NATIONAL INCOME ACCOUNTS
AND BALANCE OF PAYMENT -
NATIONAL INCOME ACCOUNTING
National Income Accounts (NIA):
• measures of national income
• measures of value of production
• measures of value of
NATIONAL INCOME ACCOUNTING
• National income accounting represents the process of working out measures of a country’s income and
production such as gross domestic product (GDP), gross national income (GNI), net national product (NNP),
disposable personal income, etc.
• National income accounting identity is an equation that shows relationship between an economy’s total
income/expense and its different categories i.e. personal consumption expenditure (C), private investment (I),
government spending (G) and net exports i.e. exports (X) minus imports (M).
The relationship can be written as follows:
Y = C + I + G + X - M
• It is to national income accounting what assets (A) = liabilities (L) + equity (E) is to business accounting.
OUTLAYS AND COMPONENTS OF
Y = C + I + G + NX
🢝 Y = GDP
🢝 C = Consumption spending by households
🢝 I = Investment by firms and households
🢝 G = Government purchases
🢝 NX = Net export (Export – Import)
CIRCULAR FLOW OF INCOME
• The national product is the value of final goods and services produced in a country. Since all the value produced
must belong to someone in the form of a claim on the value, national product is equal to national income. Each
transaction in an economy involves a buyer and a seller. Households spend money for buying goods and services
• Thus, from the buyers’ side comes the flow of money demand. In other words, we have expenditure- side
transaction. On the sellers’ side, money payments go to factor owners in the form of rent, wages, etc. Firms
spend money for buying input services. Thus, we have income-side transaction from the seller’s side. These two
are obverse and reverse of the same coin. This is called circular flow of income and expenditure.
• Interaction and inter-dependence between various economic activities like production, exchange and
consumption is called the circular flow of income. NI is a flow concept. Production give rise to Income which
gives rise to Consumption/Expenditure and expenditure gives rise to income again. It goes on continuously and
indefinitely in a circular way; it has neither any beginning nor any end.
GROSS DOMESTIC PRODUCT (GDP)
• The most important number produced by the national income accounting is the gross domestic
product (GDP), which is the market value of all final goods and services produced within geographical
boundaries of a country.
• GDP is a measure of total production that takes place inside the border of a country. It also a measure
of total expenses incurred on final goods and services and also a measure of total income. This is due
to the circular flow of income i.e. total income in an economy equals total expense.
• There are two variants of GDP: nominal GDP which is value of production based on current prices and
real GDP is the inflation-adjusted measure of GDP.
• All other indicators of national income are derived from GDP.
NOMINAL GDP VS REAL GDP
• The GDP compiled by statistical agencies is based on the prices prevailing in the market during the period. This
number is called nominal GDP.
• In order to compare GDP number across time, it is important to remove the effect of changes in purchasing
power from historical time series.
• The real GDP is the gross domestic product which is worked using current year quantities and the base year
prices. In a time series of real GDP, GDP numbers for all periods are restated based on the prices that prevailed
in the base year.
• The relationship between nominal and real GDP is given by GDP deflator.
• When we talk about an economy’s growth rate in a given period, we measure it by percentage change in its real
SHORTCOMINGS IN GDP
Even though GDP is quite useful, it does not give a complete picture of an economy because:
• GDP and GDP per capita does not provide any information about distribution of income in an economy.
In the increasing disparity of income and wealth, this drawback is a serious one.
• GDP does not count self-service and leisure and a number of other categories of productive activities.
• GDP does not count the underground economy (also called informal sector). Since the size of the
underground economy is quite large in developing countries, GDP understates total production.
• GDP ignores the physical depreciation of capital goods i.e. roads, buildings, factories, etc. which are
consumed in generating the income/expenditure. Hence, it overstates the net production of an
GDP PER CAPITA
• GDP per capita means the average income earned by a person in a country. It is calculated by dividing
total GDP by the country’s population.
• Total gross domestic product is not comparable across economies because their size differ depending
on the resources available to them such as land, population, etc. but the GDP per capita is a
standardized measure which enables comparison of standard of life across countries possible.
