FPP.

1X  –  INTRODUCTION  TO  
of  control,  the  financial  system  is  shaky,  public  finances  are  in  bad  
shape,  or  the  economy  consumes  beyond  its  means.  Well,  in  this  
situation,  that  is,  when  the  economy  is  not  stable,  it  would  be  
FPP difficult  for  firms  and  people  to  make  decisions  about  their  future,  
about  whether  or  not  to  invest  in  physical  or  human  capital,  about  
  whether  or  not  to  buy  a  house,  borrow  money,  or  lend  money.  
  Economic  instability  actually  makes  everyone  worse  off.    
VIDEO  1:  Welcome  and  Introduction  to  FPP    
  What  does  economic  stability  depend  upon?  We  can  think  that  the  
Hello,  my  name  is  Paolo  Dudine.  I  am  a  Senior  Economist  at  the  IMF   state  of  the  economy,  similarly  to  our  own  health,  depends  upon  
Institute  for  Capacity  Development.  Welcome  to  this  course.  In  this   three  factors.  One,  on  factors  external  to  the  economy  and  that  the  
course,  you  will  learn  the  foundations  of  financial  programming.     economy  alone  cannot  easily  control.    For  example,  the  emergence  
  of  a  crisis  in  economic  partners,  or  a  natural  disaster  which  destroys  
What  is  financial  programming?  Well,  financial  programming  is  a   physical  infrastructure.  
framework  to  design  economic  policies  aimed  at  maintaining  or    
achieving  macroeconomic  stability.  This  definition  might  sound  a  bit   Two,  factors  that  are  intrinsic  to  the  economy  and  that  the  economy  
obscure,  but  in  very  simple  words,  financial  programming  is  very   cannot  change,  or  that  can  be  changed  but  only  over  time.  
much  like  designing  a  health  program  for  the  economy.     Examples  are  the  state  of  economic  development,  population  
  dynamics,  the  presence  of  natural  resources.  
So,  when  is  the  economy  healthy?  In  some  sense,  an  economy  is    
healthy  if  it  enjoys  macroeconomic  stability.  Broadly  speaking,   And  third,  finally,  economic  policies  and  collective  actions.  
macroeconomic  stability  is  a  situation  where  the  economy  grows  in   Economic  policies  are  levers  that  a  country  has  and  can  use  to  affect  
a  steady  and  durable  way,  inflation  is  under  control,  the  financial   the  state  of  its  economy.  
system  is  sound-­‐-­‐  it  is  a  situation  in  which  the  economy  is  resilient    
to  shocks,  and  it  is  not  likely  to  face  a  crisis.   So  what  are  economic  policies?    In  financial  programming  we  
  broadly  classify  economic  policies  into  three  groups:  (1)Fiscal  policy,  
Why  is  macroeconomic  stability  important?  Let's  consider  what   which  is  the  use  of  government's  revenues  and  spending  to  affect  
would  happen  in  the  opposite  situation,  that  is,  when  the  economy   the  economy;  (2)Monetary  and  exchange  rate  policies-­‐-­‐these  refer  
grows  or  contracts  in  a  very  erratic  way,  prices  spiral  out   to  what  the  central  bank  does  to  influence  the  amount  of  money  
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in  the  economy,  the  overall  availability  of  credit,  interest  rates,  and   The  second  step  is  the  projection  of  where  we  can  expect  the  
the  exchange  rate;  and  finally,  (3)Structural  policies,  which  refer  to   economy  to  be  in  the  foreseeable  future  if  economic  policies  remain  
the  design  of  all  types  of  regulations  and  institutions  which   the  same.    In  this  step,  we  answer  these  questions:  given  those  
determine  how  the  economy  actually  works.   factors  that  we  cannot  control,  what  will  happen  to  the  economy  if  
  we  do  not  change  economic  policies?  Will  the  economy  grow  or  will  
Now  that  we  know  what  we  mean  by  economic  stability   it  slow  down?  Will  inflation  go  up?  Will  the  economy  be  exposed  to  
and  economic  policies,  it  should  be  easier  to  make  sense  of  what   a  crisis?  
financial  programming  is.        
  The  third  step  is  the  design  of  policies.    In  this  third  step,  we  first  set  
Again,  now,  financial  programming  is  a  framework  to  design  policies   objectives  for  the  next  three  to  five  years.    For  example,  increase  
to  keep  or  make  the  economy  stable.    What  do  I  mean  by   economy  growth,  reduce  inflation,  reduce  poverty,  build  resilience  
framework?    Financial  programming  is  not  a  model  of  the  economy.     to  shock.    After  that,  we  determine  the  changes  that  we  
Financial  programming  uses  models  but  it  goes  beyond  them.     need  to  make  to  economic  policies  in  order  to  achieve  those  goals.  
Financial  programming  includes  three  steps.    
  This  course  is  entirely  about  the  first  step:    the  analysis  and  
In  the  first  step,  we  diagnose  the  current  state  of  the  economy.   diagnosis  of  the  macroeconomic  accounts.    Specifically,  in  this  
In  this  step,  we  basically  answer  to  questions  such  as:  How  healthy   course  you  will  explore  and  learn  the  principle  features  of  the  
is  the  economy  now?  Is  it  growing  enough?  Is  inflation  OK  or  under   accounts  of  the  four  main  sectors  of  the  economy:  the  real  sector,  
control?   the  external  sector,  the  government  sector,  and  the  monetary  
  sector.  
To  do  this,  we  look  at  macroeconomic  accounts  to  see,  for  example,    
how  much  the  economy  produces  and  how  much  it  spends.   You  will  learn  what  these  accounts  record,  how  to  interpret  them,  
  and  how  these  accounts  are  interrelated-­‐-­‐that  is,  how  the  same  
We  look  at  the  accounts  of  the  government  and  the  accounts  of   economic  phenomena  are  manifested  through  the  different  
