KEY POINTS

1. National flows of expenditure, product, income, and wealth, and international flows of goods, services, income, and assets, together measure important aspects of a country’s economic performance and describe its economy’s relationship to economies in the rest of the world. The records kept in the national income and product accounts, the balance of payments account, and the net international investment position track these data.
2. The key measures of economic activity are:
   • Gross national expenditure (GNE) measures an economy’s total spending on final goods and services. It is the sum of consumption, investment, and government consumption: GNE = C + I + G.
   • Gross domestic product (GDP) measures total production (value of all output minus value of all purchased inputs).
   • Gross national income (GNI) measures the total payments to an economy’s domestic factors.
   • Gross national disposable income (GNDI, also denoted Y) measures an economy’s disposable income including transfers.
   In a closed economy, GNE = GDP = GNI = GNDI.
3. In an open economy, GDP need not equal GNE. When nations can trade, the sum of goods and services demanded by domestic residents need not be the same as the sum of goods and services supplied by domestic firms. The difference between GDP and GNE is the trade balance TB: GDP = GNE + TB. The trade balance is the difference between a nation’s imports and exports of goods and services.
4. In an open economy, GDP need not equal GNI because imports and exports of factor services (measured by net factor income from abroad or NFIA) imply that factor income received by domestic residents need not be the same as factor payments made by domestic firms. Thus, GNI = GDP + NFIA.
5. In an open economy, the true level of disposable income is best measured by gross national disposable income or Y = GNDI. GNDI need not equal GNI because net unilateral transfers (NUT) to foreigners may be positive, due to foreign aid and other nonmarket gifts. Thus, Y = GNDI = GNI + NUT.
6. The sum of all the aforementioned international transactions, TB + NFIA + NUT, is called the current account (CA).
7. From the relationships just outlined, we find that Y = C + I + G + CA. This expression is known as the national income identity.
8. National saving S is defined as Y − C − G. From the national income identity, we can derive the current account identity: S = I + CA. The current account equals saving minus investment. Movements in saving or investment, all else equal, feed directly into the current account.
9. All international trades in goods and services and in assets are recorded in an account known as the balance of payments (BOP). As a result of double-entry bookkeeping, and allowing for gifts and transfers, the BOP must sum to zero.
10. The BOP contains the following:
    • Net exports of goods and services, TB, called the trade balance
    • Net exports of factor services, NFIA, called the net factor income from abroad
    • Net unilateral transfers received, NUT, called the net unilateral transfers
    • Net transfers of assets received, KA, called the capital account
    • Net exports of assets, FA, called the financial account
11. The first three items are the current account CA. Since the BOP accounts sum to zero, this implies the balance of payments identity: CA + FA + KA = 0.
12. External wealth is a measure of a country’s credit or debt position versus the rest of the world. It equals external assets—rest of world (ROW) assets owned by home—minus external liabilities (home assets owned by ROW). The net export (import) of assets lowers (raises) a country’s external wealth. External wealth is one part of a country’s total wealth.
13. External wealth can change for one of two reasons: the export or import of assets (called financial flows) or changes in the value of existing assets due to capital gains or losses (called valuation effects). Both of these channels affect net external wealth.