GROSS NATIONAL PRODUCT
• Gross national product (also called gross national income) is the total income earned by the residents of
a country. It equals gross domestic product (GDP) plus income earned by a country’s residents abroad
(R) minus income earned by foreigners in a country (P):
GNP = GDP + R - P
• While GDP measures the income earned within geographical boundaries of a country, GNP calculates
the income earned by a country’s residents/nationals.
GDP VS GNP/GNI
Gross domestic product (GDP) is an indicator of income generated within geographical boundaries of a country. It
equals the sum of personal consumption expenditure (C), private investment (I), government spending (G), and net
exports (which equals exports (X) minus imports (M)).
Y = C + I + G + X – M
GNI is calculated by adjusting GDP as follows:
Y = C + I + G + X – M + R − P
GDP measures total production within geographical boundaries of a country achieved during a period while GNI is a
measure of income generated by residents of a country regardless of their geographical location. GDP is certainly a
more popular measure of income, but GNP is useful if we are interested in finding out a country’s tax potential, its
residents’ affluence i.e. disposable income, etc.
GDP VS GNI/GNP
GNP=GDP+ Net Factor Payments from rest of world (ROW)
🢝 i.e. money value of spending = money value input
Can be divided into several parts:
Consumption (C), Investment (I), Government Spending (G) and the Current
EX < IM 🡪 CA<0 🡪 deficit
EX > IM 🡪 CA>0 🡪 surplus
NET NATIONAL PRODUCT
Income generated by a country is achieved on the back of significant investment in infrastructure i.e.
roads, bridges, etc. which must be maintained. If we are interested in finding out the income generated net
of such charge for periodic maintenance of such infrastructure, we calculate net national product (NNP)
which equals gross national product (GDP) minus depreciation D.
NNP = GNP - D
National income (NI) is most comprehensive measure of total income earned by residents of a country. It
is approximately equal to net national product (NNP) except for an adjustment for statistical discreprency.
Personal income is the gross amount attributable to residents of a country. It is the sum of all incomes in
the hand of individuals.
Measures of aggregate income such as GDP, GNI, NNP and NI are broad economy-level measures of
income and production which do not segregate transfer payments, taxes, etc. But if we are interested in
finding out how much money ultimately accrues to people, we need to calculate personal income.
Personal income (PI) equals national income minus indirect taxes (IDT) such as sales tax, VAT minus
corporate profits (CP) minus net interest (NETI) plus income from assets (such as dividends, interest
payments, etc. (IA) plus transfer payments i.e. amount paid by government to people with low incomes
(TP) minus social security contribution made by people (SS)
PI = NI - IDT – CP – NETI + IA + TP - SS
Disposable income is the income that is at the disposal of residents of the country i.e. it is the income
which they can consume or save.
Disposable income equals personal income (PI) minus personal income taxes (PIT):
Disposable Income = PI - PIT
THINGS NEED TO UNDERSTAND
National Income Accounts will help you to understand many macroeconomic factors such as:
• Fiscal / Monetary Policy
GDP GROWTH STATEMENT BY
Bangladesh’s Gross Domestic Product (GDP) is set to grow by an 8.13%—the highest ever in the country’s economic
history—in the current fiscal year (FY2018-19).
Besides, the per capita income of the country is also set to grow to $1,909 in the current fiscal year, up from $1,751
in the previous fiscal year (FY2017-18), stated Finance Minister AHM Mustafa Kamal, while briefing the press after
the National Economic Council (NEC) meeting held at its conference room on last week.
INDEPENDENT STATEMENT ON GDP
Economists, however, remain skeptical about the GDP growth projection as it does not match with other
Policy Research Institute (PRI) Executive Director Ahsan H Mansur said other economic indicators including
credit growth, investment scenario, and imports make materialization of the projected growth seem unlikely.
Claiming tax revenues to be "very small," Ahsan questioned where the growth will come from.
"There is a mismatch [between the actual and projected data] and it makes us [economists] uncomfortable. It is
difficult to understand how much growth has been achieved in a true sense," said the economist.
"We are not observing optimism at the stock market, money market, in credit demand, or in export-import—
which should be present in a country with an 8% GDP growth rate," he added. (Source: Dhaka Tribune)
BALANCE OF PAYMENT (BOP)
• A country’s balance of payments accounts for its payments to and its receipts from foreigners.