banks,  at  the  transactions  of  the  economy  with  the  rest  of  the   accounts.  
world.   The  second  and  third  steps,  which  are  the  projections  under  
  unchanged  policies  and  the  program  design,  will  be  the  subjects  of  
And,  from  all  of  these  accounts,  we  gauge  the  state  of  the  economy,   another  course.  
and  we  try  to  understand  the  extent  to  which  this  depends  on    
economic  policies,  and  on  factors  that  the  economy  cannot  control.    
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VIDEO  2:  Macroeconomic  Objectives  and  Policies   We  have  monetary  and  exchange  rate  policies.    Broadly  speaking,  
  these  include  all  that  the  central  bank  does  to  influence  the  quantity  
As  I  introduced  in  the  first  video,  we  can  think  that  the  state  of  the   of  money  and  credit  in  the  economy,  the  interest  rates,  and  the  
economy,  basically  how  healthy  the  economy  is,  depends  upon   exchange  rate.  
three  factors:    
  Finally,  structural  policies,  which  include  the  design  of  regulations  
Exogenous  factors-­‐-­‐these  are  external  to  the  economy,  and  the   and  institutions  to  affect  the  way  in  which  the  economy  works.  
economy  alone  cannot  determine  them.    Examples  are  the    
emergence  of  a  crisis  in  economic  partners,  changes  in  the  prices  of   To  understand  the  main  objectives  of  financial  programming,  
commodities,  natural  disasters.   let  us  suppose  that  we  can  graph  the  state  of  economy  over  time.  
  So  let  us  draw  two  axes.    On  the  horizontal  axis,  we  have  time.  
Then  we  have  factors  that  are  intrinsic  to  the  economy  and  that   On  the  vertical,  we  have  the  state  of  the  economy.    And  let  us  
either  cannot  be  changed  quickly  or  cannot  be  changed  at  all.   suppose  that  over  time,  the  economy  has  moved  this  way.  
For  example,  one  can  not  easily  change  the  fact  that  a  country  is  an   Of  course,  the  interpretation  here  is  that  an  upward  movement  
island  or  that  most  of  its  land  cannot  be  cultivated.   means  that  the  economy  has  improved.    A  downward  movement  
  means  that  the  economy  is  in  less  good  shape.  
Or  factors  that  can  be  changed  but  only  slowly  over  time.    
Examples  are  the  state  of  economic  development,  population   Now  what  can  explain  these  movements?    It  may  be  for  example,  
dynamics,  the  presence  of  natural  resources.    And,  of  course,  here   that  an  exogenous  shock,  say  a  change  in  commodity  prices,  helps  
by  slowly  over  time,  I  mean  that  it  would  take  maybe  more  than   explain  almost  all  of  this  drop.    Whereas  a  change  in  policies  could  
one  or  five  years  to  implement  these  changes.    Most  often,  these   happen  to  help  explain  all  of  this  other  movement.  
are  referred  to  as  structural  factors.    
  Of  course,  other  factors  also  help  explain,  for  example,  
Finally,  we  have  economic  policies.    The  combination  of  all  of  these   the  level  of  the  curve,  the  response  to  exogenous  shocks  or  to  
factors  determine  the  state  of  the  economy,  how  basically  the   changes  in  policies.  
economy  pulses.    
  Now  the  fundamental  question  is,  given  our  expectations  
Now  what  are  economic  policies?    We  have  fiscal  policy.   about  exogenous  shocks  in  the  future,  if  policies  do  not  change,  
This  is  the  use  of  government  revenues  and  expenditures   where  will  the  economy  be?  Suppose  that  under  these  two  
to  influence  the  economy.      
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assumptions,  we  project  that  the  economy  will  trend  downward  in   are  used  at  the  normal  level  of  intensity.  
this  way.    OK,  of  course,  that's  not  good.    
  When  there  is  slack  in  the  use  of  resources,  the  economy  produces  
So  the  question  now  would  be,  suppose  that  we  would  like  the   less  than  it  is  able  to  produce.    When  the  economy  over-­‐utilizes  its  
economy  to  be  here  instead.    Or  maybe  here.    Then  the  question   resources,  the  economy  produces  more  than  what  it  is  capable  of  
that  we  try  to  address  with  financial  programming  is,  what  would  be   doing.    But  it  is  maybe  running  the  risk  of  running  out  of  steam.  
the  required  change  in  policies?    
  At  the  same  time,  internal  balance  also  means  that  inflation,  that  is,  
So  what  would  be  the  change  in  policies  that  we  need  to  implement   the  rate  at  which  prices  increase,  is  low  and  stable.    External  
to  move  the  line  up  there?    Remember,  there  is,  of  course,  little  that   balance  instead  is  a  situation  where  the  current  account,  that  is,  
we  can  do  to  prevent  exogenous  shocks  to  hit  us.    And  it  takes  time   the  transactions  with  the  rest  of  the  world-­‐-­‐again,  this  concept  will  
to  affect  other  factors.    So  again,  what  we  can  do  to  prevent  the   be  clarified  later  on-­‐-­‐can  be  financed  in  an  orderly  manner-­‐-­‐  
economy  from  falling  is  to  change  policies.   that  is,  without  resorting  to  abrupt  changes  in  the  exchange  rate,  
  the  value  of  our  currency  relative  to  that  of  other  currencies.  
Now  what  are  desirable  objectives  for  the  economy?    So,  where   Or  without  defaulting  on  payments  and  obligations  to  the  rest  of  
should  we  try  to  shift  that  line?    We  discussed  in  the  introduction   the  world,  or  without  resorting  to  financial  assistance,  for  example,  
how  macroeconomic  stability  is  a  synonym  for  a  healthy  economy.   from  institutions  like  the  IMF.  
   
