How are BOP statistics used? THE CONTRACTOR IS ACTING UNDER A FRAMEWORK CONTRACT CONCLUDED WITH THE COMMISSION

To understand drivers of domestic growth GDP = C + G + I + X – M, where M = imports of goods and services C = household consumption G = government consumption I = gross capital formation1 X = exports of goods and services

To understand the drivers of GNDI The definition of gross national disposable income (GNDI) is GDP plus net primary and secondary income from abroad, so GNDY = C + G + I + X – M + BPI + BSI, where BPI = balance on primary income BSI = balance on secondary income (net current transfers)

Current account balance The current account mirrors the balance of saving / investment in an economy. So, a current account surplus will reflect high saving (or lower investment). Therefore policy makers need to consider impact of any policy changes designed to affect BOP (eg exchange rates) on domestic saving / investment.

Net lending and borrowing The balance between the financial account and other entries can be expressed as: NLB = CAB + KAB = NFA, where NLB = net lending/net borrowing KAB = the capital account balance NFA = net financial account entries

Financing a current account deficit The current account balance is funded by the change in net claims on the rest of the world. A deficit on the current and capital accounts implies that the net acquisition of resources from the rest of the world must be paid for by either liquidating foreign assets (such as reserves) or increasing liabilities with non-residents. Sustainability? Leads to pressure on exchange rates

Other Sectoral analyses - Series of balances (e.g. trade in goods, trade in services, sectoral balances) that shed light on the performance of an economy. Partner country analyses Comparisons with competitors Monitoring Free Trade Agreements Rates of return analyses Investment decisions

Integration of the accounts Consistent classification of FA, IIP and income Allows validation of data and calculation of earnings to stock ratios Integrated IIP reconciles start and end values of IIP. Reconciliation takes place through FA (transactions) and other changes in financial assets and liabilities accounts.

The balance sheet approach Increased emphasis in BPM6 to reflect role of balance sheet in understanding vulnerability (nb financial crisis) E.g. debt to GDP ratios (financial stability) E.g. exposure to valuation changes E.g. indicator of external debt sustainability E.g. maturity of debt (short or long-term) E.g. currency composition of debt Understand structure of an economy Ability to attract foreign investment Degree of financial openness eg assets to GDP ratio Size of foreign loans and deposits of banking sector Indicator of future interest and dividend flows

Reconciled accounts

UK current balance as a % of GDP

UK primary income balances

UK FDI earnings and rates of return The implied rate of return reflects the relationship between the stock of foreign direct investment (FDI) and the earnings on that stock. The stocks of both UK FDI assets (held overseas) and UK FDI liabilities (foreign-owned direct investments in the UK) have been largely constant over the past few years. The values of assets and liabilities both increased in 2016 compared with 2015, with the increase in assets (£133.6 billion) exceeding that of liabilities (£33.6 billion). The smaller proportional increase in FDI credits compared with FDI assets means the implied rate of return on UK outward FDI remains the same at 4.5% in 2015 and 2016; both are notably lower than the 7.7% implied rate of return estimated in 2011. The implied rate of return on UK FDI liabilities appears broadly constant relative to assets, varying between 4.0% and 4.7% in each year since 2012.

UK current account balance with EU

UK financial account balances The total financial account showed a net inflow (that is, more money flowing into the UK) of £53.0 billion in Quarter 4 2016 compared with a net inflow of £27.3 billion in Quarter 3 2016. The large inflow on the financial account balance is due to direct investment recording a net inflow of £109.7 billion in Quarter 4 2016, compared with a net inflow of £28.6 billion in Quarter 3 2016.

UK International Investment Position

IIP – Gross positions (Q)

UK direct investment positions and rates of return Chart shows the cumulative change in the end of quarter valuation of UK financial assets abroad. For this piece of analysis we have only used direct investment, portfolio investment and other investment. Financial derivatives have not been included due to their volatility and reserve assets due to their comparatively small size. Most of the assets will be held in the foreign currency of the country that they are invested in and need converting back to sterling. Plotted against the changes in assets are the cumulative flows or net transactions (blue line), which in the early periods up until Quarter 3 2014 are the main reason for changes in UK foreign assets. This indicates that the changes in the asset level are due mainly to investor actions, either buying or selling assets. Other changes (red line) impact the asset valuations and can include, for example, foreign currency movements, asset price movements, reclassifications and write-offs. While other changes show little impact in the early periods, they are the main reason for changes in asset levels from Quarter 1 2015. One reason for their increased impact will be the devaluation of sterling from around Quarter 3. Another reason will be the increased market valuations of foreign stock markets, some of which ended at their highest level for 2016. The impacts of other changes are highlighted in some recent periods where UK investors have been net sellers of foreign assets but have still seen the value of their assets increased.