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Official Economic Statistics by Tarun Das

Lectures on
Balance of Payments Statistics (BOP)

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Professor Tarun Das1

UN Statistical Institute for Asia and Pacific


Chiba, Japan
20-24 August 2007

1
Professor Tarun Das teaches Public Policy and Research Methodology to the MBA students at
the Institute for Integrated Learning in Management (IILM), New Delhi. Presently, he is working at
Ulaanbaatar, Mongolia as Glocom Inc. (USA) Expert on Strategic Planning under an ADB Project
on Governance Reforms in the Ministry of Finance, Government of Mongolia. Earlier he worked
as Economic Adviser in the Ministry of Finance and Planning Commission, Government of India.
For any clarification, contact das.tarun@hotmail.com/ das5delhi@yahoo.co.in

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Official Economic Statistics by Tarun Das

ACKNOWLEDGEMENTS

Professor Tarun Das teaches Public Policy and Research Methodology to the MBA students at
the Institute for Integrated Learning in Management (IILM), New Delhi. Presently, he is working at
Ulaanbaatar, Mongolia as Glocom Inc. (USA) Expert on Strategic Planning under an ADB Project
on Governance Reforms in the Ministry of Finance, Government of Mongolia. Earlier he worked
as Economic Adviser in the Ministry of Finance and Planning Commission, Government of India.

These lectures were prepared by the author at the IILM, New Delhi for the training of the Indian
Statistical Service and Indian Economic Service. The lectures have been modified to some extent
to suit the needs of statistical officers from various countries participating the training program at
the UN Statistical Institute of Statistics for Asia and Pacific (SIAP), Chiba, Japan.

The lectures are broadly based on various IMF publications and manuals on these topics. It is
needless to indicate that these lectures express personal views of the author which may not
necessarily reflect the views of the organisations he is associated with. The author is fully
responsible for any omissions or errors in these lecture notes.

Author would like to express his deepest gratitude to Ms. Davaasuren Chultemjamts, Director,
UNSIAP and Dr. Kulshreshtha, Professor (Statistics), UNSIAP for providing an opportunity to
deliver these lectures to the participants of the Third Group Training Course in Analysis,
Interpretation and Dissemination of Official Economic Statistics during 20-24 August 2007 at
UNSIAP, Chiba, Japan.

Author is also grateful to the Ministry of Finance, Government of Mongolia, particularly to Mr.
Batjargal, Director General, Fiscal Policy and Co-ordination Department for granting necessary
permission to deliver these lectures.

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Official Economic Statistics by Tarun Das

Contents

1. Brief profile of the resource person

2. Balance of Payments (BOP) Statistics (pages 45-70)

4.1 Analytical framework


4.2 BOP Accounting Principals
4.3 Flows and Positions
4.4 Accounting System
4.5 Current and Capital Account
4.6 Time of Recording of Flows
4.7 Accrual Accounting
4.8 Valuation
4.9 Aggregation and Netting
4.10 Symmetry of Reporting
4.11 Derived Measures
4.12 Major Classifications of BOP
4.13 Balance of Payments: Standard Components
4.14 BOP Workout Session on Three Gap Model
4.15 BOP Workout Session on Indian BOP

Selected References

Lecture notes have been prepared mainly on the basis of the following IMF Publications
and Manuals:
Government Finance Statistics (GFS) 1986
Government Finance Statistics Manual (GFSM) 2001
Government Finance Statistics (GFS) Yearbook 2006
Monetary and Financial Statistics Manual (MFSM) 2007
Monetary and Financial Statistics (MFS): Compilation Guide 2007
International Financial Statistics (IFS)
Balance of Payments Manual 2005
Balance of Payments Statistics Yearbook 2006

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Official Economic Statistics by Tarun Das

Profile of the Resource Person Prof. Tarun Das

• Professor Tarun Das teaches Public Policy and Research Methodology to


the MBA students at the Institute of Integrated Learning in Management
(IILM), 3 Lodhi Institutional Area, New Delhi-110003, India.

• Presently, he is working at Ulaanbaatar, Mongolia as Glocom Inc. (USA)


Expert on Strategic Planning under an ADB Project on Governance
Reforms in the Ministry of Finance, Government of Mongolia. Earlier he
worked as Economic Adviser in the Ministry of Finance and Planning
Commission, Government of India.

• Work Experience: 35 yrs as Development Economist in the government


of India: Last assignments: Economic Advisor, Planning Commission
(1986-1988) and Economic Adviser, Min of finance (1986-2006)

• Country Co-coordinator for the IMF Govt Finance Statistics, Special


Data Dissemination Standards, World Bank Global Development
Finance (1990-2003), the Commonwealth Secretariat Debt Recording
and Management System for India (1998-2003).

• Worked as Consultant to the World Bank (Washington), ADB (Manila),


UNDP (New York), UNESCAP (Bangkok), ILO (Geneva), UNCTAD
(Geneva), UNITAR (Geneva), Global Development Network (GDN)
(Washington), UN Commission for Africa (Addis Ababa).

• Worked on Fiscal Management for the governments of Cambodia,


Indonesia, Lao PDR, Mongolia, Nepal, Philippines and Samoa.

• Member of Govt. Delegate to World Bank, ADB, IMF, UNCSD, WTO.

• Research/Teaching Interest: Macro Econometric Modeling and Policy


Planning, Research Methodology, Public Policy, Economic Reforms,
Poverty, Inequality, Transport Modeling, Public Debt and External Debt.

• Dr. Das is a widely traveled person and possesses diversity in skills in


teaching, training, research, policy planning and modeling. He has
published a number of books and papers on economic statistics, structural
reforms, fiscal policies, management of public debt and external debt,
transport modeling, poverty and inequality, foreign investment, technology
transfer and privatisation strategy.

• Qualifications: MA in Econ. (Gold Medalist), Calcutta University, 1969.


Ph. D. in Econ, as Commonwealth Scholar, East Anglia Univ., England, 1977.

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Official Economic Statistics by Tarun Das

Course Outline, Scope, Objectives and Pedagogy

Background

The consultant, an expert in the field of Economic, Financial and Government Statistics will cover select
topics in Economic Statistics, namely: Government Finance Statistics (6 sessions), Monetary and Financial
Statistics (4 sessions), BOP/Rest of the World Sector(6 sessions), and Productivity analysis (4 sessions) by
conducting lecture and workshop sessions during 20-24 August 2007. These lectures form part of the wider
Third Group Training Course in Analysis, Interpretation and Dissemination of Official Statistics, 2007 at
U.N. Statistical Institute for Asia and the Pacific, Chiba.

Objectives

The course aims to strengthen the capability of the national statistical services to take part in the process of
improving their economic statistics and quality of analysis, interpretation and dissemination of official
statistics. The consultant is expected to impart training to help participants understand select topics of the
systems of economic accounts, specifically the system of Government Finance Statistics, Monetary and
Financial Statistics, Balance of Payment Statistics, and Productivity analysis for their countries

Learning Outcome
1. Develop a comprehensive understanding of the basic concepts, analytical framework, database,
methodology, uses, applications and limitations of economic statistics.
2. Develop skills and capabilities for analytical presentation, networking and teamwork through
group workout sessions.
3. More emphasis will be laid on understanding basic concepts, methodology, techniques, and their
uses and limitations for various situations, rather than formal proofs and derivation of formula.