Let  me  be  more  specific  here.    We  can  think  that  an  economy  is   Again,  do  not  feel  intimidated  now.    We  will  explain  all  of  this  in  the  
stable  if  it  reaches  what  we  call  internal  balance  and  external   rest  of  the  course.  
balance.    Internal  balance  has  to  do  with  how  much  the  economy    
produces.    External  balance  instead  has  to  do  with  the  transactions   Now,  what  could  prevent  the  economy  from  being  at  internal  and  
that  the  economy  makes  with  the  rest  of  the  world.   external  balance?    Factors  could  be  too  much  or  too  little  demand.  
Internal  balance  is  a  situation  where  output  is  at  full  employment   Maybe  because  the  government  spends  too  much  or  too  little.  
and  inflation  is  low  and  stable.    Well,  do  not  worry  now  if  this   Or  because  there  is  too  much  or  too  little  money  in  the  economy.  
definition  seems  complicated.    During  the  rest  of  the  course,  we  will   This  may  cause  production  to  be  different  from  the  potential  
clarify  all  of  these  concepts.    But  in  simple  words,  internal  balance   production  or  inflation  to  be  too  high.  
means  that  the  economy  produces  an  amount  of  goods  and  services    
that  is  in  line  with  potential  output.    And  potential  output  is  what  
the  economy  is  capable  to  produce  if  all  its  factors  of  production  
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Another  thing  that  can  prevent  reaching  internal  and  external   So  let's  discuss  now,  how  does  this  framework  work?    The  basis  of  
balance  is  uncertainty.    Possibly  because  the  financial  sector  is  not   financial  programming  is  the  accounts  for  the  main  sectors  of  the  
sound.    Or  because  government  finances  are  not  in  good  shape.   economy,  or  the  different  components  of  the  economy.  
Or  because  the  economy  does  not  have  enough  buffers.    A    
combination  of  inflation  and  exchange  rate  that  makes  it  convenient   So  what  do  we  mean  by  sectors  of  the  economy?    Broadly  speaking,  
to  purchase  goods  abroad  and  that  makes  exports  not  attractive  can   by  sector  of  the  economy,  we  mean  a  group  of  agents  that  perform  
also  lead  the  economy  to  be  away  from  external  balance.   similar  economic  functions.  
   
And,  of  course,  for  example,  a  bubble  in  asset  prices,  or  in  house   In  this  course,  we  will  focus  on  four  main  sectors.    The  first  is  the  
prices,  or  stock  prices,  can  also  lead  to  the  economy  being  far  away   real  sector.    This  comprises  all  the  producing  and  consuming  units  of  
from  internal  and  external  balance.    And,  of  course,  many  other   an  economy.    When  we  analyze  the  real  sector,  we  will  be  
factors  can  lead  to  that.   interested  in  understanding  how  much  does  the  economy  produce?  
  How  much  does  it  consume?    How  much  does  the  economy  invest?  
Now  if  imbalances  become  severe,  the  economy  risks  accumulating    
so  much  tension  that  the  economy  faces  the  risk  of  a  crisis.    This  is  a   The  second  sector  is  the  external  sector,  by  which  we  mean  the  rest  
situation  where  the  economy  becomes  very  chaotic.    Possibly,   of  the  world.    When  looking  at  the  external  sector,  we  are  
production  falls  and  people  have  to  cut  their  consumption.   interested  in  understanding  the  transactions  of  the  economy  
Unemployment  increases.    Banks  fail.    Assets  lose  their  value,  which   with  the  rest  of  the  world.    For  example,  how  much  the  economy  
means  the  people  lose  their  savings.    And,  of  course,  this  is  just  to   consumes  from  the  rest  of  the  world.    How  much  resources  it  
name  a  few  of  the  possible  consequences.   provides  to  the  rest  of  the  world.  
   
