balance of payments. national income vs. domestic income net factor income [nfi] is income earned on...
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BALANCE OF PAYMENTS
National Income vs. Domestic Income
• Net Factor Income [NFI] is income earned on overseas work or investments minus income generated domestically but paid to foreigners.
GNI GDIGross National Income Gross Domestic Income
= income earned by national residents
= income created within domestic borders.
GNI = GDI +NFI
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
Hong Kong Net Factor Income
NFI (% of GDP)
Source: United Nations Main Aggregates Database
Compare Macau and the Philippines GDP or GNP
• Macau produces a lot of profits paid to overseas owners of casinos.
• Philippines workers earn a lot of income overseas.
• Which is larger Philippines’ GDP or Philippines GNP?
• Does Macau have greater GDP or GNP?
NFI Across Countries
NFI/GDP 2009UN Main AggregatesChad -42.68%Russian Federation -3.23%China: Hong Kong SAR3.12%Liberia -20.14%China, People's Republic of -2.04%Switzerland 4.15%Ireland -16.94%Brazil -2.04%Haiti 9.62%Cambodia -15.64%India -0.13%Bangladesh 11.00%Angola -13.95%United States 0.28%Philippines 14.73%Chile -9.69% Bermuda 23.62%Panama -8.97% Lesotho 35.17%China: Macao SAR-6.03%Australia -4.65%
Source: United Nations Main Aggregates Database
Current Account Balance
• Current Account: NX +NFI• NFI = Primary Income (Overseas Wage & Investment Income) + Secondary Income (Transfers)
Current Account (CA) (Hong Kong) 110,086 Current Account: Credit (Hong Kong) 5,199,130 Current Account: Debit (Hong Kong) -5,089,044 Goods (Hong Kong) -71,087 Goods: Credit (Hong Kong) 3,411,260 Goods: Debit (Hong Kong) -3,482,347 Services (Hong Kong) 148,138 Services: Credit (Hong Kong) 721,661 Services: Debit (Hong Kong) -573,523 Primary Income (PInc) (Hong Kong) 52,826 Investment: Credit (Hong Kong) 1,056,615 Investment: Debit (Hong Kong) -1,002,210 Compensation of Employees: Credit (Hong Kong) 2,737 Compensation of Employees: Debit (Hong Kong) -4,315 Secondary Income (SInc) (Hong Kong) -19,791
Census and Statistics Department
Global Imbalances Link
World Current Account equals zero!
International Capital Flows
• Capital Outflows: domestic acquisition of foreign assets.
• Capital Inflows: foreign acquisition of domestic assets
Net Capital Outflows = Capital Outflows – Capital Inflows
Money is an asset. Most international financial transaction are swaps of one asset for another and have zero net effect on capital flows. Only net trade of foreign assets for goods or services creates opportunity for net capital flows. Current Account = Net Capital Outflows
Savings & Current Account• Gross National Savings: GNS• GNS = GNI – Consumption (PCE + GCE)• GNI = GDP + NFI• GDP = Consumption + Gross Capital Formation + Net
Exports (Exports – Imports)• GNS – GCF = NX + NFI = Current Account
Capital & Financial Account• Current Account is net capital outflows (i.e. national
savings less national investment).• Capital & Financial Account measures the allocation of net
inflows.• Capital Account: Transfer of Real Assets• Financial Account: Transfer of Financial Assets
• Non-reserve Assets• Direct Investment: (Taking Controlling Stakes in Foreign Entities)• Portfolio Investment: (Stocks, Bonds)• Financial Derivatives (Futures, Swaps)• Other (Mostly Bank Loans and Deposits)
Capital & Financial Account 2011
Capital & Financial Account (CFA) (Hong Kong) -113,242Capital Account (Hong Kong) -2,021Financial Account (FA) (Hong Kong) -111,220 Financial Non Reserve Assets (Hong Kong) -24,437 Direct Investment (DI) (Hong Kong) 1,868
Assets (AS) (Hong Kong) -746,372 Liabilities (LB) (Hong Kong) 748,240 Portfolio Investment (PI) (Hong Kong) -10,979 Assets (AS) (Hong Kong) -155,818 Liabilities (LB) (Hong Kong) 144,839 Financial Derivatives (FD) (Hong Kong) 20,884 Assets (Hong Kong) 359,707 Liabilities (Hong Kong) -338,823 Other investment (OI) (Hong Kong) -36,210 Assets (Hong Kong) -780,960 Liabilities (Hong Kong) 744,749 Reserve Assets (Hong Kong) -86,783Net Errors and Omissions (Hong Kong) 3,156Overall Balance (Hong Kong) 86,783
Increases in financial assets, and decreases in liabilities should be shown as debits.
Decreases in financial assets,
and increases in liabilities should be shown as credits.
Salient Feature of Balance of Payments
Balance of PaymentsForeign Currency Received (Credit)
Foreign Currency Paid (Debit)
Exports (+)Income Receipts (+){Non reserve} Capital Inflows (+)
Imports (-)Income Payments (-){Non reserve} Capital Outflows (-)
Overall Balance = Current Account + Capital & Financial Account
Credits – Debits = Increase in Reserves
Link
Learning OutcomesStudents should be able to:• Explain the different methods of calculating GDP• Calculate simple real aggregates like real GDP.• Use price indices to calculate inflation rates.• Adjust nominal series for inflation.• Define and calculate real ex post and ex ante real interest rates. • Define the elements of the Balance of Payments Tables
Math Review• Review: Constrained optimization other advanced math. • 1:30-3:00 pm on Wednesday, Sept. 24th, 2014. • The venue is 4620 main academic building.