Pedagogy

1. Teaching techniques will consist of formal lectures, case studies, practical and workout sessions,
and preparation and presentation of group project reports.
2. Selected case studies would be given so as to facilitate participants to relate to theoretical concepts
with real life situations in economic analysis, policy formulation and planning. The students would
present and discuss these case studies in the class.
3. Participants will be provided with complete course material well in advance. To make classroom
presentations by the resource person more meaningful and effective, participants are required to
come prepared and collect related information and data from journals, newspapers and websites,
and participate actively in classroom sessions.
4. In order to develop teamwork and networking capabilities, students are encouraged to participate
actively in group discussions and workout sessions.

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Official Economic Statistics by Tarun Das

Balance of Payments-
Basic Concepts and Analytical Framework

Prof. Tarun Das

Analytical framework

The linkage between key aggregates of accounts of the total economy and balance of
payments flows can, by the use of symbols, be summarized algebraically within a
savings/investment framework.

C = private consumption expenditure


G = government consumption expenditure
I = gross domestic investment
S = gross saving
X = exports of goods and services
M = imports of goods and services
NY = net income from abroad
GDP = gross domestic product
GNDY = gross national disposable income
CAB = current account balance in the balance of payments
NCT = net current transfers
NKT = net capital transfers
NPNNA = net purchases of nonproduced, nonfinancial assets
NFI = net foreign investment or net lending/net borrowing vis-à-vis the rest of the world

Balance of payments flows are italicized in the following equations.

GDP = C + G + I + X–M (1)


(X–M = balance on goods and services in the balance of payments)
CAB = X – M + NY+NCT (2)
GNDY = C + G + I + CAB (3)
GNDY = C + G + S (4)

Equating (3) and (4) we get:

S = I + CAB
S – I = CAB
S – I + (NKT – NPNNA) = CAB + NKT–NPNNA = NFI
(NKT – NPNNA = balance on the capital account of the balance of payments)

Balance sheet accounts for the total economy and domestic institutional sectors depict the
level and composition of the stock of assets and liabilities at the beginnings and ends of

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appropriate reference periods. The difference between the sum of assets and the sum of
liabilities equals the net worth of the economy and the sectors.
The interrelationship between the internal and external sectors of an economy can be seen
in greater detail by distinguishing between the private and government sectors. Private
saving and investment (Sp and Ip) and government saving and investment (Sg and Ig)
are identified:

S–I = Sp+Sg–Ip–Ig (5)

Use of the definition of the current account from equation (1) then gives:

CAB = (Sp–Ip)+(Sg–Ig) = S–I (6)

This equation shows that, if government sector dissaving is not offset by net saving on
the part of the private sector, the current account will be in deficit. More specifically,
the equation shows that the budgetary position of the government (Sg-Ig) may be an
important factor influencing the current account balance. In particular, a sustained current
account deficit may reflect persistent government spending in excess of receipts, and
such excess spending suggests that fiscal tightening is the appropriate policy action.

We also know that

CAB = NKA+RT = S–I (7)

Where

NKA = net capital and financial account (i.e., all capital and financial transactions
excluding reserve assets)
RT = reserve asset transactions
This equation shows that the current account balance is necessarily equal (with sign
reversed) to the net capital and financial account balance plus reserve asset transactions.
This relationship shows that the net provision, as measured by the current account
balance, of resources to or from the rest of the world must—by definition—be matched
by a change in net claims on the rest of the world.

In this analysis, it is useful to rewrite equation (7) as:

S–I = CAB = TB+SIB+TRANB = NKA+RT (8)

Where

TB = trade balance
SIB = service and income balance
TRANB = current transfer balance

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Official Economic Statistics by Tarun Das

BOP Accounting Principals

Entries in the international accounts are either flows or stocks. In the


context of international accounts, stocks are called positions.

Flows and Positions

Flows refer to economic actions and effects of events within an


accounting period, and positions refer to a level of assets or liabilities
at a point in time. Flows reflect the creation, transformation, exchange,
transfer, or extinction of economic value; they involve changes in the
volume, composition, or value of an institutional unit’s assets and
Liabilities. Flows are classified into (i) transactions and (ii) other flows.

Transactions

A transaction is an economic flow that is an interaction between two


institutional units by mutual agreement or an action within an
institutional unit that it is analytically useful to treat like a transaction,
often because the unit is operating in two different capacities. Illegal
transactions are treated the same way as legal actions. Illegal
transactions are those that are forbidden by law.

Transactions recorded in the international accounts are always


interactions between a resident and a nonresident institutional unit. By
the nature of international accounts, internal or intra-unit transactions
are not recorded.

To establish whether a transaction involving a transferable external


asset is a transaction between a resident and a nonresident, the
compiler must know the identities of both parties. Recorded
international transactions may include not only those that involve
assets
and liabilities and take place between residents and nonresidents but
also those that involve transferable assets of economies and take
place between two residents and, to a lesser extent, transactions that
take place between nonresidents.

Some mutual agreements involve three parties. For example,


guarantees involve the guarantor, the debtor, and the creditor.
Transactions occurring between each two parties (for example,
between the guarantor and debtor, or between the guarantor and
creditor, or between the debtor and creditor) should always be
identified and recorded as such.

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When a unit carries out transactions as an agent on behalf of another


unit, those transactions are recorded exclusively in the accounts of the
principal.

Each transaction involves two entries, a debit entry and a


credit entry, for each party to the transaction. In contrast,
“other flows” involve only one entry for each party.
Transactions can be classified as exchanges or transfers, monetary or
non-monetary, and can be reported through rerouting and partitioning.

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ACCOUNTING PRINCIPLES

Every transaction is either an exchange or a transfer. An


exchange (sometimes called a transaction with “something for
something” or a transaction with a quid pro quo) involves a provision
of something of economic value in return for a counterpart item of
economic value. Purchases of goods and services, acquisition of
assets, compensation of employees, dividends, etc. are all exchanges.

A transfer (also called a transaction with “something for nothing” or a


transaction without a quid pro quo) involves a provision (or receipt) of
an economic value by one party without receiving (or providing) a
counterpart item of economic value. Taxes, debt forgiveness, grants,
personal remittances are examples of transfers.

Every transaction is either a monetary or non-monetary


transaction. A monetary transaction is one in which one institutional
unit makes a payment (receives a payment) or incurs a liability
(acquires an asset) stated in units of currency. Non monetary
transactions are not initially stated in units of currency by the
transacting parties. Barter transactions, remuneration or payments in
kind, and provision of goods and services without charge, including
foreign aid in goods, are all non monetary transactions. Since all flows
are to be expressed in monetary terms, the monetary values of non
monetary transactions need to be estimated.

Rerouting and Partitioning

Some transactions do not directly reflect the underlying economic


relationships, and need to be rearranged. Rerouting and partitioning
are the two types of rearrangements employed in the international
accounts. Rerouting records a transaction as taking place in channels
different from that observed. Social contributions paid by employers
directly to the retirement scheme provide an example. The economic
substance of such a transaction is revealed by rerouting: First, by
showing the social contributions as payments made by employers to
employees, and then showing these as social contributions by
employees to the retirement scheme.

Partitioning unbundles two or more different transactions that appear


as a single transaction from the perspective of the parties involved. For
example, bank interest payable and receivable by financial
intermediaries is partitioned into two components. One component
represents the pure interest while the remainder represents the
purchase of financial intermediation services for which the
intermediaries do not explicitly charge for determining financial

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intermediation services. Likewise, when a financial derivative is settled


with the delivery of the underlying asset, a transaction in the financial
derivative should be separated from the transaction in the underlying
asset even though only a single payment is made for the delivery of
the underlying asset.

