Transcript Document

Macroeconomic Accounting
Selcuk Caner
Bilkent University
7/18/2015
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Outline
Flow of Funds
 Current Account
 Capital Account
 Macroeconomic Consistency
Framework

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Flow of Funds

Consider an economy consisting of
– The government,
– Private sector,
– External sector
– Monetary system (central bank and
commercial banks)
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
Income = Wages and Salaries + Operating
surplus + Income of self-employed +
imputed value of household production +
property income (interest, dividend,
royalties, rent, patents, rights)
 Value of services by financial institutions
included in GDP.
– Service charges
– Difference between income received on loans
and interest/claims paid on deposits.
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Basic Relationships in an Economy?
Production and income (+ transfers)
 Income and Expenditures
 Savings and Asset Acquisition
 Income and transfers = Used for
financing expenditures = S + Exp.

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Current Accounts

Current domestic product
(expenditures at market prices) = Ymp
= Cg + Cp + X – Z + I
Imports

Ymp + Z = (T – Sb)+ OSg + (W+p) + Z + I
(Taxes –
Subsidies)
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Operating Surplus
of Gov.
Enterprises
Operating Surplus of
Other Enterprises
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Current Accounts

Total Government Current Use (Expenditure)
– CEXPg = Cg + NTRCgp + INTg + INTe + Sg

Total Government Income
– Yg = (T – Sb)+ OSg + Td + NTReg

Household Expenditure (Private sector)
– CEXPp = Cp +Td + INTpe + S
 Household Income (Private sector)
– Yp = W + p + ps + NTRgp + INTgp + NTRep + NFPep
7/18/2015 Property
income included in operating surplus of
producing units
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Current Accounts

Current Account Balance
– Total Current Foreign Exchange
Receipts = X + NTReg + NTRep + NFPep + CA
(or Se)
– Total Sources of Income Accruing to
Foreign Residents = INTge + INTpe + Z
=>
X + NTReg + NTRep + NFPep + CA = INTge +
INTpe + Z
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Capital Accounts

Financing of the acquisition of assets by the
government, private sector and the external
sector through the monetary system
– Government expenditure on asset acquisition = Ig
• Gross fixed assets
• Inventories and working capital
• Acquisition of financial and foreign assets
– Financing by government (Government savings + D in
gov. borrowing)
= Sg + DDCg + DNPBg + DNFBg
New borrowing from
monetary system
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New direct
borrowing from
private sector
Foreign borrowing
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Capital Accounts

Monetary system
– Acquisition of new liabilities = DM
– (I.e., new currency issues, demand deposits,
other liabilities such as T-bills)
– Acquired assets
 DM = + DDCg + DDCp + DR

Private sector
– Change in assets of private sector
DASp = Ip + DNPBg + DM
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Net lending to government
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
•
Financing private sector assets (private sector
savings + D in borrowing)
= Sp + DDCp + DNFBp
Borrowing from
monetary system
Borrowing from
foreigners
External Sector
•
Change in foreign borrowing
DNFB = DNPBg + DNPBp
• Savings of Foreign Residents (CA) and Net
Accumulation of Foreign Assets
• = CA + DR
=>
DNFB = CA+ DR
7/18/2015 S+CA = I
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Macroeconomic Consistency
Framework

Government Savings
– Sg + DDCg + DNPBg + DNFBg = Ig

Private Sector Savings
Ip + DNPBg + DM = Sp + DDCp + DNFBp
• Foreign Savings
• CA + DR = DNPBg + DNPBp
• Or
• CA = DNPBg + DNPBp - DR
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Foreign borrowing by: gov. departments,
monetary system, directly by private
sector
So difficult
to keep
track
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GDP
Ymp = Cg + Cp + X – Z + Ip + Ig
Ymp – (C + I) = (X – Z)
(Ymp – C) - I = (X – Z)

Savings gap
Trade gap
CA = I – S
and
CA = I - (Ymp – C)
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Government Budget Constraint
Yg = (T – Sb)+ OSg + Td + NTReg
Rewrite as
Yg = CEXPg + Ig – (DDCg + DNPBg + DNFBg )
So, Budget Deficit is Financed as
Yg - CEXPg - Ig = – (DDCg + DNPBg + DNFBg )
Budget deficit
So, IMF programs have
7/18/2015 restrictions on credit to fight
inflation
If this is limited then
crowding out can occur
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Private Sector Budget Constraint
– Yp = W + p + ps + NTRgp + INTgp + NTRep + NFPep
= CEXPp + Sp
– Since
Sp = Ip + DNPBg + DM - DDCp - DNFBp
– Substitute in the above expression for Sp and
rearrange yielding
Yp = CEXPp + Ip + DNPBg + DM – (DDCp + DNFBp)
Yp + (DDCp + DNFBp) - CEXPp = Ip + DNPBg + DM
Private sector financing of asset
acquisition
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Private sector asset
acquisition
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External Sector Budget Constraint
X + NTReg + NTRep + NFPep + CA = INTge +
INTpe + Z
Substitute DNPBg + DNPBp - DR for CA
(INTge + INTpe + Z) – (X + NTReg + NTRep +
NFPep) = DNPBg + DNPBp - DR

Asset acquisition by foreigners
A fall in this means capital
flight
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There is an opportunity cost to holding
high reserves in terms of foregone
consumption and investment
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Assets and Liabilities of the Monetary System
DM = DDCg + DDCp + DR
If DM = 0, then, DR = -DDC
 That is an increase in credits are
offset by a reduction in reserves.

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Absorption and Domestic Credit
Ymp – A = X – Z = (DNFB – INT) - DR
 But since

DR = DDCg + DDCp - DM

We can rewrite as
(Ymp + DNFB – INT) – A = DDCg + DDCp
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Current Government Deficit
CA
S + CA = I
 Sg + (Sp – I) = - (NFBp + NFBg – DR)
 Current external balance (right hand
side) can only improve if government
savings rise => So, is the reason for
primary surplus

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