Balance of Payments Manual

Chapter

III. Balance of Payments and National Accounts

Author(s):
International Monetary Fund
Published Date:
November 2005
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Introduction

34. Conceptually, balance of payments accounts and related data on the international investment position are closely linked to a broader system of national accounts that provides a comprehensive and systematic framework for the collection and presentation of the economic statistics of an economy. The international standard for this framework is the System of National Accounts (SNA), which encompasses transactions, other flows, stocks, and other changes affecting the level of assets and liabilities from one accounting period to another. Linkage of the balance of payments and the SNA is reinforced by the fact that, in almost all countries, balance of payments and international investment position data are compiled first and subsequently incorporated into national accounts.

35. The SNA is a closed system in that both ends of every transaction are recorded; that is, each transaction is shown as a use for one part of the system and as a resource for another part. Stocks of assets affected by transactions are covered as of the beginnings and ends of appropriate periods. Stocks of assets also are affected by valuation and other volume changes (such as uncompensated seizures or destruction of assets) that occur during the period and cause additional differences in stock value.

36. In the SNA, transactors and holders of stocks are the resident economic entities of a particular economy. For the SNA to be closed, there must be a segment to capture flows that involve uses or resources for nonresident entities. That segment is known as the rest of the world account. The segment for resident entities or sectors consists of accounts for production, income generation, primary and secondary distribution of income, redistribution of income, consumption, and accumulation. Since the system is closed, the rest of the world account is constructed from the perspective of the rest of the world rather than that of the compiling economy. Consequently, entries in the balance of payments and the international investment position are reversed in the presentation of rest of the world accounts.

37. In this chapter, the balance of payments and the international investment position are described in relation to the SNA and links between those international accounts and relevant segments of the SNA are discussed.

Relationship Between the SNA and Principles Underlying the Balance of Payments

38. As the balance of payments and the international investment position are integral parts of the SNA, there is virtually complete concordance—between the Manual and the SNA—on such issues as the delineation of resident units (producers or consumers), valuation of transactions and the stock of external assets and liabilities, time of recording transactions and stocks, conversion procedures, coverage of international transactions in real resources (goods, services and income), and transfers (current and capital). There is concordance, as well, on external financial assets and liabilities and coverage of the international investment position.

Resident units

39. The SNA and the Manual identify resident producers and consumers in identical fashion. Both invoke the concepts of economic territory and the center of economic interest to identify resident units. (These concepts are elaborated in Chapter 4.)

Valuation

40. In the Manual and the SNA, market price is the primary concept for valuation of transaction accounts and balance sheet accounts. (The market price concept is defined and elaborated in Chapter 5.)

Time of recording

41. Balance of payments and national accounts are constructed, in principle, on an accrual basis. The two systems employ essentially identical applications of the accrual basis in specific categories of transactions. (Chapter 6 provides a full discussion on application of the accrual basis underlying balance of payments accounts.)

Conversion procedures

42. Both systems employ consistent procedures for converting transactions denominated in a variety of currencies or units of account into the unit of account (usually the domestic currency) adopted for compiling the balance of payments statement or the national accounts. (See Chapter 7.) There also is concordance between the two systems on conversion procedures used in constructing balance sheet accounts.

Classification

43. It would be convenient, for some purposes, if the classification of transactions in the balance of payments and the rest of the world account of the SNA were identical in all respects. Differences are justifiable, however, because the two statements have different uses. Whereas the classification scheme of the rest of the world account maintains the basic, fundamental distinction between production flows, income flows, and accumulation flows, that subclassification is of lesser importance in the context of balance of payments analysis. Congruence of underlying principles makes the balance of payments consistent with the SNA framework and permits the balance of payments to be described in the context of the SNA. This overall congruence is more important than exact, detailed concordance between the balance of payments and SNA accounts pertaining to relationships of resident units with the rest of the world.

44. Before examining the relationship between the SNA rest of the world account and the balance of payments accounts and international investment position, readers may find it useful to consider how the broad elements of the latter two statements relate to integrated economic accounts for the economy as a whole, as well as to institutional sectors of the economy.

