1. Copyright 2010, The World Bank Group. All Rights Reserved. Introduction to the SNA, advanced Lesson 7 Rest of the world 1

2. Copyright 2010, The World Bank Group. All Rights Reserved. Background We have already examined the five institutional sectors for residents Another sector that can be thought of as a sixth institutional sector is the “Rest of the World” (or “RoW”) – it is the national accounts equivalent of the balance of payments The ROW sector is included in the national accounts to identify transactions between a country’s residents and the rest of the world – it completes the national accounts by providing the link between the domestic economy and other countries – it is presented from the point of view of the rest of the world, which is the opposite view to that in the BPM 2

3. Copyright 2010, The World Bank Group. All Rights Reserved. RoW sector in the national accounts The balance of payments (BoP) defines a series of accounts that all relate to resident/non-resident transactions – they cover current transactions, capital transactions and balance sheets The SNA defines a number of integrated accounts, all of which should be compiled at the national level – they can also be produced for each of the five domestic sectors and the RoW sector – however, the SNA’s integrated accounts are broader than the BoP and so the RoW does not have entries against all the data items that are applicable to the five domestic sectors 3

4. Copyright 2010, The World Bank Group. All Rights Reserved. Exports and imports of goods Exports are the goods or services whose economic ownership is changed between a resident and a non-resident, usually by sale but also through gifts or barter Conversely, imports are the provision of goods or services by non-residents to residents Traditionally, the data sources for exports and imports of goods have been the Customs recording systems – developments in the past decade or so may result in some important categories of goods slipping through this method of recording – illegal imports or exports also slip through this recording net 4

5. Copyright 2010, The World Bank Group. All Rights Reserved. Goods – classification Exports and imports of goods are classified in accordance with the Standard International Trade Classification (SITC) The highest level of the SITC is the 10 “Sections”, as follows: Section 0 - Food and live animals Section 1 -Beverages and tobacco Section 2 – Crude materials, inedible, except fuels Section 3 - Mineral fuels, lubricants and related materials Section 4 - Animal and vegetable oils, fats and waxes Section 5 - Chemicals and related products, n.e.s. Section 6 - Manufactured goods classified chiefly by material Section 7 - Machinery and transport equipment Section 8 - Miscellaneous manufactured articles Section 9 - Commodities and transactions n.e.c. 5

6. Copyright 2010, The World Bank Group. All Rights Reserved. Goods – valuation As is the case with the rest of the national accounts, the basic principle is that the values in the RoW accounts should be based on market prices – exports and imports of goods provide a special case where the preferred valuation is at the customs frontier of the exporting country – it is referred to as “free-on-board” (f.o.b.) valuation – in most countries it is possible to obtain exports f.o.b. directly from Customs databases – however in many countries details on imports are available only at the value at which they reach the ports in the importing countries – it is referred to as “imports c.i.f.” (i.e. cost, insurance and freight) 6

7. Copyright 2010, The World Bank Group. All Rights Reserved. Goods – time of recording As is the case through the domestic sectors, the principal of accrual accounting applies in the RoW account Transactions should be recorded in the RoW account at the time that ownership changes Balance of payments statistics are normally expressed in the domestic currency Using Customs data as the basis for exports and imports of goods can present difficulties for national accounts (or BoP) compilers – Customs data are often recorded on the date when the details were recorded in the Customs system rather than when ownership actually changed 7

8. Copyright 2010, The World Bank Group. All Rights Reserved. Exports and imports of services A clear distinction is made between goods and services in the BoP because international treaties often consider them separately – data sources also have an impact because the information for compiling trade in services are usually obtained by surveys rather than from administrative records Unlike the production of goods, the production of a service is generally linked to an arrangement between a particular producer and a particular consumer – as a result, international trade in services is closely linked with the international production of services as the production process involves a resident and a non-resident 8

9. Copyright 2010, The World Bank Group. All Rights Reserved. Services – classification The highest level of the IMF’s BoP services classification is:  Manufacturing services on physical inputs owned by others  Maintenance and repair services n.i.e.  Transport  Travel  Construction  Insurance and pension services  Financial services  Charges for the use of intellectual property n.i.e.  Telecommunications, computer and information services  Other business services  Personal, cultural and recreational services  Government goods and services n.i.e. 9

10. Copyright 2010, The World Bank Group. All Rights Reserved. Services – valuation The valuation principles for international trade in services are the same as those the SNA describes for transactions in the domestic economy – consistent valuation is required between goods and services – market values should be used for services In international transactions, an incentive often exists to distort the price quoted in documents provided to Customs authorities to reduce the taxes paid It can also be difficult to even identify that services have been imported or exported because of the increasing use of electronic delivery of services and obtaining a realistic value for such services can be even more difficult 10

11. Copyright 2010, The World Bank Group. All Rights Reserved. Services – time of recording According to the SNA, services should be recorded at the time when they are provided In theory, the service transaction should be recorded at the same time by both parties to the transaction In practice, differences may arise in the time of recording by the transactors in different countries – it may be necessary to make timing adjustments if major divergences are identified between the time a service was provided and when it was recorded by the local (domestic economy) transactor 11

12. Copyright 2010, The World Bank Group. All Rights Reserved. Residence The concept of residence is important in determining which country an institutional unit should be classified to The key determinant of residence is the country in which the producing unit is located for more than one year – land area – airspace – territorial waters – continental shelf – territorial enclaves elsewhere (e.g. embassies) The treatments recommended for a number of borderline cases are described in detail in both the 2008 SNA and the BPM6 12

13. Copyright 2010, The World Bank Group. All Rights Reserved. Structure of the RoW accounts The RoW “sector” potentially has entries in most of the current accounts, the capital account, the revaluation accounts and the balance sheets in the national accounts In the current accounts, the principle flows recorded relate to transactions due to trade and commerce, incomes arising from the use of “property”, and current transfers – exports and imports of goods and services appear in the production account and in expenditure on GDP – exported goods and services are not part of domestic final demand and so have to be added on to domestic final demand in estimating expenditure-based GDP – on the other hand, imported goods and services are recorded in the components of domestic final demand and so imports are deducted (in total) in estimating expenditure-based GDP to avoid double counting them 13

14. Copyright 2010, The World Bank Group. All Rights Reserved. Structure of the RoW accounts (continued) The main types of transactions recorded in the RoW sector in the capital account are capital transfers and non-produced assets The financial account potentially has significant entries for the rest of the world because it records transactions in financial assets and liabilities between the country and all other countries The balance sheets are also important for the rest of the world because the holdings of assets and liabilities for domestic sectors are in balance (by definition) so the rest of the world has a potentially important influence on the level of total net worth 14

15. Copyright 2010, The World Bank Group. All Rights Reserved. Rest of the world accounts 15

16. Copyright 2010, The World Bank Group. All Rights Reserved. Balance sheet The balance sheet for the RoW provides important information about a country’s international situation – it is a statement of the stock of a country’s external financial assets and liabilities The difference between the assets and liabilities represents either a net claim on or a net liability to the rest of the world – in the BPM6, this difference is referred to as the international investment position (IIP) National net worth equals the net IIP plus non-financial assets in the national balance sheet because resident-to-resident financial claims net to zero in the national balance sheet 16

17. Copyright 2010, The World Bank Group. All Rights Reserved. References System of National Accounts, 2008 (Chapter 26 describes the Rest of the world sector in detail) Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6) Standard International Trade Classification (SITC), Revision 4 17