VIDEO  3:  The  FPP  Framework   The  third  is  the  government  sector.    Basically,  the  public  sector  of  
  the  country,  which  means  the  central  governments,  the  local  
We  said  that  financial  programming  is  the  design  of  a  set  of   governments,  public  corporations,  etc.    In  most  countries,  this  is  the  
macroeconomic  policies  aimed  at  achieving  certain  macroeconomic   largest  single  agent  of  the  economy,  for  example,  in  terms  of  the  
objectives.    We  discussed  about  objectives  and  policies  in  the   use  of  resources.    Here,  we  will  look  at  how  much  the  government  
previous  video.   collects  from  the  rest  of  the  economy,  for  example,  in  form  of  taxes,  
  and  how  much  it  spends,  mostly.  
 
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Finally,  we  will  look  at  the  monetary  sector.    And  in  particular,  we   The  Government  Sector  Accounts  record,  instead,  the  revenues,  
will  focus  on  deposit-­‐taking  institutions,  which  in  common  language   expenditures,  assets,  and  liabilities  of  the  government.      
are  banks.    Banks  produce  services,  of  course  financial  services,    
and  hence,  they  are  part  of  the  real  sector.    But  we  isolate  them   Finally,  the  Monetary  Accounts  record  the  assets  and  liabilities  
because  of  their  very  specific  role  of  providing  credit  to  the   of  deposit-­‐taking  institutions,  that  is,  banks.  
economy  and  of  creating  money.    
  Of  course,  we  will  also  supplement  all  of  the  information  that  
We  will  see  all  of  these  sectors,  of  course,  in  detail  in  the  rest  of  the   comes  from  these  accounts  with  information  that  we  gather  from  
course.    Now,  for  each  one  of  these  sectors,  we  will  be  interested  in   other  indicators.    And  so  we  will  use  other  selected  indicators,  
tracking  the  transactions  of  the  sector  with  other  sectors,  and  the   for  example,  inflation  or  interest  and  exchange  rates  or  
level  and  composition  of  the  assets  and  claims  of  that  specific   unemployment  to  have  a  better  understanding  of  the  state  of  the  
sector,  and  all  of  its  liabilities  to  the  other  sectors.   economy.  
   
Specifically,  for  each  sector,  we  will  use  accounts  to  monitor  the   Now,  how  can  we  use  these  accounts  to  gauge  the  state  of  the  
transactions  and  the  claims  and  the  liabilities  to  the  other  sectors.   economy?    What  do  we  need  to  do  that?  
Accounts,  basically,  are  tables  with  numbers  that  detail  relevant    
information  about  that  specific  sector.   First  of  all,  we  need  a  good  understanding  of  what  these  accounts  
  record  and  how.    The  accounts  of  a  sector  provide  a  picture  
For  the  real  sector,  we  use  the  National  Income  and  Product   of  what  is  going  on  in  that  sector.    But  to  see  the  picture,  we  
Accounts.    These  record,  among  other  things,  how  much  the   actually  need  to  know  how  to  interpret  changes  in  the  accounts  in  a  
economy  produces-­‐-­‐that  is,  the  value  of  the  goods  and  services   meaningful  way.  
which  the  economy  produces-­‐-­‐and  how  much  economy  uses  in   Basically,  we  need  to  know  how  to  read  the  accounts.    However,  
terms  of  goods  and  services-­‐-­‐basically,  how  much  economy   this  is  not  enough.    We  need  also  a  framework  that  unifies  the  
consumes,  invests,  or  provides  to  the  rest  of  the  world.   account.    Why  is  that?    If  you  think  of  the  economy  as  a  body,  our  
For  the  external  sector,  we  will  look  at  the  External  Sector  Accounts,   body,  and  you  think  of  the  sectors  as  the  systems  of  our  body-­‐-­‐  
which  are  the  Balance  of  Payments  and  International  Investment   for  example,  the  cardiovascular  system,  digestive  system,  etc-­‐-­‐  
Position.    These  record  transactions  of  an  economy  with  the  rest   it  becomes  clear  that  these  four  sectors  do  not  work  in  isolation  of  
of  the  world  and  the  claims  and  liabilities  of  the  economy  to  the  rest   one  another.    Rather  they  influence  one  another.  
of  the  world.    
 
