1. Copyright 2010, The World Bank Group. All Rights Reserved. Introduction to the SNA, advanced Lesson 8 The 2008 SNA compared with balance of payments (BPM) 1

2. Copyright 2010, The World Bank Group. All Rights Reserved. Background The International Monetary Fund’s Balance of Payments Manual (or BPM) provides the framework for compiling balance of payments and related statistics The BoP is a critical source of data for the national accounts – the accounts for the RoW sector are completely dependent on the data from the BoP Historically, the BoP and the SNA were broadly consistent but there were several differences – most differences were eliminated when the 1993 SNA and the fifth revision of the Balance of Payments Manual (BPM5) were released and this process was completed with the release of the 2008 SNA and the BPM6 2

3. Copyright 2010, The World Bank Group. All Rights Reserved. The balance of payments (BoP) Like the SNA, the BoP records details of economic transactions within a framework of accounting rules relating to the time of recording transactions, their valuation and who the relevant transactors are The concept of residence is critical for the BoP because it records transactions between residents and non-residents and so they need to be precisely defined – the definition of residence is identical between the SNA and BPM6 3

4. Copyright 2010, The World Bank Group. All Rights Reserved. Terminology Despite the consistency between the concepts, valuation etc, both the SNA and BPM have largely retained the terminology that each has developed over the past few decades We saw earlier that the SNA refers to “Uses” and “Resources” as the headings for the columns in its accounts – the equivalents in the BoP are called “Credits” and “Debits” respectively, although viewing the transactions from opposite points of view (the home country by the BoP and the rest of the world in the national accounts) confuses the issue The “current account balance” is a very important data item in the BoP – it is called the “current external balance” in the SNA’s Use of disposable income account 4

5. Copyright 2010, The World Bank Group. All Rights Reserved. Terminology (continued) There are three current accounts in the BoP – the goods and services account – the primary income account – the secondary income account The BPM6 has no equivalent accounts for the SNA’s production account, the generation of income account and use of income account – the international accounts do not describe production, consumption or capital formation The Primary income account corresponds to the Allocation of primary income account in the SNA The Secondary income account is called the Secondary distribution of income account in the SNA 5

6. Copyright 2010, The World Bank Group. All Rights Reserved. Current accounts The main features of the BoP current accounts correspond to those in the current accounts in the SNA – each distinguishes between goods and services – each distinguishes current from capital transfers The balance of payments distinguishes between goods and services because of the policy interest in this distinction The BoP and the SNA present their accounts differently – the national accounts shows details of Uses and Resources and then the reconciliation between them as a balancing item under “Uses”, which is carried through to the following account as a “Resource” – the BoP shows details under “Credits” and “Debits” and also shows totals for each account and then the balance 6

7. Copyright 2010, The World Bank Group. All Rights Reserved. BoP double entry accounting Every transaction is represented in the BoP statement with two entries (credit and debit) This table presents examples of the types of items entered under the “Credits” and “Debits” headings 7 CREDITSDEBITS ExportsImports Income receivableIncome payable Transfers receivableTransfers payable Increase in liabilitiesReduction in liabilities Disposal of (decrease in) assets Acquisition of (increase in) assets

8. Copyright 2010, The World Bank Group. All Rights Reserved. BoP double entry accounting (continued) 8 Current accountsCreditsDebitsBalance Goods and services account Goods462392 Services78107 Goods and services54049941 Primary income account Compensation of employees62 Interest1321 Distributed income of corporations17 Reinvested earnings140 Primary income504010 Goods, services and primary income59053951

9. Copyright 2010, The World Bank Group. All Rights Reserved. BoP double entry accounting (continued) 9 Current accountsCreditsDebitsBalance (From previous slide) Goods, services and primary income59053951 Secondary income account Current taxes on income, wealth10 Net non-life insurance premiums211 Non-life insurance claims123 Current international transfers131 Miscellaneous current transfers110 Secondary income1755-38 Current account balance13

10. Copyright 2010, The World Bank Group. All Rights Reserved. Financial account The BPM’s Financial account corresponds to part of the accumulation accounts in the SNA – it is particularly concerned with financial instruments – the main classification is into assets and liabilities There is a functional split within each of assets and liabilities – direct investment – portfolio investment – financial derivatives – other investment – reserve assets The assets and liabilities are also classified by type of instrument 10

11. Copyright 2010, The World Bank Group. All Rights Reserved. International investment position The BPM’s international investment position (IIP) is a statement showing the stock of an economy’s foreign financial assets and liabilities The IIP shows details of – claims on non-residents – liabilities to nonresidents – monetary gold – special drawing rights (SDRs) The net IIP is the net position at a point in time (the end of an accounting period such as a year) Changes in the IIP reflect changes in an economy’s external positions due to flows, price changes, exchange rate changes and other changes 11

12. Copyright 2010, The World Bank Group. All Rights Reserved. SNA’s balance sheet equivalent of the IIP The IIP is a subset of the assets and liabilities included in the national balance sheet In addition to the IIP, the SNA’s national balance sheet shows non-financial assets as well as financial assets and liability positions between residents A country’s net worth is defined as its stock of non-financial assets plus its net international investment position – the net worth of a unit (or person, or sector, or country) is defined as the value of all the assets owned less the value of all outstanding liabilities 12

13. Copyright 2010, The World Bank Group. All Rights Reserved. Data links between SNA and BoP A number of important aggregates in the national accounts depend on the accuracy and consistency of the BoP data as well as the data from the national accounts themselves The supply–use table was described in detail in the Part 1 The basic identity was that supply = use, where Supply = output + imports, and Use = final consumption (households and government) + investment + exports + intermediate consumption We can use symbols to show these as follows: Supply = Use, so O + M = C + I + X + IC Rearranging these, we obtain O – IC = C + I + X – M Output less intermediate consumption = GDP, so C + I + X – M must also equal GDP 13

14. Copyright 2010, The World Bank Group. All Rights Reserved. Data links between SNA and BoP (continued) From the previous slide we saw that GDP = C + I + X – M Gross national disposable income (GNDY) is GDP plus net primary and secondary income from abroad, so: GNDY = GDP + BPI + BSI where BPI = balance on primary income and BSI = balance on secondary income By substitution from the equation above, we obtain GNDY = C + I + X – M + BPI + BSI 14

15. Copyright 2010, The World Bank Group. All Rights Reserved. Data links between SNA and BoP (continued) Gross national disposable income (GNDY) is GDP plus net primary and secondary income from abroad GNDY = C + I + X – M + BPI + BSI The current account balance is the sum of the balances from the three BoP current accounts, i.e. CAB = (X – M) + BPI + BSI By substitution in the first equation above we can see that GNDY = C + I + CAB The SNA defines gross saving as GNDY less final consumption i.e. S = GNDY – C Therefore S = (C + I + CAB) – C, which collapses to S = I + CAB Rearranging these terms gives CAB = S – I, which shows the BoP’s current account balance is equal to the gap between saving and investment in the national accounts 15

16. 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 16