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16 CHAPTER 1. SOME INSTITUTIONAL BACKGROUNDS Private saving,NFA Net foreign asset holdings.Closed economy national income accounting. We’ll begin with a quickreview of the national income accounts for a closed economy. Abstractingfrom capital depreciation, which is that part of total Þnal goodsoutput devoted to replacing worn out capital stock. The value of outputis gross domestic product Y . When the goods and services aresold the sales become income Q. If we ignore capital depreciation, thenGDP is equal to national incomeY = Q. (1.15)In the closed economy, there are only three classes of agents–households,businesses, and the government. Aggregate expenditures on goods andservices is the sum of the component spending by these agentsA = C + I + G. (1.16)The nation’s output Y has to be purchased by someone A. If thereis any excess supply, Þrms are assumed to buy the extra output inthe form of inventory accumulation. We therefore have the accountingidentityY = A = Q. (1.17)The Open Economy. To handle an economy that engages in foreigntrade, we must account for net factor receipts from abroad R, whichincludes items such as fees and royalties from direct investment, dividendsand interest from portfolio investment, and income for laborservices provided abroad by domestic residents. In the open economynational income is called gross national product (GNP) Q =GNP.This is income paid to factors of production owned by domestic residentsregardless of where the factors are employed. GNP can differ fromGDP since some of this income may be earned from abroad. GDP canbe sold either to domestic agents (A − IM) or to the foreign sector