Imputation of transactions refers to constructing entries in the


accounts when no actual transactions occur. Imputation of transactions
in the international accounts is made in the following specific cases:

• Retained earnings of direct investment enterprises are treated as


reinvestments made by the enterprise.

• Property income earned on technical reserves held by insurance


corporations and pension funds are deemed to be payable to policy
holders who are then deemed to pay back to insurance corporations as
premium supplements even though in terms of actual cash flows the
property income is retained by the insurance enterprises.

• When government has a nonresident entity to undertake fiscal


functions related to government borrowing and/or incurring
government outlays abroad with no or incomplete economic flows
between the government and the nonresident entity related to these
fiscal activities, transactions are imputed in the accounts of both the
government and the nonresident entity to reflect the fiscal activities of
the government.

• Retained earnings of investment funds are treated as if they were


distributed to shareholders who are then deemed to reinvest in the
investment fund.

Other flows

Other flows are changes in the volume or value of an asset or liability


that does not result from a transaction. In the context of international
accounts, other flows are only recorded for financial assets and
liabilities because the international investment position relates only to
external financial assets and liabilities. Two broad types of other flows
are distinguished:

(i) Changes between opening and closing positions that are not
due to transactions or revaluations. Examples are unilateral
write offs of claims by creditors, reclassification of assets,
monetization and demonetization of gold, and other events.
Changes in financial claims and liabilities arising from the

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change in residence of individuals are treated as other


changes in the volume of assets.

(ii) Revaluations of an asset or liability that arise from changes


in their prices and/or the exchange rates that affect the
domestic currency values of assets and liabilities
denominated in foreign currency.

Positions

Positions refer to the level of financial assets or liabilities at a point in


time. They are recorded in the international investment position, which
is a balance sheet of external financial assets and liabilities. Generally,
positions are shown at the beginning and end of an accounting period.
Positions between two periods are connected with flows during that
period because changes in positions are caused by transactions and
other flows. The following relationship is valid for each position:

P¹ = Pº+ F or F = P¹ - Pº
Where Pº = values of a specific position at the beginning of an accounting period
P¹= values of a specific position at the end of an accounting period
F = Net value of all flows during the period that affected that particular position.

Financial assets include financial claims and, by convention, monetary


gold. A financial claim is a financial instrument that has a counterpart
liability. However, financial derivatives in the form of forward contracts
may change between assets and liabilities during their life. Gold bullion
is not a claim and does not have corresponding liability. It is treated as
a financial asset because of its special role as a means of financial
exchange in international payments by monetary authorities.

C. Accounting System

The accounting system underlying the international accounts derives


from broad bookkeeping principles. Three bookkeeping principles can
be distinguished:

(a) Vertical double-entry bookkeeps, also known as simply


double-entry bookkeeping used in business accounting: The
main characteristic of vertical double-entry bookkeeping is that
each transaction leads to two entries, a credit entry and a debit
entry, in the books of the transactor. This principle ensures that
the total of all credit entries equal that of all debit entries for all
transactions. The method permits a check on consistency of

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accounts and also ensures the fundamental identity of a unit’s


balance sheet i.e., the total value of assets equals the total
value of liabilities plus net worth.

(b) Horizontal double-entry booking: It implies that if unit A


provides something to unit B, the accounts of both A and B
show the transaction for the same amount: as a payment in A’s
account and as a receipt in B’s account. Horizontal double entry
bookkeeping ensures the consistency of recording for each
transaction category by counterparties. For example, at the
global worldwide level, dividends payable by all economies
should be equal to dividends receivable by all economies.

(c) Quadruple-entry bookkeeping: It implies the simultaneous


application of both the vertical and horizontal double entry
bookkeeping results. A single transaction between two
counterparties thus gives rise to four entries. In contrast to
business bookkeeping, international accounts deal with
interactions among a multitude of units in parallel, and thus
requires special care for consistency. For instance, as a liability
of one unit is mirrored in a financial asset of another unit, they
should be identically valued, allocated in time, and classified; to
avoid inconsistencies in aggregating balance sheets of units
into regional or global totals. Thus, definitions, classifications,
and accounting principles in the international accounts are
derived to ensure symmetry and uniformity in concepts and
reporting. The quadruple property is used for bilateral
comparisons and global integrated data.
Current and Capital Account

In the current and capital accounts, a credit denotes receivables from


exports, incomes, transfers, and disposals of nonproduced nonfinancial
assets. A debit implies payables for imports, incomes, transfers, and
acquisitions of nonproduced nonfinancial assets.

In the case of the flows in financial assets and liabilities, the terms “net
changes in assets” and “net changes in liabilities” are used to reflect
the nature of the financial flows, which are recorded on a net basis
separately for each financial asset and liability. For both assets and
liabilities, a positive change indicates an increase in positions and a
negative change indicates a decrease in positions.

D. Time of Recording of Flows

Once a flow is identified, the time at which it occurred must be


determined so that the results of all flows within a given accounting

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period can be compiled. Determination of timing is very important for


maintaining consistency of international accounts but is complicated
due to existence of leads and lags in international payments.

Broadly, the time of recording could be determined on four bases:


accrual basis, the due-for-payment basis, the commitment
basis, and the cash basis.

(a) Accrual accounting records flows at the time economic value is


created, transformed, exchanged, transferred, or extinguished.
In other words, the effects of economic events are recorded in
the period in which they occur, irrespective of whether cash was
received or paid or was due to be received or paid.
(b) A due-for-payment basis records flows that give rise to cash
payments at the time the payments fall due. If a payment is
made before it is due, then the flows are recorded when the
cash payment is made.
(c) A commitment basis records flows when a unit has committed
itself to a transaction. Normally, this basis applies only to
acquisition of financial assets or incurrence of liabilities, and
purchases of goods, services, and labor inputs. The time of
recording generally is when a commitment is made or a
purchase order is issued. Flows for which the commitment basis
is not applicable must be recorded on one of the other three
bases.
(d) A cash basis records flows when cash is received or disbursed.
In its strict form, only those flows that involve cash as the
medium of exchange are included.

Advantages of accrual basis in the international accounts

The international accounts use the accrual basis for determining the
time of recording of flows, as it matches the time of recording with the
timing of the events giving rise to the actual resource flows. With the
cash basis, the time of recording may diverge significantly from the
time of events and transactions to which the cash flows relate. The
due-for payment basis will usually record transactions after the
resource flows have taken place, although the long delays caused by
cash basis would, in most cases, be reduced. The timing of the
commitment basis will precede the actual resource flows.

The accrual basis provides the most comprehensive information


because all resource flows are recorded, including non monetary
transactions, imputed transactions, and other flows. Such a
comprehensive recording ensures the integration of flows and changes
in balance sheets.

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The accrual basis is consistent with the way transactions, other flows,
and main economic aggregates (balance on goods and services, net
lending/net borrowing) are defined. It is also close to the business
accounting.

a. Time of recording of transactions

The change of economic ownership is central in determining the time


of recording on an accrual basis for transactions in goods,
nonproduced nonfinancial assets, and financial assets. Entries for
transactions in assets owned by institutional units (goods,
nonproduced nonfinancial assets, and financial assets) are made at the
time economic ownership of the underlying asset is transferred.

