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MIBE The economics of emerging economies

MIBE The economics of emerging economies. The role of Finance in economic development and the emerging economies Gianni Vaggi , April 2014 Finance 3-1 National accounting in an open economy. The components of GDP: closed and open economy. Closed economy

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MIBE The economics of emerging economies

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  1. MIBEThe economics of emerging economies The roleof Finance in economic development and the emergingeconomies Gianni Vaggi, April 2014 Finance 3-1 National accounting in an open economy

  2. The components of GDP: closed and open economy Closed economy GDP (Y) is the sum of the following: • Consumption (C) • Investment (I) • Government expenditures (G) Y = C + I + G Open Economy plus Net Exports (NX) Y = C + I + G + NX

  3. Saving, Investments and Trade • National saving S (private and public) is the income of the nation that is left after paying for current consumption and government purchases: S = Y - C - G = I + NX S = I + NX NX = (X – M) = Trade Balance or Balance of Goods and services For the moment suppose that NX is the only component of the Current Account of the BoP

  4. Saving, Investments and Trade S – I = X – M (Sp – Ip) + (T – G) = (X – M) • Sp private savings • Ip private investments • T taxes • G government expenditures

  5. The Current Account Balance In the BoP the Current account balance (CA) is the sum of three items: • Trade balance (X-M), • Net income transfers (interest payments, dividends, etc.;)= Net Primary Income = NPI • Net unilateral transfers (gifts, donations, remittances, international aid, etc.)=Net Secondary Income = NSI

  6. The Current Account Balance CA = [(X-M) + NPI + NSI] Sometimes (NPI + NSI) are called Net Factor Income = NFI and NPI is called Net Incomes and NSI is called Net transfers

  7. The Financial and the Capital Account The Financial Account , FA, has largely absorbed what was formerly called the Capital account!! In the BoP CA + FA = 0 Current Account Balance + Financial Account Balance = 0 Net of Changes in reserves, R. The overall balance of payments also includes movements of Official reserves, if private transactions do not match exactly. Suppose: ∆R = 0. FA = NCF = Net Capital Flows NCF = (Inflows – Outflows)

  8. The Current and Capital Accounts NCF can be +/- depending on CA If CA = +10 then FA = -10 Which means: Outflows >Inflows Therefore: NCF = -10 And CA = - NCF

  9. The Equality of Current Account and Net Capital Flows For an economy as a whole CA, and NCF must balance: CA= [(X-M) +NPI+NSI] = FA (+/-) = NCF(+/-) • This holds true because every transaction that affects one side of the BoP must also affect the other side by the same amount. • In principle the sign of FA (+/-) depends on that of CA

  10. Saving, Investment, and International Flows Y = C + I +G+[(X-M) + NPI + NSI] (S – I) = [(X-M) + NPI + NSI]= CA = FA= NCF Saving = Domestic Investment + Net Capital Flows S = I + NCF

  11. Saving, Investment, and International Flows Investments may be financed either by national saving (S) or by foreign saving (NCF): I = S – NCF Remember that in general the sign of FA (+/-) and NCF depends on the Current Account Balance, CA,…BUT… with large international flows…

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