• Each international transaction enters the accounts twice: once as a credit (+) and once as a debit (-).
• The balance of payment accounts are separated into 3 broad accounts:
1. Current Account: accounts for flows of goods and services (mainly, imports and exports).
1. Financial Account: accounts for flows of financial assets (financial capital).
1. Capital Account: flows of special categories of assets (capital), typically non-market, non-produced, or
intangible assets like debt forgiveness, copyrights and trademarks.
COMPONENTS OF BALANCE OF
• Each of the 3 broad accounts are more finely divided:
1. Current account
• Trade Balance
• Imports and Exports of goods (merchandise goods like DVDs)
• Imports and Exports of services (payments for legal services, shipping services, tourist meal)
• Primary Income
• Income receipts and payments for factors (interest and dividend payments, earnings of firms
and workers operating in foreign countries)
• Secondary Income
• Net unilateral transfers (remittances)
• Gifts (transfers) across countries that do not purchase a good or service nor serve as income.
Records trade in goods and services, as well as transfer payments.
Trade balance only records trade in goods.
Adding trade in services and transfer payments we reach current account balance
🢝 The current account is in surplus if receipts exceed payments
🢝 The current account in deficit if receipts are less than payments
2. Capital Account
Capital account in the international accounts includes the acquisition and disposal of non-produced, non-
financial assets between residents and non-residents and capital transfers receivable and payable between
residents and non-residents.
A) Gross acquisition/disposals of non-produced and non-financial assets
The credit entries of non-produced and non-financial assets consist of natural resources; contracts, leases and
licenses and marketing assets. Payments on the same accounts constitute debit entries.
B) Capital transfers
Capital transfer consists of transfer of ownership of fixed assets or forgiveness of financial liabilities between
residents and non-residents without quid pro quo.
3. Financial account
Financial account records all transactions associated with changes of ownership in foreign financial
assets and liabilities. The Financial Account is classified, firstly, mainly by four functional categories: A)
Direct investment, B) Portfolio investment, C) Other investment and D) Reserve assets; secondly, by
direction of investment (assets and liabilities) and thirdly, by instrument of investment (equity, bonds
and notes, loans etc.).
A) Direct investment
This item covers remittances received from foreign direct investors in their enterprises in the
reporting economy and remittances made abroad by Bangladeshi direct investors for equity
B) Portfolio investment
Portfolio investment covers remittances received from (credit) and paid to (debit) on account of
equity securities (share) and debt securities in the form of bonds and notes, money market
instrument and financial derivatives. Information on portfolio investment are collected through
C) Other investment
Other investment includes all financial transactions that are not covered in the categories for direct
investment, portfolio investment or reserve assets. Under other investment, the instrument classified
under assets and liabilities, comprises trade credits and advances, loans (including use of Fund credit and
other loans from the Fund), currency and deposits and other assets and liabilities.
D) Reserve assets
Data on international reserves comprise of monetary gold, SDR, reserve position in the Fund and foreign
exchange which are collected from the internal records of the Bangladesh Bank and IMF. Transactions of
gold, SDR and foreign exchange of Bangladesh Bank, transactions in the reserve position in the IMF are
reflected in the reserve assets.
Financial (capital) inflow
♦ Foreigners loan to domestic citizens by acquiring domestic assets.
♦ Foreign owned (sold) assets in the domestic economy are a credit (+)
Financial (capital) outflow
♦ Domestic citizens loan to foreigners by acquiring foreign assets.
♦ Domestically owned (purchased) assets in foreign economies are a debit (-)
The increase in official reserve is also called the overall balance-of-payments
= increase in official exchange reserve
= current account surplus + net private capital inflows
If both current account and private capital account are in deficit, then the overall
BOP is in deficit; central bank is losing reserves.