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It  also  becomes  clear  that  the  state  of  the  economy,  basically  the   that  we  record  in  the  same  account.  
health  of  the  economy,  is  the  result  of  the  interplay  between  the    
developments  in  all  of  these  sectors.   Behavioral  relationships,  instead,  link  the  development  
  of  variables  of  different  accounts  in  an  economic  meaningful  way.  
Now,  when  we  look  at  these  sectoral  accounts  to  go  gauge  the  state   These  reflect  our  understanding  of  how  certain  economic  
of  the  economy,  we  cannot  analyze  each  single  account  in  isolation   phenomena  manifest  in  different  aggregates  or  variables,  so  how  
of  the  others.    We  need  to  understand  how  different  economic   they  manifest  in  the  different  accounts.    For  example,  how  an  
phenomena  manifest  themselves  through  the  different  accounts.   increase  in  bank  credit  to  the  private  sector  affects  consumption  
So  we  need  a  framework  that  brings  together  all  the  accounts   and  investment.    Or  how  an  increase  in  taxes  and,  at  the  same  time,  
and  then  links  developments  in  these  accounts  in  a  way  that   a  reduction  in  government  expenditures  may  affect  consumption,  
is  consistent  with  the  link  that  exists  in  reality  between  the   production,  and  imports.  
underlying  sectors.    
  At  this  point,  you  might  be  wondering,  why  do  we  just  focus  on  
In  financial  programming,  this  framework  is  provided  by  accounting   these  sectors  and  accounts?    Why  just  four  and  not  more?  
identities  and  behavioral  relationships.    Accounting  identities   First  of  all,  it's  not  that  one  should  only  look  at  this  set  of  accounts.  
consist  of  two  sets  of  conventions.    First,  flows  or  positions  involving   For  example,  if  good  accounts  are  available  for  firms,  households,  or  
agents  in  one  sector  and  agents  in  other  sectors  or  agents  of  a  sub-­‐ other  financial  institutions,  of  course,  we  should  make  use  of  this  
sector  and  agents  in  the  broader  sector  should  be  reflected  equally   information.    However,  the  accounts  for  the  real,  external,  
in  the  respective  accounts.   government,  and  monetary  sectors  constitute  a  core  group  of  
  accounts  that,  at  a  minimum,  we  should  look  at.  
By  flow,  basically,  we  mean  the  transactions.    And  by  positions,  we    
mean  the  claims  and  the  liabilities.    Well,  for  example,  monetary   Indeed,  these  accounts  are,  first  of  all,  comprehensive.    They  pretty  
and  government  accounts  should  report  the  same  amount  of  bank   much  encompass  all  types  of  agents  in  the  economy.    And  they  
lending  to  the  government.   encompass  the  makers  of  fiscal  and  monetary  policies,  two  of  the  
The  second  set  of  convention  underlying  accounting  identities   three  policies  that  we  look  at  in  financial  programming.  
is  that  the  sum  of  certain  aggregates  should  be  the  same  as  the  sum    
of  other  aggregates  and  simply  because  of  the  way  the  accounts  are   Then,  they  are  available  for  most  countries.  Periodically-­‐-­‐which  is,  of  
constructed.    For  example,  the  supply  of  goods  and  services   course,  important  to  see  broad  developments  in  the  economy  of  
that  we  record  in  the  National  Income  and  Product  Accounts   these  countries.  
must  be  equal  to  the  effective  demand  for  goods  and  services    
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They  are  also  reported  on  in  a  timely  fashion  which  is  important  to   To  illustrate  this,  let's  consider,  for  example,  households  and  
detect  changes  promptly.       individuals.    Their  residence  is  considered  to  be  the  economy  where  
  they  have  been  living  for  a  year  or  longer.    For  example,  tourists  are  
And,  of  course,  they  are  also  reported  with  good  accuracy   not  residents  of  the  economy  which  they  visit,  whereas  migrants  
which  is  important  for  precisions.   who  have  been  in  an  economy  for  more  than  one  year  are  
  considered  to  be  residents  of  that  economy.  
Many  countries  also  have  very  good  data,  for  example,  again,  on    
firms,  households,  other  financial  institutions,  but,  once  more,  even   For  enterprises,  the  residence  is  attributed  to  that  economy  where  
for  those  countries,  we  should  at  a  minimum  focus  on  the  accounts   that  particular  enterprise  produces  the  most.    With  very  few  
of  the  four  sectors  described  above.   exceptions,  enterprises  are  residents  of  the  economy  where  they  
  are  located,  no  matter  where  they  are  incorporated.    The  
  government  is  resident  of  the  economy,  the  country  of  which  it  is  
VIDEO  4:  Common  Concepts   the  government,  of  course.    As  a  final  example,  non-­‐profit  
  organizations  are  residents  of  the  economy  where  they  are  based.  
Throughout  this  course,  we  will  repeatedly  use  some  common    
concepts.    We  will  talk  about  the  sectors  of  the  economy,  or  the   Another  concept  that  we  will  use  over  and  over  in  this  course  
accounts  of  a  sector  of  the  economy;  we  will  talk  about  residents   is  that  of  stock,  flows,  and  transactions.    When  we  talk  about  stocks,  
and  non-­‐residents  of  the  economy,  hence  the  concept  of  residence;   we  will  mean  the  level  of  assets  and  liabilities  of  a  particular  agent  
and  we  will  repeatedly  talk  about  stock,  flows,  and  transactions;   or  a  particular  sector  at  a  certain  point  in  time.  
cash  and  accrual  accounting;  and  consolidation  of  accounts.   Well,  what  do  we  mean  by  assets?    Assets  are  resources  from  which  
Well,  we  have  already  discussed  what  we  mean  by  the  sectors  of   their  holder  can  enjoy  economic  benefit.    Assets  can  be  non-­‐
