KW2_Ch34_lecture.ppt

GDP, GNP, and the Current Account Why doesn’t the national income equation use the current account as a whole? Gross domestic product, which is the value of goods and services produced in a country, doesn’t include two sources of income that are included in calculating the current account balance: international factor income and international transfers. For example, the profits of Ford Motors U.K. aren’t included in America’s GDP and the funds Latin American immigrants send home to their families aren’t subtracted from GDP. Gross national product does include international factor income. GDP, GNP, and the Current Account Estimates of U.S. GNP differ slightly from estimates of GDP. GNP adds in items such as the earnings of U.S. companies abroad and subtracts items such as the interest payments on bonds owned by residents of China and Japan. Economists use GDP rather than a broader measure because: the original purpose of the national accounts was to track production rather than income. data on international factor income and transfer payments are generally considered somewhat unreliable. A Global Savings Glut? In 2005, Ben Bernanke said that the “principal causes of the U.S. current account deficit” were from outside the country. He argued that special factors had created a “global savings glut” that had pushed down interest rates worldwide. What caused this global savings glut? According to Bernanke, the main cause was the series of financial crises that began in Thailand in 1997; moved across much of Asia; then hit Russia in 1998, Brazil in 1999, and Argentina in 2002. As a result, a number of these countries experienced large capital outflows. For the most part, the capital flowed to the United States. The Golden Age of Capital Flows The golden age of capital flows actually preceded World War I—from 1870 to 1914. During this period, Britain offered investors a higher return and attracted capital inflows. During the golden age of capital flows, the big rec