Macroeconomics Chapter 13 Study Guide

PART 3. Exchange Rates and Open-Economy Macroeconomics

Chapter 13. National Income Accounting and the Balance of Payments

1. International macroeconomics is concerned with the full employment of scarce economic resources and price level stability throughout the world economy. Because they reflect national expenditure patterns and their international repercussions, the national income accounts and the balance of payments accounts are essential tools for studying the macroeconomics of open, interdependent economies.

2. A country's gross national product (GNP) is equal to the income received by its factors of production. The national income accounts divide national income accounting to the types of spending that generate it: consumption,

In an economy closed to international trade, GNP must be consumed, invested, or purchased by the government. By using current output to build plant, equipment, and inventories, investment transforms present output into future output. For a closed economy, investment is the only way to save in the aggregate, so the sum of the saving carried out by the private and public sectors, national saving, must equal investment.

4. In an open economy, GNP equals the sum of consumption, investment, government purchases, and exports of goods and services. Trade does not have to be balanced if the economy can borrow from and lend to the rest of the world. The difference between the economy's exports and imports, the current account balance, equals the difference between the economy's output and its total use of goods and services.

5. The current account also equals the country's net lending to foreigners. Unlike a closed economy, an open economy can save through domestic and foreign investments. National saving therefore equals domestic investment plus the current account balance. The current account is closely related to the change in the net international investment position, though usually not equal to that change because of fluctuations in asset values not recorded in the national income and product