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International Business Economics

International Business Economics. Economic & Financial Environment of Global Business. MACROECONOMICS.01. GDP & GNP & NDP & NNP. Depreciation = GDP – NDP Depreciation = GNP – NNP

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International Business Economics

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  1. International Business Economics Economic & Financial Environment of Global Business MACROECONOMICS.01

  2. GDP & GNP & NDP & NNP • Depreciation = GDP – NDP • Depreciation = GNP – NNP • Depreciation = the total of currently produced machines, parts, inventories of raw materials, maintenance, etc. necessary to keep productive capacity at a given and constant level. • Hence, Net Product is sustainable indefinitely.

  3. COMPONENTS OF US GDP (1990s) Consumption (Roughly) 69% Investment 15% General Government 17% Net exports -1% TOTAL 100% As an Equation Y = GDP = C + I + G + X - M

  4. Why “NET” exports? • Consumption, Investment, Government purchases and Exports include some imported components and materials (metals, chips, food products, ideas, fenders, energy, services, etc.) • These items can be accounted for when imported in bulk, but not when integrated into final products. • Examples: Automobiles, Airliners, Beef, Computers.

  5. In other words: C = CD + CM I = ID + IM G = GD + GM X = XD + XM Where D => Domestically produced & M => Imported. Hence, Imports = CM + IM + GM + XM

  6. NDP or NNP = Income earned Once income has been earned, what do the earners (consumers in general) do with it? NNP = C + S + T C still equals consumption, but S = saving, and T = taxes paid (to all governments)

  7. Y = Income = NNP or NDP Y = C + I + G + X-M; but Y = C + S + T. So it must be true that I + G + X-M = S + T. Therefore, (I - S) + (G-T) + (X-M) = 0

  8. Basic Accounts I - S = the investment/saving account; the two do not have to be equal, but if S > I, there is money for other things. G - T = the infamous government budget deficit or surplus. G-T>0 => deficit. X - M = the equally infamous current account or trade deficit or surplus

  9. If G - T > 0 (Budget Deficit) G - T = Bond sales or government borrowing; who lends to the government? IfS - I> 0, the excess can be used to finance the government deficit. If X - M< 0 (CA deficit) the capital inflow can also be used. If G-T>0, then S-I>0, X-M<0 or both. Why?

  10. SUMMARY Remember the identity: (I - S) + (G - T) + (X - M) = 0 (X - M)is large and positive in Japan; therefore something else must be large and negative. (X - M)is large and negative in the US; therefore something else must be large and positive.

  11. PROBLEMS The US budget deficit, (G - T) > 0, recently was equal to zero, even negative (surplus). Now we have a deficit again. What implications does that have for the trade and saving/investment balances? Asia’s turmoil => rising US current account or trade deficits. Does that make sense to you?

  12. Let’s Play With These Equations • Y – G = C + I + CA. What if G is large/small, relative to Y? • Y – T = C + S. What if T is large/small? • Y – C = I + G + CA. What if C is large/small? • Y – C = S + T. What if C is large/small? • Y – CA = C + I + G. What if CA < o or C > 0?

  13. More Fun & Games • S + T = I + G + CA. Net supply = net demand. Net of consumption. • Tax revenues provide resources for G. • Saving provides resources for I. • CA = Y – C – I – G. Why is CA < 0 in some countries and not in others?

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