Application to Goods

Transactions in goods should be recorded as of the time that the


change of economic ownership takes place. The timing used in
international merchandise trade statistics follows customs procedures,
which are set up to record the movement of goods across borders. The
time at which goods cross the border can be taken only as an
approximation to the time when the change of economic ownership
occurs. A customs-based collection system usually provides a choice of
dates at which transactions may be recorded (for example, lodgment
of customs declaration, customs clearance of goods, etc.). The time of
recording in the international standards for merchandise trade
statistics is when the customs declaration is lodged.

Goods on consignment (that is, goods intended for sale but not
actually sold when the goods cross the frontier) should be recorded
only at the time economic ownership changes. Goods under financial
lease arrangements are considered to change economic ownership at
the inception of the lease.

Application to services

Transactions in services are recorded when the services are provided.

Application to incomes and transfers

Distributive transactions are recorded at the moment the related


claims arise. As a result, for example, compensation of employees,
interest, social contributions and benefits are all recorded in the period
during which the amounts payable accrue. With respect to some
distributive transactions, the time of accrual depends on the unit’s

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decision as to when to distribute income or make a transfer. Dividends


are recorded at the moment they are declared payable. Distributed
branch profits are recorded when they actually take place. Reinvested
earnings are derived from retained earnings, and therefore are
recorded in the period in which retained earnings accrue.

Interest is recorded as accruing on a continuous basis as the financial


resources are provided for use on a continuous basis. For some
financial instruments, the debtor does not make any payments to the
creditor until the financial instrument matures, at which time a single
payment discharges the debtor’s liability; the payment covers the
amount of funds originally provided by the creditor and the interest
accumulated over the entire life of the financial instrument.

Taxes and other compulsory transfers should be recorded when the


activities, transactions, or other events occur that create the
government’s claim to the taxes or other payments. In principle,
income taxes and social contributions based on income should be
attributed to the period in which the income is earned.

Some compulsory transfers, such as fines, penalties, and property


forfeitures, are determined at a specific time. These transfers are
recorded when a legal claim is established, which may be when a court
renders judgment or an administrative ruling is published.

Determining the time of recording for grants and other voluntary


transfers can be complex because there is a wide variety of eligibility
conditions that have varying legal powers. In some cases, a potential
grant recipient has a legal claim when it has satisfied certain
conditions, such as the prior incurrence of expenses for a specific
purpose or the passage of legislation. These transfers are recorded
when all requirements and conditions are satisfied.

Application to transactions in nonproduced nonfinancial assets

Transactions in nonproduced nonfinancial assets are recorded at the


time economic ownership of these assets changes.

Application to financial transactions

Transactions in financial assets (including payments of cash) are


recorded when economic ownership changes. Some financial
claims/liabilities, such as trade credit and advances, are the implicit
result of a nonfinancial transaction. In these cases, the financial claim
is deemed to arise at the time the counterpart nonfinancial transaction
occurs.

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According to the accrual basis, repayments of debts are recorded when


they are extinguished (such as when they are paid, or rescheduled, or
forgiven by the creditor). When arrears occur, no transactions should
be imputed, but the arrears should continue to be shown in the same
instrument until the liability is extinguished. Data on arrears are
important in their own right, and thus should be presented as
supplementary items.

The time of recording of flows arising from activation of one-off


guarantees (including capital transfers and other changes in the
volume of assets if applicable) is determined by the occurrence of the
events activating the guarantee.

Employee stock options are recognized at the time of grant.


Compensation of employees associated with employee stock options
should be recorded as accruing over the period to which the option
relates, generally the period between the granting and vesting dates.

b. Time of recording of other flows

Other changes in the volume of assets, including reclassifications, are


recorded as these
Changes occur. Revaluations occur continuously as prices and
exchange rates change. In practice, revaluations are computed
between two points in time during which the relevant assets/liabilities
are held on the balance sheet.

E. Valuation

Market prices refer to current exchange value, i.e., the values at


which goods and other assets, services, and labors are exchanged or
else could be exchanged for cash. Market prices are the basis for
valuation in the international accounts.

1. Valuation of transactions

Transactions that involve dumping and discounting represent market


prices. Transaction prices for goods and services are inclusive of
appropriate taxes and subsidies. Market price is the price payable by
the buyer after taking into account any rebates, refunds, adjustments,
etc. from the seller. Exports of goods are recorded at FOB values,
which take into account any export taxes payable or any tax rebates
receivable, while imports are valued at c.i.f. prices (including customs,
insurance and freight charges).

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Transactions in financial assets and liabilities are recorded at the prices


at which they are acquired or disposed of. Transactions in loans should
always be valued at market prices. Transactions in financial assets and
liabilities should be recorded exclusive of any commissions, fees, and
taxes whether charged explicitly, included in the purchaser’s price, or
deducted from the seller’s proceeds. This is because both debtors and
creditors should record the same amount for the same financial
instrument. The commissions, fees, and taxes should be recorded
separately from the transaction in the financial asset and liability,
under appropriate categories.

When market prices for transactions are not observable, valuation


according to market-price-equivalents provides approximation to
market prices. In such cases, market prices of the same or similar
items when such prices exist will provide a good basis for applying the
principle of market prices. Generally, market prices should be taken
from the markets where same or similar items are traded currently in
sufficient numbers and in similar circumstances. If there is no
appropriate market in which a particular good or service is currently
traded, the valuation of a transaction involving that good or service
may be derived from the market prices of similar goods and services
by making adjustments for quality and other differences.

When nonfinancial resources are provided, without a quid pro quo, to


nonresidents by the government or private nonprofit institutions of an
economy, the same values must be reflected in the international
accounts of both recipient and donor. The suggested rule of thumb is
to use the value assigned by the donor as a basis for recording.

In some cases actual exchange values may not represent market


prices. Examples are transactions involving transfer prices between
affiliated enterprises, manipulative agreements with third parties, and
certain noncommercial transactions, including concessional interest.
Prices may be under- or over invoiced, in which case, an assessment of
a market-equivalent price needs to be made. Selection of the best
market-value equivalents to replace book values is an exercise calling
for cautious and informed judgment.

While some noncommercial transactions, such as a grant in kind have


no market price, other noncommercial transactions may take place at
implied prices that include some element of grant or concession so
that those prices also are not market prices. Examples of such
transactions could include negotiated exchanges of goods between
governments and government loans bearing lower interest rates than
those with similar grace and repayment periods or other terms for
purely commercial loans.

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Official Economic Statistics by Tarun Das

2. Valuation of other flows

Other flows in the international accounts capture changes in


international investment position of financial assets and liabilities that
are not due to transactions. Holding gains and losses arise from
changes in market values of positions of financial assets and liabilities.
Other changes in the volume of financial assets and liabilities are
recorded at the market-equivalent prices of similar instruments.

3. Valuation of positions of financial assets and liabilities

Positions of financial assets and liabilities should be valued as if they


were acquired in market transactions on the balance sheet reporting
date. Valuation according to market value equivalent is needed for
valuing financial assets and liabilities that are not traded in financial
markets or are traded only infrequently. For these assets and liabilities,
it will be necessary to estimate fair values that, in effect, approximate
market prices. The present value of future cash flows can also be used
as an approximation to market prices provided an appropriate discount
rate can be used.

Loan positions are recorded at nominal value. The use of nominal


values is partly influenced by pragmatic concerns about data
availability and the need to maintain symmetry between debtors and
creditors. In addition, because loans are not intended for negotiability,
without an active market, estimating a market price can be somewhat
subjective. such as the fair value of loans or the value of
nonperforming loans should be included as memorandum items. Loans
that have become negotiable de facto should be reclassified under
debt securities.

