Thread by @Trinhnomics

Here is a thread on macroeconomics. Are you ready? It's for everyone, investors, journalists, students, & people interested in the basics to read the news.

First, u get people throwing words like supply & demand a lot. I'll go through it all using IMF GDP & BOP standards. Okay?

1. A national output is either expressed as production or expenditure. As in, u either create a bunch of stuff, as in,

GDP = gross domestic product
GDP = stuff produced in economy such as
GDP = Agri + Industrial + Services
China does this
GDP = Primary + secondary + tertiary.

2. Some countries can produce a lot of stuff, some can't so they import (think China exporting manu & import raw stuff don't have). If we don't trade, we just eat/consume what we can produce. A production GDP approach doesn't look at demand side. Planned economies use production.

3. If you produce stuff, u want people to buy/use the goods too. So there is another way to look at output, through expenditure or the demand side of things.

Looks like this:
GDP = private Consumption + Government consumption + Investment + eXport–iMport
GDP = C + G + I + X–M

4. First, some economies consume more than what they produce (US) & some spend less than they produce (China). But actually, US has surplus of raw and services & deficit of manufactured.

And so to afford the demand, they import capital.

2 ways: through income or investment.

GDP identity if X-M is negative:

GDP = C + G + I + X–M

Have to square w/ income & capital account. Income u know, it's through either resident sending money home (Filipino workers remitting) or firms repatriating profits. Or capital through loans, portfolio or direct investment

If a country consumes more than it produces, it has to finance it through income coming or investment from abroad. Net capital transfers + net income transfer = the shortage b/n demand & the supply (production of GDP).

Over time, if produce more than consume, accumulate savings

Net trade (services + merchandise) + Net income (remittances, etc) + Net capital (portfolio, direct, loans etc) = Your balance of payment

Whether u got more money than u need or short, and of course this matters if u got any savings.

Gross national disposable income (GNDY) =

National disposable income = C + G + I + CAB (Income from abroad = remittances + repatriation of profits)

GDP = C + G + I + X–M
GDP - net trade = C + G + I

GNDY = C + G + I + CAB
GNY - C - G - I = CAB

CAB is diff b/c ur saving & investment

Meaning, to invest u, need to save

If u don't save, need to import capital!

Let's analyze an economy like Indonesia. If Indonesia's capital (foreigners buying stocks & bonds) & income (tourism, remittances, net trade) down then the following happen:

*Demand of IDR vs USD falls
*IDR falling = expensive to import

GDP = C + G + I + X–M

So naturally u see that the M will fall more than the X
so X-M becomes less negative.

And that is because C, which is private consumption, falls as income falls.

While revenue falling, government is spending more, so G rises. Investment likely falls.

So?

So naturally, it needs less foreign funding and so the FX depreciation is good as a shock absorber (I recommended BI when I gave a speech in Bali years ago) & only if CPI low.

Okay, don't forget that foreign investors risk appetite improve too if an EM survives shocks like IDR.

GDP = C + G + I + X–M

And finally, a country like Indonesia, which is an emerging market, and that means a lot of people & their consumption basket is still predominantly ESSENTIAL (food share of consumption high), then there's only so much C can fall.

People need to consume!

Key to avoiding a massive shock is:
*Have space to move, as in not too much CPI & too much foreign debt, and willing to use FX to absorb shock
*Do fiscal for vulnerable population like poor + SMEs + key sectors
*Avoid malinvestment & accept adjustment & create space for recovery