ESTP Course Balance of Payments – Introductory course Paris, 22-23 May 2014 Main aggregates: Current and Capital Accounts

Outline Introduction Gross reporting Other basic principles of accounting Classification Goods Services Primary income Secondary income Capital account

Introduction The current account is an important grouping of accounts within the BOP. It shows flows of goods, services, primary income, and secondary income between residents and nonresidents. BPM6 follows the requirements of the national accounts very closely in separately identifying these four groups of accounts as the components of the current account to facilitate the integration of the BOP into the “rest of the world” account. The value of the current account balance equals the savings- investment gap for the economy (BPM6, chapter 14 for the links between SNA and BOP). By implication, the net balance of the current account, together with net capital transfers, and the net acquisition of nonproduced nonfinancial assets, represents net foreign investment.

Gross Reporting For the current account, transactions are always reported gross; i.e. credits and debits are never netted (BPM6, para 2.19). There is seldom a causal relationship between credit and debits. Gross reporting facilitates analysis of current account transactions. Credits and debits, sometimes in conjunction with other statistics, may have separate uses. Most summary classifications of current account transactions require gross reporting of the underlying details to permit the necessary consolidation. Examples of this: Calculation of shares in world trade To facilitate the exchange of partner country data

Other Basic Principles of Accounting There are no exceptions to the principles of valuation and time of recording already described for the balance of payments as a whole.

Classification The major components of the current account are: goods, services, primary income, and secondary income. Each of these components is related to different economic processes. A detailed review of the methodological and conceptual issues involved in the compilation of current account data is provided in forthcoming lectures on goods, services, and primary, and secondary income. The following provides a somewhat basic review of the conceptual issues and principles of classification related to the four principal components of the current account.

Goods Goods: Physical produced items over which ownership rights can be established and whose economic ownership can be passed from one unit to another by engaging in transactions (BPM6, para 10.6). Coverage consistent with the SNA: General merchandise—Including procurement of goods in ports by carriers (BPM6, para 10.13). Goods under merchanting (BPM6, para 10.41). Nonmonetary gold—All gold other than monetary. Monetary gold is owned by monetary authorities and held as a reserve asset (BPM6, para 10.50). The goods item excludes: Goods sent abroad for processing for which there is no change in economic ownership (services in BPM6). Goods sent abroad for repair and servicing (services in BPM6). As discussed in the lecture on goods, adjustments are needed to convert goods reported in merchandise trade statistics to a BOP basis.

Services (1/2) Services are the result of a production activity that changes the conditions of the consuming units, or facilitates the exchange of products or financial assets (BPM6, para 10.8). In general, services are not separate outputs over which ownership rights can be established and cannot be separated from their production. Nonetheless, the boundary goods / services is sometimes blurred, as items classified as goods may contain elements of services, and items classified as services may contain elements of goods. An example is the close interrelationship between freight services and goods, in which some analytic uses would prefer their inclusion, and some their exclusion.

Services (2/2) Another example: Treatment of computer software. A blank CD is a good. A CD containing off-the-shelf software has elements of goods and services, but is classified as a good. A CD containing customized software is a service. A master copy CD, which earns royalties, is a service it may be classified under computer services because its predominant value is as specialized software rather than the potential to generate future license fees.

Services: Principles of Classification Classification of services in the BOP is mainly product-based (type of service), but transactor-based for travel, construction, and government services n.i.e. (BPM6, para 10.61). Travel: Goods and services purchased by travelers for own use. Transport: Goods and services purchased in connection with the movement of goods and passengers. Government services n.i.e: Goods and services purchased by agencies of foreign governments in the home country, and vice versa. Construction services: Including purchases and sales of goods and services from the host economy associated with construction activity. Other services: Classified in accordance with the central product classification (CPC)—a classification of goods and services, which in turn is linked to the international standard industrial classification (ISIC)—UN classification of industries.

Primary Income Primary income: Return that accrues to institutional units for the provision of labor and financial assets and renting natural resources to other units (BM6, para 11.5). Identification of cross-border primary income flows facilitates the identification of national disposable income in the NA. Disposable income is the maximum amount that a household, or other unit, can spend on consumption goods or services without having to finance its expenditures by reducing cash holdings, selling financial assets, or acquiring liabilities. Identification of disposable income tightens the links between income and financial account flows, and between BOP and IIP. The BOP transactions that fit this concept are: Investment income (actual or imputed) Other primary income (including rent--i.e. property income) Labor income (i.e. compensation of employees).

Secondary Income The secondary income account (from SNA) shows current transfers between residents and nonresidents (BPM6, para 12.1). A transfer is an entry that corresponds to the provision of a good, service, financial asset, or other nonproduced asset by an institutional unit to another unit when there is no corresponding return of an item of economic value. Transfers are offsetting entries. Transfers can be in cash or in kind. Two categories of transfers: Current transfers (facilitate consumption) Capital transfers (facilitate investment) Distinguishing between current and capital transfers is basic for the current account balance. The more frequent and regular a transfer, the more likely it is a current transfer.

Capital Account The capital account in the BOP shows: Capital transfers receivable and payable between residents and nonresidents, and The acquisition and disposal of nonproduced nonfinancial assets1/ between residents and nonresidents. The capital account in the SNA shows capital formation for the full range of produced and nonproduced assets. The corresponding parts of the BOP show only transactions in nonproduced nonfinancial assets. Transactions in produced assets are included in the goods and services account (without distinguishing whether those goods or services are destined for capital or current purposes). The capital account balance plus the current account balance provides a measure of an economy’s net lending (+)/borrowing (-) vis-à- vis the rest of the world. ______ 1/ They include (1) land and other natural resources sold to embassies; (2) contracts, leases, and licenses that are recognized as economic assets (intangible assets); and (3) marketing assets.