Positions on deposits and accounts receivable/payable are also


recorded at nominal value although they give rise to the same issues
of nominal and fair values as loans. Deposits at banks and other
depository corporations in liquidation should also be recorded at their
nominal value until they are written off.

Concepts on Values

Market values, fair values, and nominal values should be distinguished


from such notions as amortized values, face values, book values, and
historic cost.

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Official Economic Statistics by Tarun Das

• Fair value is a market-equivalent value. It is defined as the amount


for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s-length transaction.

•Nominal value refers to the amount the debtor owes to the creditor,
which comprises the outstanding principal amount including any
accrued interest.

• Amortized value reflects the amount at which the financial asset or


liability was measured at initial recognition minus the principal
repayments.

• Face value is the undiscounted amount of principal to be repaid.

• Book value in business accounts generally refers to the value


recorded in the enterprise’s records. Book values may have different
meanings because their values are influenced by timing of acquisition,
company takeovers, frequency of revaluations, and tax and other
regulations.

• Historic cost, in its strict sense, reflects the cost at the time of
acquisition, but sometimes it may also reflect occasional revaluations.

4. Unit of account and currency conversion


a. Unit of account

Values of nonfinancial and financial transactions and the values of


positions of financial assets and liabilities may be expressed initially in
a variety of currencies or in other standards of value, such as Special
Drawing Rights (SDRs). The conversion of these values into a reference
unit of account is a requisite for the construction of consistent and
analytically meaningful accounts.

International accounts can be compiled in the domestic currency as


well as in another currency in addition to the domestic currency. Data
in domestic currency are needed because several other
macroeconomic and micro data are compiled in domestic currency. In
addition, a standard or international unit of account is necessary to
allow for aggregation on a global or regional basis and to facilitate
international comparisons. It is preferable that the unit of account be a
stable one.

b. Currency conversion principles

A distinction should be made between the currency of account and the


currency of settlement. The currency of account is determined by the

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Official Economic Statistics by Tarun Das

currency in which the value of flows and positions is fixed, and thus
determines the currency denomination. The currency of settlement
may be different from the currency of account.

For an economy, a domestic currency is distinguished from foreign


currency. Domestic currency is that which is legal tender in the
economy and issued by the monetary authority for that economy; i.e.
either that of an individual country or, in a currency union, that of the
common currency area to which the country belongs. All other
currencies are foreign currencies.

Special Drawing Rights (SDRs) are considered to be foreign currency in


all cases, including for the economies that issue the currencies in the
SDR basket. Unallocated accounts for gold and other precious metals
are classified as being denominated in foreign currency.

A financial derivative contract to purchase foreign currency with


domestic currency is classified as a financial derivative to receive
foreign currency. If instead the contract is to purchase domestic
currency with foreign currency at a future date, this is a financial
derivative to pay foreign currency.

Flows expressed in a foreign currency are converted to their value in


the domestic currency at the rate prevailing when the flows take place,
and positions are converted at the rate prevailing on the balance sheet
date. The midpoint between the buying and selling rates should be
used at the time of transaction (for transactions) and at the close of
business on the reference date for positions.

Derived measures relating to a period are calculated by subtracting


one type of flow from
another. In principle, therefore, derived measures of flows in one
currency (for example, domestic currency) should not be directly
converted into another currency (for example, foreign currency). First,
the underlying flows themselves should be converted from the
domestic currency into the foreign currency. Then, the derived
measures in foreign currency can be calculated from the flows
denominated in foreign currency.

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Official Economic Statistics by Tarun Das

F. Aggregation and Netting

Aggregates are summations of elementary items in a class of flows or


positions. For example, compensation of employees is the sum of all
flows that are classified as compensation of employees. Aggregations
or combinations in which all elementary items are shown for their full
values are called gross recordings (e.g., all interest receivables are
aggregated separately from all interest payables). Aggregations or
combinations whereby the values of some elementary items are offset
against the same items that have an opposite sign are called net
recordings (e.g., acquisitions of foreign currency are netted against the
sales of the foreign currency).

The international accounts follow gross recording in the current and


capital accounts. For goods under merchanting, both purchases and
resales of goods are shown on a gross basis, although both entries are
shown under exports with a negative sign for purchases. Acquisitions
and disposals of nonfinancial nonproduced assets are recorded on a
gross basis. Capital transfers receivables and payables are also
recorded separately on a gross basis. Flows on transactions in
nonfinancial nonproduced assets and capital transfers are recorded on
a gross basis, as they are important in the context of cross-border
analysis. At the same time, the gross recording allows the derivation of
net flows, if needed.

In the case of flows in financial assets and liabilities, the term “net”
may have dual meanings (summing all debits and credits for a financial
asset type or a liability type and netting of an asset against a liability).

• “Net recording” always refers to aggregations whereby all debit


entries of a particular asset or liability are netted against all credit
entries in the same asset or liability type (e.g., acquisitions of foreign
currency are netted against the sales of the foreign currency; bond
issues are netted against redemption of bonds).

• When net is used together with a category of financial instrument


such as “net financial derivatives”, it is meant for netting of a financial
asset against the same type of liability.

• Title of some derived measures also uses the term “net”. They are
“net lending/borrowing” and “net international investment position”.

The international accounts follow net recording in the financial and


other changes in financial assets and liabilities accounts.

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Official Economic Statistics by Tarun Das

Positions of financial assets and liabilities are recorded on a gross


basis. Positions of the same type of a financial instrument held both as
a financial asset and a liability are to be presented gross, so that
assets are recorded under assets and liabilities are recorded under
liabilities.

G. Symmetry of Reporting

Symmetry of reporting by counterparties is important to ensure


consistency, comparability, and analytical usefulness of international
accounts, which group the flow and position data of individual units
into sectoral and national aggregates. International accounts can also
be prepared for a region and the world as a whole.

H. Derived Measures

Derived measures are not transactions or other flows. They are


economic constructs that are calculated by subtracting one or more
aggregates from one or more other aggregates. Some important
derived measures in the international accounts are as follows:

– Balance on goods
– Balance on services
– Balance on goods and services
– Balance on primary incomes
– Balance on secondary incomes
– Current account balance
– Net lending/borrowing
– Changes in net IIP arising from other flows
– Net international investment position.

Financial Account

The financial account of the SNA shows the net acquisition of financial assets and the net
incurrence of liabilities. Transactions in financial assets and liabilities for each
institutional sector and the total economy encompass those among domestic sectors and
those related to the rest of the world. Consolidated domestic flows cancel each other so
that transactions for the economy as a whole are (i) accounted for by transactions vis-à-
vis the rest of the world and (ii) equal to flows shown in columns for the rest of the
world. In the balance of payments, transactions (from the viewpoint of the compiling
economy) in the financial account of the capital and financial account correspond to
entries in columns for the financial account of the rest of the world, but changes in assets

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Official Economic Statistics by Tarun Das

of the rest of the world represent changes in liabilities for the compiling economy and
vice versa.

Some useful concepts

Residence is a particularly important attribute of an institutional unit in the balance of


payments because the identification of transactions between residents and nonresidents
underpins the system. Residence is also important in the SNA because the residency
status of producers determines the limits of domestic production and affects the
measurement of GDP and many important flows.