BALANCE OF PAYMENT ACCOUNTS
🢝 Import of goods and services (-)
🢝 Export of good and services (+)
🢝 Net investment income ( +/-)
🢝 Net transfers (+/-)
🢝 Current account balance (+/-)
The capital account in the international accounts
shows (a) capital transfers receivable and payable
between residents and nonresidents and (b) the
acquisition and disposal of non-produced,
nonfinancial assets between residents and
Foreign investment in the country (+)
Country’s investment in foreign countries (-)
Balance for official financing
Country’s official reserves
https://www.imf.org/external/pubs/ft/bop/2007/pdf/bpm6.pdf see appendix 9
EXAMPLE OF BALANCE OF PAYMENT
• You import a DVD of Japanese anime by using your debit card.
• The Japanese producer of anime deposits the funds in its bank account in San Francisco. The bank
credits the account by the amount of the deposit.
DVD purchase –$30
Credit (“sale”) of bank account by bank +$30
EXAMPLE OF BALANCE OF PAYMENT
• You invest in the Japanese stock market by buying $500 in Sony stock.
• Sony deposits your funds in its Los Angeles bank account. The bank credits the account by the
amount of the deposit.
Credit (“sale”) of bank account by bank +$500
Purchase of stock –$500
EXAMPLE OF BALANCE OF PAYMENT
• US banks forgive a $100 M debt owed by the government of Argentina through debt restructuring.
• US banks who hold the debt thereby reduce the debt by crediting Argentina's bank accounts.
Credit (“sale”) of bank account by bank +$100 M
Debt forgiveness: non-market transfer –$100 M
HOW DO THE BALANCE OF PAYMENT
• Due to the double entry of each transaction, the balance of payments accounts will balance by the
current account + financial account + capital account = 0
US NET FOREIGN ASSETS
• The US has the most negative net foreign wealth in the world, and so is therefore the world’s largest
• And its current account deficit in 2004 was $670 billion dollars, so that net foreign wealth continued to
• The value of foreign assets held by the US has grown since 1980, but liabilities of the US (debt held
by foreigners) has grown more quickly.
• About 70% of foreign assets held by the US are denominated in foreign currencies and almost all of
US liabilities (debt) are denominated in dollars.
• Changes in the exchange rate influence value of net foreign wealth (gross foreign assets minus gross
• A depreciation of the US dollar makes foreign assets held by the US more valuable, but does not change the
dollar value of dollar denominated debt.
• The US is the largest debtor nation, and its foreign debt continues to grow because its current
account continues to be negative.
BANGLADESH BALANCE OF TRADE
Bangladesh recorded a trade deficit of 113.70 BDT Billion in February of 2019. Balance of Trade in
Bangladesh averaged -28.35 BDT Billion from 1976 until 2019, reaching an all time high of 0 BDT Billion in
April of 1977 and a record low of -209.80 BDT Billion in May of 2018.
Bangladesh Trade Last Previous Highest Lowest Unit
Balance of Trade -113.7 -193.4 0 -209.8 BDT Billion
Current Account -1728 -1354 1852 -3247 USD Million
Current Account to GDP -3.6 -0.6 3.7 -4.4 percent
Exports 232.41 271.93 271.93 0.05 BDT Billion
Imports 346.07 465.3 465.3 0.57 BDT Billion
Terms of Trade 87.1 87.1 104.7 80.01 Index Points
Capital Flows 1.81 7.15 679.5 -12.72 BDT Billion
Remittances 1434.05 1458.68 1597.21 856.87 USD Million
Gold Reserves 14 14 14 3.29 Tonnes
Foreign Direct Investment 1583 1706 1726 276 USD Million
External Debt 33.11 28.34 33.11 16.17 USD Billion
Crude Oil Production 3 3 6 1.1 BBL/D/1K
BANGLADESH CURRENT ACCOUNT
Bangladesh recorded a Current Account deficit of 1728 USD Million in the fourth quarter of 2018.
Current Account in Bangladesh averaged 104.37 USD Million from 2005 until 2018, reaching an all
time high of 1852 USD Million in the third quarter of 2015 and a record low of -3247 USD Million in
the fourth quarter of 2017.
BANGLADESH CURRENT ACCOUNT
Bangladesh recorded a Current Account deficit of 3.60 percent of the country's Gross Domestic
Product in 2018. Current Account to GDP in Bangladesh averaged -0.99 percent from 1980 until
2018, reaching an all time high of 3.70 percent in 2010 and a record low of -4.40 percent in 1988.
