WTO or the
World Bank.. are not the residents of the nation where
they are located.
 Balance of Payment Accounting Principles
• International Transactions are recorded in BOP27
based on the double-entry bookkeeping
principle
3. The Balance
of Payment • International transactions are classified as
credits or debits.
 Credit transactions are those that involve
the receipt of payments from foreigners. Credit
transactions are entered with a positive sign (+)
 Debit transactions are those that involve the
making of payments to foreigners. Debit
transactions are entered with a negative sign (-)
 28
Balance of Payment Accounting Principles
• The credit transactions (+) include:
 Exports of goods and services
The Balance of  Receipts of factor incomes (profits, dividends and

Payments
employee compensation)
 Transfers from foreigners
 Inflow of foreign capital

• The debit transaction (-) include:

 Imports of goods and services
 Payment of factor incomes (profits, dividends and
employee compensation)
 Transfers made to foreigners
 Outflows of capital involve payments to foreigners
 29
Balance of Payment Accounting Principles
Capital inflows and outflows

3. The Balance • Capital inflows can take two forms: an increase

in foreign assets in a nation or a reduction in the
of Payment nation’s assets abroad.

• Capital inflows take place when there is a

purchasing of domestic assets by foreigners or a
selling of foreign assets by domestic residents
• Examples
 30
Balance of Payment Accounting Principles
Capital inflows and outflows

3. The Balance • Capital outflows can results from an increase in

a nation’s assets abroad or a reduction in the
of Payment foreign ownership of the national assets

• Capital outflows occur when there is a selling of

domestic assets by foreigners or a purchasing of
foreign assets by domestic residents

• Examples?
 31
Example: The U.S government gives a U.S. bank
balance of 1000 dollars as a grant to a foreign
government.
3. The Balance
 In the U.S. Balance of Payments
of Payment
Credits (+) Debits (-)
Payments of unilateral income -$1000
transfers
Capital inflows (increase in $1000
foreign assets in the U.S.)
 32
Example: A foreign resident purchase a U.S. stock
for 100 dollars and pays for it by drawing down his
bank balances in the U.S.
3. The Balance
 In the U.S. Balance of Payments
of Payment
Credits (+) Debits (-)
Capital outflow (decrease in -$100
foreign assets in the U.S)
Capital inflows (increase in $100
foreign assets in the U.S.)
 33
Example: A U.S company exports 1000 dollars of
goods. The payment will be made after 3 months

3. The Balance  In the U.S. Balance of Payments

of Payment
Credits (+) Debits (-)
Exports of goods and services $ 1000
Capital outflows (credits to -$ 1000
foreign importers)
 34
Example: A U.S. resident travels to a foreign country
and pays 1000 dollars for hotels, meals etc.

3. The Balance  In the U.S. Balance of Payments

of Payment
Credits (+) Debits (-)
Imports of travel services -$1000
Capital inflows (increase in $1000
foreign assets in the U.S.)
 35
Double - entry bookkeeping

• The double-entry bookkeeping: each

3. The Balance international transaction is recorded twice
of Payment in the balance of payments, once as a
credit and once as a debit of equal value.

• International payments have two sides:

receipts and payments.
 Crediting shows where the incomes
come from. And debiting shows how the
incomes are used for.
 The Balance of Payment Accounts
36
The content of the balance of payments: the
balance of payments consist of three accounts:
3. The BalanceThe current account (CA)
of Payment
The capital accounts (KA)
The financial account (FA)
 The current account (CA)
37

• The current account involve transactions in:

trade in goods and services,
3. The Balance the receipts and payments of factor incomes
of Payment unilateral income transactions

• Trade in goods: exports and imports of goods

Trade in services: exports and imports of services
• Receipts and payments of factor incomes (primary
incomes): the receipt and payments of profits,
dividends, and employee compensations)
• Unilateral transfers (secondary incomes): remittances
and official grants
 The current account (CA)
• Trade balance: trade balance is the difference between
38
exports of goods and imports of goods.
 A country may have a surplus or deficit in the trade
balance
3. The Balance
• Current account (CA) balance: the CA balance is the
of Payment difference between the receipt from non-residents (exports
of goods and services, receipts of factor incomes and
unilateral transfers) and the payments made to foreign
residents (imports of goods and services, payments of
factor incomes and unilateral transfers to non-residents).

• A country may have a current account deficit or surplus.

 A surplus in the current account implies that a country is
investing or lending abroad.
 A deficit must be financed by foreign borrowing and
foreign investments.
 39

The current account (CA)

How to record transactions in CA

Credit (+) Debit (-)

Export Receipts Receipts of Import Payments Payments of
Goods of factor Unilateral Goods of factor Unilateral
& incomes transfers & incomes transfers
Service
(primary (secondary Servic (primary (secondary
s
incomes) incomes es incomes) incomes
 Capital account 40

 The capital account keeps track of the transactions on

special assets and capital
3. The Balance  Special assets consist of non-financial and unproduced
of Payment assets (intangible asset), such as natural resources or
marketing assets: trademark, patents
 Special capital transfers include debt forgiveness or
investment grant, or goods and financial assets that
migrants take with them.
 The capital account balance is the difference between
the receipts of special capital transactions and
payments of special capital transactions
 The financial account (FA) 41

• The financial account records all the

transactions involving the financial assets.
3. The Balance  It gives a record of the flow of financial
of Payment capital to and from a country

• The financial account consist of three

components:
 Net changes in the country’s assets abroad
 Net changes in the foreign based assets in
the country
 Net changes in financial derivatives
 The financial account
• The financial assets can be classified into reserve
42
assets and non-reserve assets