The concept of residence used in this Manual is identical to that used in the SNA. The
concept is not based on nationality or legal criteria, although it may be similar to concepts
of residence used for exchange control, tax, and other purposes in many countries. The
concept of residence is based on a sectoral transactors center of economic interest.
Moreover, country boundaries recognized for political purposes may not always be
appropriate for economic purposes.

Economic Territory of a Country

The economic territory of a country consists of the geographic territory administered by a


government; within this territory, persons, goods, and capital circulate freely. In a
maritime country, economic territory includes islands that belong to the country and are
subject to the same fiscal and monetary authorities as the mainland; goods and persons
move freely to and from the mainland and the islands without any customs or
immigration formalities. The economic territory of a country includes the airspace,
territorial waters, and continental shelf lying in international waters over which the
country enjoys exclusive rights and has, or claims to have, jurisdiction over fishing rights
and rights to fuels or minerals below the sea bed. The economic territory of a country
also includes territorial enclaves in the rest of the world. These are clearly demarcated
land areas (such as embassies, consulates, military bases, scientific stations, information
or immigration offices, aid agencies, etc.) located in other countries and used by
governments that own or rent them for diplomatic, military, scientific, or other purposes.
In addition, economic territory includes free zones and bonded warehouses or factories
operated by offshore enterprises under customs control. (These are considered part of the
Economic territory of the country in which the free zones, etc. are physically located.)

Resident Institutional Units

The sectors of an economy are composed of two main types of institutional units: (i)
households and individuals who make up a household and (ii) legal and social entities,
such as corporations and quasi-corporations (e.g., branches of foreign direct investors),
nonprofit institutions, and the government of that economy. These institutional units must
meet certain criteria to be considered resident units of the economy.

Residence of Enterprises

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Official Economic Statistics by Tarun Das

An enterprise is said to have a center of economic interest and to be a


resident unit of a country when the enterprise is engaged in a
significant amount of production of goods and/or services there or
when the enterprise owns land or buildings located there. The
enterprise must maintain at least one production establishment in the
country and must plan to operate the establishment indefinitely or
over a long period of time. Enterprises may be privately owned and/or controlled,
publicly owned and/or controlled, or controlled by residents and/or nonresidents.
Enterprises may be financial or nonfinancial institutions.

General Government

General government agencies that are residents of an economy include all departments,
establishments, and bodies located in the economic territory of an economy’s central,
state, and local governments and all embassies, consulates, military establishments, and
Other entities, which are located elsewhere, of an economy’s general government.

Concept of Market Price

A uniform system of valuation for the international accounts—for valuation of (i)


transactions in real resources and financial assets and liabilities and (ii) stocks of assets
and liabilities—is required for the compilation of aggregates of such statistics on a
consistent basis and for international comparability purposes. The recommendation in
this Manual is that market price should be used as the basis of valuation for both
transactions and stocks. Thus, transactions are generally valued at the actual prices agreed
upon by transactor; stocks of assets and liabilities are valued at market prices in effect at
the time to which the balance sheet relates. These principles are in accord with those
presented in the SNA.

Major Classifications of BOP

The standard components of BOP are comprised of two main groups of accounts: The
current account pertains to goods and services, income, and current transfers. The
capital and financial account pertains to (i) capital transfers and acquisition or disposal
of nonproduced, nonfinancial assets and (ii) financial assets and liabilities.

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Official Economic Statistics by Tarun Das

Balance of Payments: Standard Components

1. Current Account

A. Goods and services


B. Income
a. Goods 1. Compensation of employees
1. General merchandise 2. Investment income
2. Goods for processing 2.1 Direct investment
3. Repairs on goods 2.1.1 Income on equity
4. Goods procured in ports by carriers 2.1.1.1 Dividends and distributed branch
5. Nonmonetary gold profits***
5.1 Held as a store of value 2.1.1.2 Reinvested earnings and
5.2 Others undistributed branch profits***
2.1.2 Income on debt (interest)
b. Services 2.2 Portfolio investment
1. Transportation 2.2.1 Income on equity (dividends)
1.1 Sea transport 2.2.2 Income on debt (interest)
1.1.1 Passenger 2.2.2.1 Bonds and notes
1.1.2 Freight 2.2.2.2 Money market instruments and
1.1.3 Other financial derivatives
1.2 Air transport 2.3 Other investment
1.2.1 Passenger
1.2.2 Freight C. Current transfers
1.2.3 Other 1. General government
1.3 Other transport 2. Other sectors
1.3.1 Passenger 2.1 Workers’ remittances
1.3.2 Freight 2.2 Other transfers
1.3.3 Other
2. Travel
2.1 Business
2.2 Personal*
3. Communications services
4. Construction services
5. Insurance services**
6. Financial services
7. Computer and information services
8. Royalties and license fees
9. Other business services
9.1 Merchant and other trade-related
services
9.2 Operational leasing services
9.3 Misc. business, professional, technical
services
10. Personal, cultural, and recreational
services
10.1 Audiovisual and related services
10.2 Other personal, cultural, and
recreational services
11. Government services n.i.e.

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Official Economic Statistics by Tarun Das

2. Capital and Financial Account

A. Capital account 2.1.2.3 Financial derivatives


1. Capital transfers 2.1.2.3.1 Monetary authorities
1.1 General government 2.1.2.3.2 General government
1.1.1 Debt forgiveness 2.1.2.3.3 Banks
1.1.2 Other 2.1.2.3.4 Other sectors
1.2 Other sectors 2.2 Liabilities
1.2.1 Migrants’ transfers 2.2.1 Equity securities
1.2.2 Debt forgiveness 2.2.1.1 Banks
1.2.3 Other 2.2.1.2 Other sectors
2. Acquisition/disposal of nonproduced, 2.2.2 Debt securities
nonfinancial assets 2.2.2.1 Bonds and notes
1. B. Financial account 2.2.2.1.1 Monetary authorities
1. Direct investment 2.2.2.1.2 General government
1.1 Abroad 2.2.2.1.3 Banks
1.1.1 Equity capital 2.2.2.1.4 Other sectors
1.1.1.1 Claims on affiliated enterprises 2.2.2.2 Money market instruments
1.1.1.2 Liabilities to affiliated enterprises 2.2.2.2.1 Monetary authorities
1.1.2 Reinvested earnings 2.2.2.2.2 General government
1.1.3 Other capital 2.2.2.2.3 Banks
1.1.3.1 Claims on affiliated enterprises 2.2.2.2.4 Other sectors
1.1.3.2 Liabilities to affiliated enterprises 2.2.2.3 Financial derivatives
1.2 In reporting economy 2.2.2.3.1 Banks
1.2.1 Equity capital 2.2.2.3.2 Other sectors
1.2.1.1 Claims on direct investors 3. Other investment
1.2.1.2 Liabilities to direct investors 3.1 Assets
1.2.2 Reinvested earnings 3.1.1 Trade credits
1.2.3 Other capital 3.1.1.1 General government
1.2.3.1 Claims on direct investors 3.1.1.1.1 Long-term
1.2.3.2 Liabilities to direct investors 3.1.1.1.2 Short-term
2. Portfolio investment 3.1.1.2 Other sectors
2.1 Assets 3.1.1.2.1 Long-term
2.1.1 Equity securities 3.1.1.2.2 Short-term
2.1.1.1 Monetary authorities 3.1.2 Loans
2.1.1.2 General government 3.1.2.1 Monetary authorities
2.1.1.3 Banks 3.1.2.1.1 Long-term
2.1.1.4 Other sectors 3.1.2.1.2 Short-term
2.1.2 Debt securities 3.1.2.2 General government
2.1.2.1 Bonds and notes 3.1.2.2.1 Long-term
2.1.2.1.1 Monetary authorities 3.1.2.2.2 Short-term
2.1.2.1.2 General government 3.1.2.3 Banks
2.1.2.1.3 Banks 3.1.2.3.1 Long-term
2.1.2.1.4 Other sectors 3.1.2.3.2 Short -term
2.1.2.2 Money market instruments 3.1.2.4 Other sectors
2.1.2.2.1 Monetary authorities 3.1.2.4.1 Long-term
2.1.2.2.2 General government 3.1.2.4.2 Short-term
2.1.2.2.3 Banks
2.1.2.2.4 Other sectors

1.

