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1.2. NATIONAL ACCOUNTING RELATIONS 15can buy the foreign currency in the interbank market because arbitragewill equate the two prices near the maturity date.(1.14) also tells you the extent to which the futures contract hedgesrisk. If you have long exposure, an increase in S T −k (a weakening of thehome currency) makes you worse off while an increase in the futuresprice makes you better off. The futures contract provides a perfecthedge if changes in F T −k exactly offset changes in S T −k but this onlyhappens if φ T −k = 1. To obtain a perfect hedge when φ T −k 6=1,youneed to take out a contract of size 1/φ and because φ changes overtime, the hedge will need to be rebalanced periodically.1.2 National Accounting RelationsThis section gives an overview of the National Income Accounts andtheir relation to the Balance of Payments. These accounts form some ofthe international time—series that we want our theories to explain. TheNational Income Accounts are a record of expenditures and receiptsat various phases in the circular ßow of income, while the Balance ofPayments is a record of the economic transactions between domesticresidents and residents in the rest of the world.National Income AccountingIn real (constant dollar) terms, we will use the following notation.Y Gross domestic product,Q National income,C Consumption,I Investment,G Government Þnal goods purchases,A aggregate expenditures (absorption), A = C + I + G,IM Imports,EX Exports,R Net foreign income receipts,T Tax revenues,