the  economy  in  the  previous  video,  so  let  me  introduce  now  the   financial-­‐-­‐  for  example,  a  house,  land,  natural  resources-­‐-­‐and  
concept  of  residence.    By  residence,  we  mean  the  economy  to   financial.    Often,  we  will  refer  to  financial  assets  as  financial  claims.  
which  a  particular  agent  belongs.    Residence  is  attributed  on  the   Examples  are  stocks,  bonds,  currency,  deposits  that  we  held  at  
basis  of  the  location  of  the  center  of  predominant  economic   banks,  gold.  
interest  of  an  agent,  and  not  on  citizenship.    
  Liabilities  instead  are  defined  as  the  obligation  to  transfer  economic  
In  simple  words,  we  say  that  the  residence  of  an  agent  is  the   benefits  to  other  agents.    Liabilities  are  exactly  the  opposite  of  
economy  where  this  agent  has  the  center  of  predominant  economic   financial  claims,  or  if  you  wish,  liabilities  are  financial  claims  as  seen  
interest.       from  the  point  of  view  of  their  issuer.    Keep  this  in  mind;  for  the  
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issuer  of  a  bond,  the  bond  constitutes  a  liability,  whereas  for  the   What  is  the  nature  of  these  flows?    There  are  transactions,  the  
holder  of  that  bond,  that  bond  constitutes  a  financial  claim.   water  that  pours  into  the  bathtub  from  the  shower,  but  there  are  
  also  other  changes.  For  example,  the  evaporation  of  the  water,  
How  can  we  explain  changes  in  stocks?    Well,  we  can  explain  them   or  in  case  there  is  a  leakage,  the  dripping  from  the  bottom  of  the  
with  flows.    These  are  changes  in  the  value  of  the  level  of  stocks   tub.  
during  a  period  of  time.    Flows  can  happen  because  of  transactions    
or  because  of  other  flows.   Another  concept  that  we  will  use  extensively  in  the  course  
  is  that  of  cash  and  accrual  accounting.    This  has  to  do  with  the  
Transactions  are  economic  interactions  that  occur  by  mutual   period  to  which  we  attribute  a  transaction.    In  our  recording,  when  
agreement  between  two  different  agents  or  two  different   does  a  transaction  take  place?    Under  cash  accounting,  we  attribute  
institutions.    And  for  example,  we  can  consider  the  exchange   the  transaction  to  the  period  when  the  payment  for  this  transaction  
of  a  currency,  which  is  an  asset,  for  a  good,  say  a  car,  or  the   takes  place.      
occurrence  of  a  liability,  for  example  a  mortgage,  in  exchange  of    
another  asset,  say  a  house.   Under  accrual  accounting  instead,  we  attribute  a  transaction  to  the  
  period  when  the  transaction  actually  takes  place.    Not  when  the  
Other  flows  are  all  those  factors  that  affect  the  value  of  assets  and   payment  for  the  transaction  takes  place,  but  when  the  transaction  
liabilities  and  that  have  nothing  to  do  with  the  change  in  the   takes  place.    When,  for  example,  the  change  of  property  happens.  
quantities  of  such  assets  and  liabilities.    Examples  are  changes  to   So  irrespective  of  when  the  payment  is  made.  
the  prices  of  assets,  or  physical  losses,  or  the  forgiveness,  for    
example,  of  a  liability.   Finally,  we'll  talk  about  consolidation  of  accounts.    By  consolidation  
  we  mean  merging  the  accounts  of  two  or  more  agents  that  belong  
To  better  understand  this  difference,  let's  consider  a  graphic   to  the  same  sector  of  the  economy,  in  order  to  obtain  a  unified  
representation.    Let's  consider  a  bathtub,  and  let  us  suppose  that   account  for  that  sector.    If  you  wish,  consolidation  of  accounts  is  
water  is  an  asset.    The  stock  of  assets  in  this  case  would  be  the   similar  to  consolidating  the  accounts  of  different  members  of  the  
quantity  of  water  in  the  tub  at  a  certain  point  in  time.    So  the  stock   same  family  in  order  to  obtain  the  account  of  the  family.  
of  this  asset,  water,  meaning  the  level  of  water  in  the  tub,  can    
increase  during  a  period  of  time.    And  it  will  increase  because  of   So  what  do  we  actually  do  when  we  consolidate,  and  why  do  we  do  
flows.   that?    When  we  consolidate,  we  eliminate  all  the  transactions  
  and  debtor-­‐creditor  relationships  between  different  units  within  the  
same  sector.  
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  this  short  video  on  describing  and  introducing  to  you  the  Excel  file  
Why  do  we  do  that?    Why  do  we  consolidate?    As  said,   that  you  will  be  using  to  answer  the  different  questions  based  
consolidation  allows  us  isolating  the  transactions  and  debtor   on  the  country  case.  
and  creditor  relationships  between  agents  of  different  sectors  and    
agents  of  the  same  sector,  so  as  to  obtain  the  relationship  that   So  let  me  now  show  you  the  Excel  file.    The  Excel  file  is  composed  of  
exists  between  a  sector  as  a  whole  and  all  of  the  other  sectors  of   many  worksheets.    And  as  you  can  see,  each  tab  corresponding  to  
the  economy.   the  different  worksheets  has  a  different  color  so  that  you  can  clearly  
  identify  the  worksheets  that  refer  to  a  specific  module  of  this  
  course.  
VIDEO  5:  Country  Case    
  The  brown  tabs  here  will  all  refer  to  the  real  sector.    The  green  tabs  
In  this  course,  we  will  use  a  country  case,  a  country  that  we  have   here  will  all  refer  to  the  external  sector.    These  other  tabs  will  refer  
called  Macronia,  which  is  a  fictional  country.    The  country  case  will   to  the  government  sector,  and  so  on  so  forth.    All  of  these  tabs  are  
be  based  on  an  Excel  file,  which  I  will  show  you  later  on.   labeled  hopefully  in  a  clear  way.  
   
