Chapter 12 National Income Accounting and The Balance of Payments.ppt

Thirdly, governments may also increase taxes This would either reduce budget deficit or produce a surplus X-M = S + (T-G) - I Increasing taxes would either reduce government borrowing or reduce previous debt. Same effect as an increase in savings GDP AND THE TRADE BALANCE Fourthly, governments may change their spending Reducing G reduces the trade deficit, further raising taxes: potentially more effective than either policy used in isolation GDP AND THE TRADE BALANCE GDP AND THE TRADE BALANCE Table 12.2 Potential Adjustment to Reduce Trade Imbalances Country Has a Trade Deficit Surplus Increase Private Savings Decrease Private Savings Or Or Increase Government Taxes Decrease Government Taxes Or Or Decrease Business Investment Increase Business Investment Or Or Decrease Government Spending Increase Government Spending GDP AND THE TRADE BALANCE Table 12.3 Relationship Between Savings, Investment, and Government Balance, and Trade Balance Country Time Period S I (G – T) (X – M) U.S. 1978 – 1980 17.6 17.1 0.4 –0.1 1988 – 1990 16.6 14.8 3.2 –1.4 2000 – 2002 18.4 21.6 0.7 –4.0 Japan 1978 – 1980 36.5 31.7 4.9 –0.1 1988 – 1990 33.6 33.1 –1.6 2.1 2000 – 2002 26.7 17.4 6.9 2.5 EU 1978 – 1980 26.6 22.1 4.2 0.3 1988 – 1990 22.7 17.6 4.2 –0.2 2000 – 2002 23.6 20.9 2.2 0.5 Balance of payments accounts: Summary of all international transactions by locals at a specified time period Three different accounts: The current account: records inflows and outflows of goods, services, investment income, unilateral transfers The financial account: records international monetary flows related to investment in business, real estate, stocks bonds. Also, govt. assets (reserves, gold, SDR) The capital account: records flows of nonfinancial assets resulting in transfers of wealth between countries. Includes machinery, land ownership, debt relief, immigrant/emigrant property, and inheritance. THE BALANCE OF PAYMENTS ACCOUNTS The Balance on Current Account Merchandise exp