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Official Economic Statistics by Tarun Das

Balance of Payments: Standard Components


Capital and Financial Account
3.1.3 Currency and deposits 3.2.4.3 Banks
3.1.3.1 Monetary authorities 3.2.4.3.1 Long-term
3.1.3.2 General government 3.2.4.3.2 Short-term
3.1.3.3 Banks 3.2.4.4 Other sectors
3.1.3.4 Other sectors 3.2.4.4.1 Long-term
3.1.4 Other assets 3.2.4.4.2 Short-term
3.1.4.1 Monetary authorities 4. Reserve assets
3.1.4.1.1 Long-term 4.1 Monetary gold
3.1.4.1.2 Short-term 4.2 Special drawing rights
3.1.4.2 General government 4.3 Reserve position in the Fund
3.1.4.2.1 Long-term 4.4 Foreign exchange
3.1.4.2.2 Short-term 4.4.1 Currency and deposits
3.1.4.3 Banks credits 4.4.1.1 With monetary authorities
3.1.4.3.1 Long-term 4.4.1.2 With banks
3.1.4.3.2 Short-term 4.4.2 Securities
3.1.4.4 Other sectors 4.4.2.1 Equities
3.1.4.4.1 Long-term 4.4.2.2 Bonds and notes
3.1.4.4.2 Short-term 4.4.2.3 Money market instruments/
derivatives
3.2 Liabilities 4.5 Other claims
3.2.1 Trade credits Selected Supplementary
3.2.1.1 General government Information
3.2.1.1.1 Long-term 1. Liabilities for foreign authorities’
3.2.1.1.2 Short-term reserves
3.2.1.2 Other sectors 1.1 Bonds and other securities
3.2.1.2.1 Long-term 1.2 Deposits
3.2.1.2.2 Short-term 1.3 Other liabilities
3.2.2 Loans 2. Exceptional financing transactions
3.2.2.1 Monetary authorities 2.1 Transfers
3.2.2.1.1 Use of Fund credit and loans 2.1.1 Debt forgiveness
from the Fund 2.1.2 Other intergovernmental grants
3.2.2.1.2 Other long-term 2.1.3 Grants received from Fund subsidy
3.2.2.1.3 Short-term A/C
3.2.2.2 General government 2.2 Direct investment
3.2.2.2.1 Long-term 2.2.1 Investment associated with debt
3.2.2.2.2 Short-term 2.2.2 Other
3.2.2.3 Banks 2.3 Portfolio investment:
3.2.2.3.1 Long-term 2.4 Other investment—liabilities*
3.2.2.3.2 Short-term 2.4.1 Drawings on new loans by
3.2.2.4 Other sectors authorities
3.2.2.4.1 Long-term 2.4.2 Rescheduling of existing debt
3.2.2.4.2 Short-term 2.4.3 Accumulation of arrears
3.2.3 Currency and deposits 2.4.3.1 Principal on short-term debt
3.2.3.1 Monetary authorities 2.4.3.2 Principal on long-term debt
3.2.3.2 Banks 2.4.3.3 Original interest
3.2.4 Other liabilities 2.4.3.4 Penalty interest
3.2.4.1 Monetary authorities 2.4.4 Repayments of arrears
3.2.4.1.1 Long-term 2.4.4.1 Principal
3.2.4.1.2 Short-term 2.4.4.2 Interest
3.2.4.2 General government 2.4.5 Rescheduling of arrears
3.2.4.2.1 Long-term 2.4.5.1 Principal
3.2.4.2.2 Short-term 2.4.5.2 Interest

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Official Economic Statistics by Tarun Das

2.4.6 Cancellation of arrears


2.4.6.1 Principal
2.4.6.2 Interest

Balance of Payments: Standard Components


Capital and Financial Account

3. Other transactions 4. Services sub-items


3.1 Portfolio investment income 4.1 Travel (personal)
3.1.1 Monetary authorities 4.1.1 Health-related
3.1.2 General government 4.1.2 Education-related
3.1.3 Banks 4.1.3 Other
3.1.4 Other sectors 4.2 Miscellaneous business, professional,
3.2 Other (than direct investment) and technical services
income 4.2.1 Legal, accounting, management
3.2.1 Monetary authorities consulting, and public relations
3.2.2 General government 4.2.2 Advertising, market research, and
3.2.3 Banks public opinion polling
3.2.4 Other sectors 4.2.3 Research and development
3.3 Other investment (liabilities) 4.2.4 Architectural, engineering, and
3.3.1 Drawings on long-term trade credits other technical services
3.3.2 Repayments of long-term trade 4.2.5 Agricultural, mining, and on-site
credits processing
3.3.3 Drawings on long-term loans 4.2.6 Other
3.3.4 Repayments of long-term loans

BOP WORKOUT SESSIONS

1. Two-Gap Model
Y=C+I+X–M (1)
Y=C+S (2)
Y = Income, C = Consumption, I = Investment, S = Savings, X = Exports, M = Imports
Equating equations (1) and (2) we get
C+S=C+I+X–M OR (S – I) = (X – M ) (3)
Savings - Investment gap (or Resource Gap on the domestic account) equals current
account balance (CAB).

2. Macro-economic Balance Sheet with Government


Y = GNP = GDP + NFI (4)
GDP= PubExp + PubInv + PvtExp + PvtInv + X–M (5)
Where
GNP = Gross national product
GDP = Gross domestic product
PubExp = Public expenditure
PubInv = Public investment
PvtExp = Private expenditure

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Official Economic Statistics by Tarun Das

PvtInv = Private investment


X = Exports of goods and services
M = Imports of goods and services
NFI = Net factor income from abroad

Rearranging the terms of equations (4) and (5) we get


Y = (PubExp + PubInv + PvtExp + PvtInv + X – M) + NFI (6)
Or, Y – (PvtExp + PvtInv) = (PubExp + PubInv) + (X – M + NFI) (7)
Or, Y – (PvtExp + PvtInv + T) = (PubExp + PubInv - T) + (X – M + NFI) (8)
Or, (X – M + NFI) = [Y – (PvtExp + PvtInv + T)] + [T – (PubExp + PubInv)]
(X – M + NFI) = Current account balance = Exports of goods and services minus imports
of goods and services plus net factor incomes from abroad

Y – (PvtExp + PvtInv + T) = Private sector balance = Income minus private expenditure


minus private investment minus taxes paid to the government

T - (PubExp + PubInv) = Public sector balance = Taxes minus Public expenditure minus
public investment

Thus we get:
Current account balance = Private sector balance + Public sector balance