But  let  me  broadly  explain  what  we  will  do  with  that.    The  country   For  example,  GDP  nominal  you  will  understand  we  refer  to  the  real  
case  will  be  a  relevant  part  of  your  weekly  assignments.    You  will   sector,  similarly  GDP  Real.    And  all  of  these  tabs  contain  a  table  
actually  download  this  file.    And  actually  we  advise  that  you  save  it   which  has  a  similar  formatting  throughout  the  course.  
on  your  computer.    And  as  you  answer  questions  and  complete  that   So  all  tables  that  you  find  in  these  worksheets  look  alike.  
file,  we  suggest  that  you  keep  saving  your  work,  because  over  the   There  is  the  title  of  the  table.    Then  there  is  the  series  of  the  year  to  
duration  of  the  course,  all  of  the  work  that  you  have  done  on  the   which  economic  data  for  Macronia  are  reported.    And  all  tables  will  
country  case  will  build  on  itself.   report  data  for  the  period  2006-­‐12.  
   
The  country  case  can  be  found  within  the  course  handout  sections   Then  generally  you  have  a  set  of  indicators  that  are  grouped  in  
of  the  course  info  tab  along  with  a  brief  text  that  describes  and   categories.    For  example  in  this  case,  gross  domestic  product  at  
gives  some  information  about  this  country,  Macronia.   current  prices,  national  income.  
   
You  can  use,  of  course,  that  information  to  make  your  judgment   At  the  beginning  of  each  set  of  variables,  you  have  a  clear  indication  
about  the  economic  developments  in  the  country.    So  because  the   about  the  unit  in  which  variables  are  expressed.    It  could  be  billions  
description  of  the  country  will  be  found  there,  let  me  now  focus  in   of  national  currency  or  in  millions  of  US  dollars  say,  or  in  percent.  
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And  generally  at  the  bottom  of  the  table,  you  might  have-­‐-­‐  actually,   Under  most  tables  you  will  find  some  graphs  which  will  actually  help  
let  me  show  you  a  table  where  we  have  such  a  feature...here  we  go.   you  to  do  a  little  diagnosis  of  what  is  going  on  for  that  specific  
The  balance  of  payments.    At  the  bottom  of  the  table  I  was  saying,   sector  and  in  reference  to  those  specific  variables.  
you  have  another  group  of  variables  grouped  under  Memorandum    
Items.    These  are  variables  that  might  have  been  computed  in  other   At  the  end  of  each  group  of  tables  that  refers  to  a  sector,  all  of  
tables  or  originally  belonged  to  other  tables,  and  that  are  simply   these  graphs  are,  again,  reported  to  facilitate  comparison  of  all  of  
reported  to  facilitate  your  calculations.   them.  
   
In  each  of  these  tables,  you  have  hard  numbers  that  are  hard  coded.   So  with  this,  I  hope  that  this  was  enough  to  make  you  become  
And  then  you  have  some  white  cells.    You  will  actually  have  to  insert   familiar  with  the  country  case.  
yourself  either  formulas  or  numbers  to  basically  complete  this  table.    
And  you'll  have  to  do  it  only  for  those  white  cells.   I  advise  that,  again,  you  download  it,  save  it  on  your  C  drive  or  save  
  it  on  your  computer.  
In  each  assignment  we  will  ask  that  you  actually  report  some  of  the    
numbers  that  you  have  computed.    And  by  the  way,  within  each   And  actually  start  looking  at  the  structure  of  this  file  and  get  
assignment  you  will  find  some  tutorial  videos  that  demonstrate  how   familiar  with  its  structure  before  you  get  into  using  it  for  the  
you  can,  for  example,  compute  what  you  are  asked  to  compute  for   assignments.  
another  year,  generally  for  the  year  2011.   That  said,  this  concludes  the  introduction.    I  hope  that  you  will  now  
  enjoy  the  course.  
In  some  of  these  tables  there  are  some  cells  that  complete  by    
themselves.    Let  me  actually  find  such  an  example.    For  example   Thank  you.  
here  in  one  of  the  last  tables  that  you  will  use  on  the  monetary    
accounts,  as  you  can  see  for  the  year  2012,  you  have  actually  no    
numbers  displayed.    These  will  actually  populate  automatically  once   VIDEO  6:  Accessing  Data  
you  answer  questions  from  previous  tables.    
  During  the  course,  we  will  propose  to  you  some  activities.    In  
So  that  is  why  I  will  say  it's  very  important  that  you  keep  saving  your   particular,  in  some  of  these  activities,  we  will  ask  or  suggest  that  
work.     you  try  to  find  data  for  your  own  country  and  discuss  some  of  the  
economic  developments  in  your  country.  
 
