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This training material is the property of the International Monetary Fund and is intended for use in IMF Institute for Capacity
Development courses. Any reuse requires the permission of the IMF. The views expressed in this material are those of the
course staff and do not necessarily represent those of the IMF or IMF policy.
Introduction to the Course
DETERMINANTS OF ECONOMIC HEALTH DETERMINANTS OF ECONOMIC HEALTH
EXOGENOUS FACTORS INSTRINSIC FACTORS
ECONOMY
ECONOMIC POLICIES
2
Fiscal Policy Fiscal Policy
POLICIES POLICIES
The use of government
revenues and expenditures to
i fl th influence the economy
Monetary &
Exchange Rate
Policies
Monetary &
Exchange Rate
Policies
What the central bank does to
influence money, credit,
interest and exchange rates
Structural
Policies
Structural
Policies
The design of regulations and
institutions to affect how the
economy works
POLICIES AND STABILITY POLICIES AND STABILITY
y
Exogenous
shock
Future
Exogenous
shock
o
f

t
h
e

e
c
o
n
o
m
y
shock
shock
Policy
Change
Time
S
t
a
t
e

Policies
Other
factors
Same
Policies
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Internal balance
Output is at full
Internal balance
Output is at full
MACROECONOMIC STABILITY MACROECONOMIC STABILITY
External balance
The current account can
External balance
The current account can Output is at full
employment and inflation
is low and stable
Output is at full
employment and inflation
is low and stable
The current account can
be financed in an orderly
manner
The current account can
be financed in an orderly
manner
Too much or too little demand
Uncertainty
Inflation and exchange rate
Assets price bubble

Internal balance Internal balance
INSTABILITY AND CRISIS INSTABILITY AND CRISIS
External balance External balance
CRISIS CRISIS
te a ba a ce te a ba a ce
Production falls
Unemployment increases
B k f il Banks fail
Assets lose their value

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BASIS OF FPP BASIS OF FPP
Financial programming is the design of a set of Financial programming is the design of a set of p g g g
macroeconomic policies aimed at achieving desired
macroeconomic objectives
p g g g
macroeconomic policies aimed at achieving desired
macroeconomic objectives
Accounts for the main sectors of the economy Accounts for the main sectors of the economyyy
All agents that perform similar economic functions All agents that perform similar economic functions
SECTORS SECTORS
Real Sector:
producing units
within an economy
Real Sector:
producing units
within an economy
External Sector:
the rest of the
world
External Sector:
the rest of the
world
Government
Sector
Government
Sector
Monetary
Sector:
b k
Monetary
Sector:
b k banks banks
transactions with other sectors
assets and liabilities to other sectors
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ACCOUNTS ACCOUNTS
National Income and
Product Accounts
Production and use of
External Sector Accounts
Transactions, claims and
liabilities of an economy
Production and use of
goods and services
with/to the rest of the
world
Government Accounts
Revenue, expenditures,
financing, assets, and
Monetary Accounts
Assets and liabilities of
a c g, assets, a d
liabilities of the
government
Assets and liabilities of
deposit taking institutions
Other selected indicators
LINKS BETWEEN SECTORS LINKS BETWEEN SECTORS
Real Sector Real Sector
National
Income & Prod.
National
Income & Prod.
External Sector External Sector
Government
Sector
Government
Sector
Accounts Accounts
External Sector
Accounts
External Sector
Accounts
Government
Accounts
Government
Accounts
Monetary
Sector
Monetary
Sector
Monetary
Accounts
Monetary
Accounts
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ACCOUNTING IDENTITIES ACCOUNTING IDENTITIES
Flows or positions involving
agents in one sector and agents in other sector
agents of a sub-sector and the broader sector
Flows or positions involving
agents in one sector and agents in other sector
agents of a sub-sector and the broader sector
should be reflected equally in the respective accounts should be reflected equally in the respective accounts
Examples:
The sum of certain aggregates should be the same as the sum
of other aggregates, by construction
The sum of certain aggregates should be the same as the sum
of other aggregates, by construction
Examples:
Monetary and the government accounts should report the same
amount of bank lending to the government
The supply of goods and services must be equal to the effective
demand for goods and services
BEHAVIORAL RELATIONSHIPS BEHAVIORAL RELATIONSHIPS
Behavioral relations link the development of variables of
different accounts in an economic meaningful way
Behavioral relations link the development of variables of
different accounts in an economic meaningful way different accounts in an economic meaningful way different accounts in an economic meaningful way
Examples:
An increase in credit to the private sector may affect
consumption and/or investment
An increase in taxes and reduction in government
expenditures may affect consumption, production, and
imports
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WHY ONLY 4 ACCOUNTS WHY ONLY 4 ACCOUNTS
The set of real, external, government, and monetary sector
t i accounts is:
Comprehensive (and captures fiscal and monetary policy)
Generally available
Periodic
Timelyy
Accurate
Sectors
COMMON CONCEPTS COMMON CONCEPTS
Sectors
Residence
Stock, flows, and transactions
Cash and accrual accounting Cash and accrual accounting
Consolidation of accounts
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Residence is based on center of predominant
economic interest (not on citizenship)
Residence is based on center of predominant
economic interest (not on citizenship)
RESIDENCE RESIDENCE
Households and individuals who live in an
economy for a year or longer
Enterprises that produce in the economy
The government
Non-profit organizations
STOCK, FLOWS,
AND TRANSACTIONS
STOCK, FLOWS,
AND TRANSACTIONS
Flows
Changes in stocks during
Flows
Changes in stocks during
Stocks
The level at a point
in time of the
holdings of assets
and/or liabilities
Stocks
The level at a point
in time of the
holdings of assets
and/or liabilities
Changes in stocks during
a period of time
Changes in stocks during
a period of time
Transactions Transactions
and/or liabilities and/or liabilities
Other flows Other flows
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STOCK, FLOWS,
AND TRANSACTIONS
STOCK, FLOWS,
AND TRANSACTIONS
Other changes
Stock
1
Flow
Transactions
Stock
0
CASH AND ACCRUAL
ACCOUNTING
CASH AND ACCRUAL
ACCOUNTING
Cash accounting Cash accounting
Transactions are attributed to the period when
payment is made
Transactions are attributed to the period when
payment is made
Accrual accounting Accrual accounting Accrual accounting
Transactions are attributed to the period when they
take place, irrespective of when payment is made
Accrual accounting
Transactions are attributed to the period when they
take place, irrespective of when payment is made
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CONSOLIDATION OF
ACCOUNTIS
CONSOLIDATION OF
ACCOUNTIS
Eliminates all transactions and debtor-creditor Eliminates all transactions and debtor-creditor
relationships between units within the same sector. relationships between units within the same sector.
Allows isolating the transactions and debtor- Allows isolating the transactions and debtor-
creditor relationships between a sector as a whole
and other sectors.
creditor relationships between a sector as a whole
and other sectors.