Exercise-1: The following data relate to Indian economy for the year
2003-04
Items (Rupees billion)
1.GNP 27459
2.Public Expend (PubExp) 3121
3.Private Expend (PvtExp) 17353
4.Public Invest (PubInv) 1802
5.Private Invest (PvtInv) 5680
6.Public savings (PubSav) 284
7.Private savings (PvtSav) 7695
8.Taxes less subsidies (T) 2402
9.Exports of goods & services (X) 4078
10.Imports of goods and services (M) 4434

Workout Session- 1:
Given above data, estimate the following:
1. GDP at current market prices
2. Net factor income from abroad
3. Current account balance
4. Private Investment-Savings gap
5. Public Investment-Savings gap
6. Overall Investment-Savings gap
7. Private account balance
8. Public account balance

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Official Economic Statistics by Tarun Das

9. Examine the following identities:


(a) Overall Investment-savings gap (or resource gap on the domestic account) equals
current account balance (CAB)
(b) Current account balance equals private sector balance plus public sector balance

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Official Economic Statistics by Tarun Das

2. Balance of Payments Accounting

A. Current Account – Account is closed by the end of the year. These are non-asset
transactions and have no future obligations.
B. Capital Account- Account is not closed within a year and has future obligations. It
consists of financial flows, which can be grouped into debt flows and non-debt creating
financial flows. Debt has attendant obligations for repayment of principal (amortization)
and payment of interest charges. Amortization appears on capital account while interest
charges appear on current account. Similarly non-debt financial flows appear on capital
account, while dividends, royalties etc. appear on current account.

Current Account

A.1 Trade Account –


Trade balance = Merchandise exports minus merchandise imports
A.2 Invisibles Account- A.2.1 to A.2.4
A.2.1 Non-factor services = Travel + Transportation + Insurance + Govt not included
elsewhere (n.i.e) + Miscellaneous business and professional services (including software,
BPO etc.)
A.2.2 Factor incomes (interest, rent, dividend, wage)
A.2.3 Private transfers (remittances)
A.2.4 Official transfer (foreign grants)

Capital Account

B.1 Non –debt creating financial flows


B.1.1 Foreign Investment = Foreign Direct Investment (FDI) + Portfolio Investment
B.2 Debt Flows- B.2.1 to B.2.5
B.2.1 External Assistance = Loans obtained from multilateral organizations and bilateral
countries
B.2.2 External Commercial Borrowing
B.2.3 Short-term credits (trade credits)
B.2.4 Banking capital (deposits and others)
B.2.5 Other capital

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Official Economic Statistics by Tarun Das

2. The following data relate to the Balance of Payments Situation of India during
2005-06

Items US$ Billion


1 Merchandise Exports f.o.b. 104.8
2 Merchandise Imports c.i.f. 156.3
3. Net travel services 1.4
4. Net transportation services -1.2
5.Net software and other non-factor services 22
6. Inward FDI flows 7.7
7. Outward FDI flows 2.0
8. Net Portfolio investment 12.5
9.Factor incomes, net -5.6
10.Private transfers, net 24.1
11.Official transfers, net 0.2
12.External assistance, net 1.4
13. Ext. comm. borrowing, net 1.6
14. Short-term credit, net 1.7
15. Banking capital, net 1.4
16. Other capital flows, net 1.4
17. Foreign exchange reserves at the beginning of the year 130.9

1. Workout Session-2

Given above data, estimate the following for Indian BOP in 2005-06:
1. Trade balance
2. Non-factor services balance
3. Net invisibles
4. Current account balance
5. Non-debt creating financial flows
6. Debt creating financial flows
7. Total capital flows
8. Overall balance of payments
9. Build up of foreign exchange reserves
10. Foreign exchange reserves at the year-end

33
Official Economic Statistics by Tarun Das

Exercise-3
India's Balance of Payments (US$ Million)

Items 2006-
07
1 2
Merchandise Exports 127,090
Merchandise Imports 191,995
Software services receipts 31,300
Software services payments 2,502
Business services receipts 31,065
Business services payments 28,951
Transfers receipts 28,861
Transfers payments 1,446
Foreign Direct Investment, net 8,437
Portfolio Investment, net 7,062
Investment income receipts 8,574
Investment income payments 12,856
External Assistance, net 1,770
Ext.commercial borrowing, net 16,084
NRI Deposits, net 3,895
Short-term Credits, net 3,275
Other capital inflows 4,421
Travel receipts 9,423
Travel payments 7,235
Transportation receipts 8,069
Transportation payments 8,857
Insurance receipts 1,200
Insurance payments 641
Government n.i.e. receipts 273
Government n.i.e. payments 417
Employee's compensation, net -564

Memorandum items:
Foreign exchange reserves at 162650
the beginning of the year
GDP at current mp 892930

34
Official Economic Statistics by Tarun Das

WORKOUT SESSION-2 ON BOP


Given the data on India's BOP in 2006-07
Estimate the following:
US$ As % of
Million GDP
1 Goods balance
2 Net invisibles
2.1 Invisibles receipts
2.1.1 Services
2.1.2 Income
2.1.3 Transfers
2.2 Invisibles payments
2.2.1 Services
2.2.2 Income
2.2.3 Transfers
3 Current account balance
4 Foreign investment
5 Non-debt capital flows
6 Other capital flows
7 Total capital flows
8 Net balance of payments
9 Build up of foreign exchange
10 End-year foreign.exch.reserves

35
Official Economic Statistics by Tarun Das

BOP Workout Session -1

Items (Rupees billion)


1.GNP 27459
2.Public Expend (PubExp) 3121
3.Private Expend (PvtExp) 17353
4.Public Invest (PubInv) 1802
5.Private Invest (PvtInv) 5680
6.Public savings (PubSav) 284
7.Private savings (PvtSav) 7695
8.Taxes less subsidies (T) 2402
9.Exports of goods & services (X) 4078
10.Imports of goods and services (M) 4434

Given above data, estimate the following:


GDP at current market prices (GDP)
= PubEXP+PvtEXP+PubINV+PvtINV+X-M 27600
Net factor income from abroad (NFI)
= GNP - GDP -141
Current account balance (CAB) = X - M + NFI -497
Private Investment-Savings gap -2015
Public Investment-Savings gap 1518
Overall Investment-Savings gap -497
Private account balance (PVTAB) = CAB, verified 2024
Public account balance (PUBAB) -2521
PVTAB + PUBAB = CAB, verified -497

36
Official Economic Statistics by Tarun Das

BOP Workout Session -2

Given the data on India's BOP in 2006-07


Estimate the following:
US$ Million As % of GDP
1 Goods balance -64,905 -7.3
2 Net invisibles 55,296 6.2
2.1 Invisibles receipts 118,201 13.2
2.1.1 Services 81,330 9.1
2.1.2 Income 8,010 0.9
2.1.3 Transfers 28,861 3.2
2.2 Invisibles paymets 62,905 7.0
2.2.1 Services 48,603 5.4
2.2.2 Income 12,856 1.4
2.2.3 Transfers 1,446 0.2
3 Currence account balance -9,609 -1.1
4 Foreign investment 15,499 1.7
5 Non-debt capital flows 15,499 1.7
6 Other capital flows 29,445 3.3
7 Total capital flows 44,944 5.0
8 Net balance of payments 35,335 4.0
9 Build up of foreign exchange 35,335 4.0
10 End-year foreign.exch.reserves 197,985 22.2

37
Official Economic Statistics by Tarun Das

38