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So,  let  me  now  show  to  you  how  and  where  you  can  find  some   For  example,  by  clicking  here  you  have  the  possibility  to  add  
economic  data  for  countries  in  general.   another  line  for  another  country  or  for  a  specific  region.    I'm  just  
  picking  countries  and  regions  randomly  here.    And  on  the  top  part  
So,  if  you  open  your  favorite  browser,  and  if  you  go  under  any   you  are  actually  able  to  see  a  heat  map  of  the  world  that  details  
search  engine,  for  example,  Google,  and  if  you  type,  for  example,   how  that  specific  variable  is,  at  which  level  it  is,  in  its  most  recent  
"ministry  of  finance,"  you  will  see  immediately  that  your  browser   observation.  
will  immediately  detect  the  website  of  ministries  of  finance  around    
the  world.   So,  for  example,  in  this  case  we  picked  real  GDP  growth,  annual  
  percentile  change,  and  here  you  see  the  color  coding.    Notice  that,  
Similarly,  if  you  type  "central  bank,"  you  can  also  have  easy  access   for  example,  if  you  go  into  one  country,  it  will  tell  you  
to  the  website  of  the  central  bank  of  your  country.    There  you  will   immemediately  what  the  reading  is  for  that  specific  country.  
be  able  to  most  likely  find  a  lot  of  data  about  your  country.    
  You  can  actually  zoom  in  and  out  to  check,  for  example,  
Another  interesting  website  that  you  can  use  is  that  of  the  IMF.   for  your  own  country.    And  of  course,  you  can  select  the  variables  
So,  if  you  go  under  IMF.org,  under  the  tab  "Data  and  Statistics,"   that  you're  interested  in  too.  
if  you  move  under  "Data,"  you  will  find  a  menu  of  data  sets  and   Let  me  show  you  again.    If  you  click  here  under  "Data  Set,"  and  here  
tools  to  retrieve,  but  also  immediately  to  analyze,  economic   you  have,  first  of  all,  a  list  of  all  possible  data  sets  available  publicly  
developments  in  your  country.   at  the  Fund.    And  for  each  one  of  them  you  have  a  list  of  variables  of  
  interest.  
Let  me  just  show  to  you  two  of  these  data  set  and  tools.    Of  course,    
if  you  scroll  down  in  this  page  you  will  notice  that  there  are  many   If  instead  you're  interested  in  downloading  data,  if  you  just  go  back  
other  data  sets  that  you  can  find  useful,  including  also  links  to  other   to  the  page  where  you  can  find  all  the  data  and  statistics,  you  can  
institutions  that  collect  and  provide  data.   consider,  for  example,  going  under  the  data  set  of  the  World  
  Economic  Outlook  (WEO),  which  is  one  of  the  flagship  economic  
The  first  of  these  tools  is  this  Data  Mapper.    The  Data  Mapper  is  an   publications  of  the  Fund.  
interactive  tool  that  allows  you  immediately  to  select  certain    
economic  variables  and  see  how  they  have  developed  over  time  in   Here  on  the  left  column  you  have  the  database.    If  you  click  there,  it  
this  part  of  the  chart  for  a  selected  group  of  countries  or  for   will  take  you  to  all  of  the  database  for  the  World  Economic  Outlook,  
countries  that  you  can  also  select.   including  vintages.    And  for  example,  if  you  click  on  the  most  recent,  
d  
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it  will  lead  you  to  a  page  where  you  have  the  possibility  to  search  
and  download  data  by  countries,  at  country-­‐level,  or  by  a  group  of  
countries.  
 
For  example,  if  you  click  here,  you  can  select  the  group  of  countries  
you're  interested  in.    And  then  if  you  continue,  you  have  the  
possibility  to  choose  from  a  list  of  possible  economic  variables.  
 
And  for  example,  let's  suppose  we  pick  gross  domestic  product.  
Of  course  if  you  continue  at  that  point,  you  can  set  the  time  period,  
which  would  include  also  forecasts.    And  then  you  can  actually  
prepare  a  report,  and  you  have  a  possibility  to  download  the  report  
into  a  spreadsheet  format.  
 
Under  this  page,  again,  you  can  also  find  the  link  to  other  
publications  or  to  other  databases.  
For  example,  if  you  click  under  the  "IMF  Finances,"  you  will  also  find  
information  about  the  position  of  your  own  country  towards  the  
IMF.  
 
Of  course  we  encourage  you  to  visit  this  page  and  to  make  use  of  it,  
again,  to  conduct  all  of  the  activities  that  we  will  be  proposing.