ECO610 Week 3 assignment: National income accounting

Name

ECO610

24/10/2022

National income accounting

Trend

The IIP is calculated by subtracting a country’s liabilities from its assets, similarly to calculating an individual’s investment position. This shows that the United States had an investment surplus of $734 billion by year­end of 2012. From 1987 to 2006, there was almost a linear increase in the IIP with a positive slope of 0.2 per cent which indicates no growth or decline in the international investment rate for the United States during that period, other than a slight decline between 1998 and 2001 which most likely coincided with the Asian financial crisis of 1997­1998. In 2001 it had an IIP of $4.18 trillion, and in 2012 it had an IIP of $7.06 trillion. On the other hand, the U.S. GDP from 1976 to 2012 has been a vertical line with almost no variation, indicating that the growth of the investment surplus has not been responsible for any increase or decrease in the United States' nominal GDP during this period of time.

The trend in annual data for the United States’ IIP and GDP depicts two vastly different views of how Americans invest their money during this period (Lambert,2020). In the first five decades, the United States was consistently able to invest most of the money it earned. In fact, from 1976 to 2012, the United States has had a IFP surplus of $7.06 trillion. This surplus grew from 1980 to 1989 (the period in which U.S. GDP growth was at its slowest since World War II) and then decreased following a recession in 1990 for several years until another decline began in 1996 and continued through 2006 due to increasing oil prices as well as events such as the Asian financial crisis and 9/11 attacks. The IFP peaked in 2006 at $8.03 trillion before dropping to $6.11 trillion in 2012. Since the rate of increase in U.S. GDP has been consistently less than the sum of U.S. IFP and IIP since 1972, it can be said that the U.S. IIP does not determine the growth of individual U.S. residents’ income during these 36 years because most people pay for their yearly expenditures with money earned from other sources such as income from selfemployment, dividends, interest and wages from jobs outside of the United States, i.e., foreign investment income (FII).

Comparison

The current account deficit is the difference between the total value of goods and services exported from the United States to all nations and that of imports from those same nations. It is a valuable tool in measuring the health of a nation’s balance of payments. The growth rate of any variable is the percent change over time in that variable.

The comparison between the current account deficit with the growth rate of the nominal GDP is that it is the percent of the GDP that changes over the course of a year. Thus, it has a reasonably good correlation with the nominal GDP data. It has been used to measure “national wellbeing” or “national prosperity” (i.e., national income) since 1853 (less than 20 years after the United States was established), although it was not used as an indicator of general economic health until the late 1800s. The current account deficit is used as an indicator for the government, businesses, and individuals.

The main usage of the current account deficit by the government is to determine a nation’s trade policy. In 2009, before President Obama took office, Fox News reported that

“China surpassed Japan to become the number­one foreign holder of U.S. Treasuries in May 2009 by purchasing $21.5 billion in U.S. bonds”. In July 2009, under President Obama’s new economic policy that stated that “countries responsible for large imbalances need to take steps to adjust”; China purchased even more U.S debt and became the largest buyer of U.S Treasury Bonds (U.S debt). The current account data has been used by the government, businesses, and individuals in various ways. In the early 1900s, it was seen as a tool to bring stability to the economy (Higgins,2017). The current account data from the BEA website shows that, as of

2012, the United States current account deficit had risen to 3.7% of GDP and has worsened since

President Obama took office. According to a recent budget report by the CBO (Congressional Budget Office), the federal debt has risen by nearly 8 trillion dollars. To put that into perspective, when President George W. Bush took office in 2001, the national debt was 5.76 trillion dollars; in 2009, it rose to 10.52 trillion dollars; and in 2012 it rose as much as it did in 2009.

Current account deficit and a surplus in balance of payments

A country’s current account balance is how much it’s buying and selling products and services. Borrowing money from abroad and investing abroad are two ways countries can increase their current account balances. A country can then have a trade surplus in its balance of payments ­ the total of what it sells to the world minus what it buys from the world (Callen,2022) . Usually, we consider a deficit in a country’s current account to be bad because as consumers consume, they must finance their lifestyles through borrowing or by paying down debt (the opposite happening with a trade surplus). However, it can be argued that countries with large surpluses in their balance of payments but also have deficits in their real current accounts would be better off. The US has a big trade surplus in its balance of payments and it also has a large current account deficit. The US would be better off if it had a trade deficit and smaller current account deficits.

References

Callen, T. (2022). Gross domestic product: An economy’s all. International Monetary Fund:

Washington, DC, USA.

Higgins, M., Klitgaard, T., & Tille, C. (2017). Borrowing without debt? Understanding the US

international investment position. Business Economics, 42(1), 17­27.

Lambert, F., & Paul, L. (2020). The international investment position: measurement aspects and

usefulness for monetary policy and financial stability issues. ifc Bulletin, 116.

http://www.bea.gov