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Open Economy Macroeconomics

Question
CBSEENEC12012892
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Explain the relationship between BOP and National income Accounts.

Solution

Economic activities generally create two types of transactions which lead to international payments and receipts. First concerns with production and sale of current output whereas the second concerns with purchase and sale of existing assets (both real and financial assets).
We have already learnt that in an open economy, final expenditure of consumers (C), Investors (I), Government (G) and Foreigners’ expenditure on our Exports (X) indicates nation's production of goods and services generating national income (Y). This can be represented in the following equation.
Y = C + I + G + X
This generated income is disposed of in the purchase of consumer goods and services (C), in making savings (S), in the payment of taxes (T) and in purchase of goods and services from abroad: (i.e., imports (M). Thus disposal of income can be shown in the following expression.
Y = C + S + T + M
Since according to national income accounting, income generated must be equal to income disposed of, therefore:
C + I + G + X = C + S + T + M
I + G + X = S + T + M
Clearly here I, G, X which partly represent generated income, are injections into income stream whereas S, T, M which partly represent disposal of income are leakages from income stream. As a result in equilibrium, planned injections must be equal to total planned leakages.

Some More Questions From Open Economy Macroeconomics Chapter

Describe components of Balance of Payment Account.

What is meant by visible and invisible items in BOP Account? Give two examples of invisible items.

What is balance of trade? 
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Which two transactions determine BOT?
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What is the difference between the values of exports and imports of goods called? 
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When will BOT show a surplus? 
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When is there deficit in BOT?
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What is balance of visible items in BOP accounts called?

BOT shows a deficit of र 5,000 crores and value of imports are र 9,000 crores. What is the value of exports?

The value of a country’s import of goods is र 200 crores, and value of export is र 250 crores. Find out its BOT. 

A country’s balance of trade is र (–) 60 crores and value of import of goods is र 100 crores. out value of export of goods. 

What is meant by balance of payment (BOP) account?
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What does BOP account record?
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Where are borrowings from abroad recorded and why
 

Balance of payment always balances. Comment.

When does a situation of deficit/surplus in BOP arise?
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Explain meaning of deficit in BOP.

Distinguish between BOT and BOP. 

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