IV. MACROECONOMIC POLICY IN OPEN SYSTEM OF WORLD ECONOMY AND INTERNATIONAL ECONOMIC RELATIONS

Targets and Instruments of Macroeconomic Policy in Open Economies

The System of National Economic Accounting Used in International Exchange

Macroeconomic analysis assumes the usage of multitude of economic indicators which are calculated by statistical agencies and are included into the national accounts system (NAS).

National accounts system is a system of interconnected macroeconomic indicators, classifications and groupings which characterize production, distribution, redistribution and reproduction, formation of national wealth for market-oriented economies. Accounts are combined into tables by balance method of accounting of economic operations between economic enteritis or state institutions. They also reflect foreign economic and financial relations with other countries. National income accounts (for open and closed economies) show that aggregate amount of expenses on produced goods and services equals to aggregate income in national economy.

There is data of the most important indicators in the center of the system: gross national product (GNP) and gross domestic product (GDP).

Gross national product indicates the market value of all the products and services produced in one year by labor and property supplied by the country's residents both abroad and at a home-country.

Gross domestic product indicates income received inside a country. This indicator includes income received by foreigners inside the country, but excludes income received by citizens of this country outside. The difference between these two indicators is cased by the fact that production factors do not always belong to the residents.

Thus, gross domestic product is one of the most substantial macroeconomic indicators. The analysis of its dynamics lets to estimate the general efficiency of economy and to define the relative consistency of economic policies conducted by the government. This indicator represents the value of final goods, which are used for final consumption, saving and export. The value of intermediate goods and services that are equipped in production process are not included into GDP (raw materials, fuel, advertising, freight and other services) as, otherwise, the indicator would contain double count. While calculating the GDP the amortization of capital assets is subtracted from the value.

GDP measures the amount of the annual national production, it serves as a source of growth of national wealth, which is the total value of the property (assets) belonging to residents. Residents include all entities (enterprises, households), regardless of their nationality and citizenship, having a center of economic interest on the economic territory of this country.

In a closed economy, all produced goods are sold within the country, and all costs are divided into three components: consumption, investment and government spending. In an open economy one part of the production amount is sold domestically, while the other part is exported for the sale abroad, consequently, the cost of domestically produced goods in an open economy can be divided into the four components:

where Y — gross domestic product;

Cd — consumption of national goods and services;

Id — investment spending on national goods and services;

Gd — governmental purchases of national goods and services;

EX — export of goods and services produced within a country.

The sum (Cd +Id +Gd) indicates domestic spendings on national goods and services. EX indicates foreigners' spendings on goods and services produced within the country. The amount of domestic spendings on all goods and services consists of the sum of domestic spendings on national goods and services and domestic spendings on goods and services produced abroad. That is why the total amount of consumption (C) is equal to the sum of the amount of national goods and services consumption (Cd) and the amount of the consumption of good and services produced abroad (Co; the total amount of investment (I) is equal to the sum of the amount of investment spending on national goods and services (Id) and he amount of investment spending on goods and services produced abroad (I/); the amount NT of governmental purchases (G) is equal to the amount of governmental purchases of national goods and services (Gd) and the amount of governmental purchases of goods and services produced abroad (G/), i.e.:

We put these explicit expressions into equation (18.1):

After conversion we get:

The sum of domestic spendings on goods and services produced abroad (Cf + If + Gf) is the amount of spendings on import (IM). Thus, we have the basic identity of national accounts:

The difference between export and import (Nex) indicates the net export. While calculating GDP it is necessary to take into account all costs related to purchases of final goods and services produced within the country, including the costs of foreigners (i.e. the value of export) and at the same time to subtract those goods and services produced abroad (i.e. the value of import):

This equation shows that the amount of costs on goods produced within the country is the sum of consumption, investment spendings, governmental purchases and net export. In this case the flow of goods and services are regarded . But markets of goods and services are associated with financial markets in every economy. In order to consider the correlation between the markets we write the basic identity of national accounts, including investments and savings. We subtract C and G from both parts of equation 7.8:

According to the definition, savings are represented as income minus consumption. Consequently, the expression Y-N-G represents as national savings (S):

Moving all components of the equation to the left side we get:

This form of the basic identity of national accounts shows the (relationship) correlation between international flows of funds for capital accumulation (/ - S), and international flows of goods and services (Nex). In the system of national accounts (/ - S) is called as the capital account of balance of payments. Capital account represents the excess of domestic investment over domestic savings. Investments may exceed the savings of the country, as investors can finance investment projects with funds borrowed in the global financial markets. Thus, the capital account is equal to the internal capital accumulation financed by foreign loans.

Nex it is a current account of balance of payments. The current balance of payment includes exports and imports of goods and services, income from foreign investments and current transfers. It reflects the operations completed within the period for which a balance is calculated, the effect of which does not affect the balance of payments in subsequent periods. According to the basic identity, the capital account and the current account of balance of payments are equalized. This means that the sum of the capital account's (account) balance and the current account balance's (balance) is zero.

If the value of (/ - S) is positive, and the Nex is negative, we have a surplus in the capital account and a deficit in the current account of the balance of payments. This means that we take loans in the world financial markets and import more goods than export. If the value of (I - S) is negative and the (positive) Nex is positive, we have a deficit in the capital account and a surplus of the current account. This means that in the global financial markets we act as a lender and export more goods than import.

 
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