Exports in Bangladesh decreased to 232.41 BDT Billion in February from 271.93 BDT Billion in
January of 2019. Exports in Bangladesh averaged 46.79 BDT Billion from 1972 until 2019,
reaching an all time high of 271.93 BDT Billion in January of 2019 and a record low of 0.05 BDT
Billion in February of 1972.
Imports in Bangladesh decreased to 346.07 BDT Billion in February from 465.30 BDT Billion in January of
2019. Imports in Bangladesh averaged 79.68 BDT Billion from 1976 until 2019, reaching an all time high
of 465.30 BDT Billion in January of 2019 and a record low of 0.57 BDT Billion in November of 1976.
BANGLADESH TERMS OF TRADE
Terms of Trade in Bangladesh decreased to -31.72 Index Points in 2018 from -30.57 Index Points in
2017. Terms of Trade in Bangladesh averaged 57.06 Index Points from 1986 until 2018, reaching an all
time high of 104.70 Index Points in 1988 and a record low of -31.72 Index Points in 2018.
Remittances in Bangladesh decreased to 1434.05 USD Million in April from 1458.68 USD Million in
March of 2019. Remittances in Bangladesh averaged 1212.94 USD Million from 2012 until 2019,
reaching an all time high of 1597.21 USD Million in January of 2019 and a record low of 856.87 USD
Million in September of 2017
BANGLADESH CAPITAL ACCOUNT
Bangladesh recorded a capital account surplus of 1.81 BDT Billion in January of 2019. Capital Flows in
Bangladesh averaged 24.23 BDT Billion from 1997 until 2019, reaching an all time high of 679.50 BDT
Billion in March of 2007 and a record low of -12.72 BDT Billion in May of 1998.
BANGLADESH FOREIGN DIRECT
Foreign Direct Investment in Bangladesh increased by 1583 USD Million in 2018. Foreign Direct
Investment in Bangladesh averaged 994.88 USD Million from 2002 until 2018, reaching an all time high
of 1726 USD Million in 2013 and a record low of 276 USD Million in 2004.
External Debt in Bangladesh increased to 33.11 USD Billion in 2018 from 28.34 USD Billion in 2017.
External Debt in Bangladesh averaged 21.55 USD Billion from 2001 until 2018, reaching an all time high
of 33.11 USD Billion in 2018 and a record low of 16.17 USD Billion in 2002.
RELATED INDICATORS FOR
BANGLADESH FOREIGN EXCHANGE
Bangladesh's Foreign Exchange Reserves equaled 7.3 Months of Import in Feb 2019, compared with the ratio of 5.3 in the previous month.
Bangladesh's Foreign Exchange Reserves: Months of Import data is updated monthly, available from Jul 1986 to Feb 2019. The data reached an
all-time high of 9.6 in Apr 1994 and a record low of 0.9 in Mar 1990. CEIC calculates Foreign Exchange Reserves as Months of Import from
monthly Foreign Exchange Reserves and monthly Imports. The International Monetary Fund provides Foreign Exchange Reserves in USD.
Bangladesh Bank provides Imports in local currency. Bangladesh Bank average market exchange rate is used for currency conversions.
In the latest reports, Bangladesh's Foreign Exchange Reserves was measured at 29.7 USD bn in Mar 2019. Its Money Supply M2 increased 10.4
% YoY in Feb 2019. Bangladesh's Domestic Credit reached 123.5 USD bn in Sep 2018, representing an increased of 13.2 % YoY. The country's
Non Performing Loans Ratio stood at 10.3 % in Dec 2018, compared with the ratio of 11.5 % in the previous quarter.
BANGLADESH FOREIGN EXCHANGE
RESERVES Bangladesh's Foreign Exchange Reserves
was measured at 30.1 USD bn in Apr 2019,
compared with 29.7 USD bn in the previous
month. Bangladesh's Foreign Exchange
Reserves: USD mn data is updated monthly,
available from Mar 1973 to Apr 2019. The
data reached an all-time high of 31.6 USD bn
in Aug 2017 and a record low of 42.5 USD mn
in Aug 1974. The International Monetary Fund
provides monthly Foreign Exchange
Reserves in USD.
