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.