• Reserve assets: the asset held by monetary authorities

3. The Balance for intervention in the foreign exchange market
of Payment (accommodating transactions- giao dịch bình ổn)

• Non-reserve assets are the assets not included in the

reserve assets or capital account (autonomous
transactions - giao dịch tự trị)
 Foreign direct investment: inward or outward
 Portfolio investment: bonds and stocks
 Financial derivatives: futures, options, forward
contracts
 Other investments: bank deposits and loans,
currencies
 The financial account 43

• The financial assets can be classified into reserve

assets and non-reserve assets
3. The Balance
Reserve
of Payment asset
Foreign Other
direct Investments
investment Financial
account

Portfolio Financial
investment derivatives
 The financial account 44

How to record transactions in KA and FA

Credit (+) Debit (-)

Capital Inflow Capital outflow
• an increase in foreign assets in a • an increase in a nation’s assets
nation abroad
• a reduction in the nation’s assets • a reduction in the foreign
abroad. ownership of the national assets
• a reduction of money deposits • an increase of money deposits
abroad abroad
• Borrowing loans from abroad • Lending abroad
 Reserve assets (RA) 45

The reserve assets are the assets held

by the monetaries authorities for
3. The Balance
of Payment
financing the BOP or intervening in the
foreign exchange market.

The official reserve assets includes:

•Foreign exchange
•Gold holdings
•Special drawing rights (SDR)
•IMF reserve position
 46
How to record transactions in RA
 The central bank involves in the sale or purchase of
foreign currencies to accommodate the foreign
3. The Balance exchange market.
of Payment  The central bank sells the foreign exchange to market
when there is a excess demand for foreign exchange
in the market, causing a decrease in the Central
Bank’s international reserves. => credited (+)
 The central bank buys the foreign exchange when
there is a excess supply of foreign exchange in the
market, leading to an increase in the Central Bank’s
international reserves. => Debited (-)
 The Balance of Payment Identity 47

 By using the double entry bookkeeping, the sum of the

current account balance, the capital account balance
and the financial account balance must be equal to
3. The Balance
zero => CA + KA + FA = 0
of Payment
 However, This identity does not always hold in the
reality (CA + KA + FA  0) due to the existence of
errors and omissions (EO) that includes following
reasons:
 The under-recording of economic transactions,
 Inconsistent information obtained from different
sources
 Including transactions that inconvenient to be listed
on a national level
 The official settlement balance (OSB) 48

 The official settlement balance (Simply the balance of

payments) is the sum of the current account balance,
capital account balance and the financial account
3. The Balance balance excluding the changes in reserve assets.
of Payment  OSB = CA + KA + FA(-reserve) + EO

 The balance of payments may have surplus or

deficits. The balance of payment is said to have a
surplus if the overall balance has a positive sign
and vice versa.
 The deficit in the balance of payment means an
excess demand for foreign exchange
 The surplus in the balance of payment means an
excess supply of foreign exchange
 49
International reserve assets
 Foreign exchange intervention involves the sale or
purchase of foreign currencies by the central bank to
3. The Balance accommodate the foreign exchange market.
of Payment The central bank sells the foreign exchange to market
when there is a Official settlement balance (balance-
of-payments) deficit, causing a decrease in the Central
Bank’s international reserves..
The central bank buys the foreign exchange when
there is a surplus in the Official settlement balance
(balance of payment), leading to an increase in the
Central Bank’s international reserves.
OSB = -ORA
 U.S. International Transactions 2011 (billion dollars)
50

Credits Debits
Current Account
(1) Exports 2848.0
Of which:
3. The Balance Goods 1497.0
of Payment Services 606.0
Income receipts (primary income) 745.0
(2) Imports -3181.0
Of which:
Goods -2236.0
Services -427.0
Income payments (primary income) -518.0
(3) Net unilateral transfers (secondary income) -133.0
U.S. government grants -47.0
U.S. government pensions and other transfers -9.0
Private remittances and other transfers -77.0
Balance on current account -466.0

Capital Account
(4) Capital account transactions, net -1.0
 U.S. International Transactions 2011 (billion dollars)
51
Financial Account
(5) U.S. owned assets abroad, excluding financial derivatives -484
(Increase/outflows (-))
U.S. Official reserve assets -16
U.S. government assets, other than reserve assets -104
U.S. private assets -364
Direct investments -419
Foreign securities -147
Non-bank claims -12
Bank claims 214
(6) Foreign owned assets in the U.S., excluding financial derivatives 1001
(Increase/inflows (+))
Foreign official reserve assets in the U.S. 212
Other foreign assets in the U.S. 789
Direct investment in the U.S. 234
U.S. treasury securities 241
U.S. securities, other than U.S. treasury securities -56
U.S. currency 55
Nonbank liabilities 7
Bank liabilities 309
(7) Financial derivatives, net 39
Financial account balance 556

Net errors and omissions -89

U.S. International Transactions 2011 (billion dollars)
52

Exercise
 Calculate OSB
 US BOP in 2011 is deficit or surplus?
 In case of deficit, How the BOP is
balanced by using the official reserve
assets (RA)?
U.S. International Transactions 2011 (billion dollars)
53

Exercise
 Calculate OSB
 CA + KA + FA(-reserve) + EO
 = -466 + (-1) + [556 – (-16) – 212] + (-89) = -196
 US BOP in 2011 is deficited by 196 billions US
dollars

RA = -16 + 212 = 196

 54

• Read Chapter 1
HOMEWORKS
• Do the exercise on Msteams
 55

Thanks! 😉
Any questions?