In the latest reports, Bangladesh's Foreign
Exchange Reserves equaled 7.3 Months of
Import in Feb 2019. Its Money Supply M2
increased 10.9 % YoY in Mar 2019.
Bangladesh's Domestic Credit reached 130.2
USD bn in Mar 2019, representing an
increased of 13.7 % YoY. The country's Non
Performing Loans Ratio stood at 10.3 % in
Dec 2018, compared with the ratio of 11.5 %
in the previous quarter.
NIA AND CURRENT ACCOUNT
BALANCE OF BANGLADESH
• Current account balance is negative.
• Is government budget responsible for negative balance in the current account?
• What should be the fiscal policy to address negative balance in current account?
• Fiscal tightening
• Increase in taxes
WHAT SHOULD BE ANALYZED?
1. Demand and supply of currency
1. Local industry competitiveness
1. Area of Improvement
1. Exploring ways to improve the BOP scenario
ALTERNATIVE PRESENTATIONS OF
1. Standard Presentation
1. Analytic Presentation
1. Sectoral Analysis
1. Monetary Presentation
1. Partner Analysis
1. Excessive reliance on any particular product or country
1. Excessive reliance on any particular item of Current Account
1. International trade negotiations
1. Exchange risk
1. Interest Rate
Do you have any doubt that Bangladesh needs
investment in solving so many problems it has?
1. Exports more
1. Earning more remittances
FINANCING CURRENT ACCOUNT
1. Net financial inflows
2. Changes in reserve assets (Reduction in net foreign assets if
excess of investment over savings)
1. Some of the economic policies , interest rate increase
1. FDI (non resident , foreigner – (Doing Business report – 177)
1. Bonds sales in international market
Which one to use? When?
Rate of return
1. Reserves provide confidence to
1. Today’s financing by foreigner
may increase future current
BOP ADJUSTMENT IN RESPONSE TO
A CURRENT ACCOUNT DEFICIT
1. Adjustments through market participants are painful. Therefore, policy measures aimed at
mitigating the adjustment path may need to be considered.
1. Roles of the exchange rate, fiscal measures and monetary policy adjustment.
1. The deficit in balance in goods, services and primary income may be offset by the balance
in secondary income.
1. The foreign debt must be repaid. Large amortization payments demand immediate steps to
1. Currency depreciation
BOP ADJUSTMENT IN RESPONSE TO
A CURRENT ACCOUNT DEFICIT
6. Interest rate effect leads to lower consumption.
6. Changes in government spending and taxation may be required. This is basically changes
in fiscal policy.
6. Subsidies may be cut and sectors may be opened to private sector.
6. Monetary policy adjustments. Link between reserve asset transaction and domestic
RECIPE TO SUSTAIN THE GROWTH
To sustain this momentum in the medium to long-term
• expanded industrial base,
• diversified export basket,
• improved business environment for vibrant
private sector development,
• expanded tax base,
• better revenue collection for increased resource
• continued focus on prudent macroeconomic
• sound debt management,
• human capital development,
• strengthening the banking sector,
• enforcing stronger regulations,
• introducing a bankruptcy law,
• corporatizing SCBs,
• applying a uniform guideline for writing off
• appointment to SCB boards of directors can
be limited to competent professionals who
possess operational knowledge of banking
and finance, and avoiding political
• SCB management should be given full
operational independence, but both the
board and management should remain
accountable to the central bank.
• removing infrastructure constraints, and
• reducing the cost of doing business
•Under flexible exchange rates a country with a negative current account will have to
import capital from the rest of the world.
•This will imply a reduction in the net foreign asset and a subsequent decrease in the
current account (the domestic economy will have to pay the interest on the newly
•This can enter into a vicious circle: negative current accounts can increase over and
over, requiring a subsequent, possibly fast and painful adjustment
An economy that registers a positive capital account is accumulating / de-accumulating
its net foreign assets. This is the counterpart of a positive / negative current account,
resulting from exports of goods and services being higher / lower than imports of
goods and services
Under fixed exchange rates, if capital inflows exceed capital output and the current
account is in surplus. it means that the economy is accumulating / de-accumulating its