Integrated Economic Accounts

45. Integrated economic accounts (see pages 14-19) in the form of T-accounts provide an overview of structural elements of the SNA by depicting various facets of economic phenomena (e.g., production, income, consumption, accumulation, and wealth) in three types of accounts: current accounts, accumulation accounts, and balance sheets. Details for the total economy and various institutional sectors are presented separately in these accounts. Resources, stocks of liabilities, and net worth (and changes thereof) are shown on the right side of the accounts; uses and stocks of assets (and changes thereof) are shown on the left side in the tabular presentation. However, in the account for goods and services, the sources of supply (resources) from the economy’s output and imports are shown on the left side, and the distribution of that supply (uses such as exports, intermediate consumption, and final consumption by the economy) is shown on the right side. For each category of transactions, the sum of the entries on the right side of the accounts is equal to the sum of the entries on the left side. Because the SNA is closed, external flows are portrayed or measured from the perspective of the rest of the world to achieve this equality. Thus, for example, payments of compensation to employees (uses) by various institutional sectors may exceed receipts (resources) for the household sector because some payments are made to nonresidents (resources for the rest of the world). The inclusion of payments to nonresidents on the resources side (for the rest of the world sector) ensures that both sides of the account are equal.

46. SNA current (transactions) accounts—the first set of integrated economic accounts—portray (i) output, intermediate consumption, and value added for each sector and the total economy, as well as the disposition of domestic production and imports of goods and services; (ii) distributive, from the viewpoint of producers, transactions that are directly linked to the process of production or, alternatively, the composition of value added; (iii) primary income distribution showing how gross value added is distributed to factors of labor, capital, and government and, when appropriate, reflects flows to and from the rest of the world; (iv) secondary income distribution; (v) income redistribution covering, in principle, current taxes on income, wealth, and other current transfers and allowing for the derivation of disposable income and adjusted disposable income; and (vi) use of income. Saving is a balancing item for all transactions accounts and provides a link to accumulation accounts.

47. Accumulation accounts of the SNA show changes in assets and liabilities and net worth (the difference, for any sector or for the total economy, between assets and liabilities) and follow a presentation similar to balance sheets. A first group of accounts covers transactions that would correspond to all changes in assets, liabilities, and net worth if saving and voluntary transfers of wealth were the only sources of change in net worth. A second group of accounts relates to changes—in assets, liabilities, and net worth—that are due to other factors. The first group of accumulation accounts contains the capital account and the financial account. These two accounts are distinguished to show a balancing item (i.e., net lending/net borrowing) useful for economic analysis. The second group covers changes—in assets, liabilities, and net worth—that are a result of other factors affecting the values and volume of assets and liabilities. Examples of such changes are discoveries or depletion of subsoil resources, natural catastrophes, uncompensated seizures of assets, etc., and price and exchange rate changes that affect only the values of assets and liabilities.

48. Flows reflected in the balance of payments affect, in important ways, the total economy’s activities associated with production, generation and distribution of income, consumption, and accumulation activities. For instance, credit and debit entries for goods and services in balance of payments accounts are equivalent to flows of exports and imports of goods and services. These flows are reflected in the economy’s account for goods and services and consequently affect the measurement of gross domestic product (GDP) and its composition in terms of final demand components (e.g., final consumption, gross capital formation, etc.). When measured from the final demand side, GDP is equivalent to the sum of entries in the uses column of the goods and services account less imports (the first entry on the resources side of the account) in the integrated accounts. Flows of exports and imports of goods and services are defined, in terms of coverage, in virtually identical fashion in the SNA and the Manual.

49. In viewing—for both institutional sectors and the total economy—the generation of income, the allocation of primary income, the secondary distribution of income, and the redistribution of income in kind, readers should note that, apart from income flows generated domestically and included in the measure of gross value added or GDP, there are income flows to or from the rest of the world. These flows (in the form of compensation of employees; property income; taxes on production and imports; current taxes on income, wealth, etc.; and other current transfers) constitute additional sources of income. These additional sources of income are included in the measurement of sectoral and national disposable income and, consequently, in sectoral and national saving—the balancing item between disposable income and final consumption. In terms of the balance of payments, compensation of employees and property income flows comprise the income category, while taxes and other current transfers are identical with the coverage of current transfers.

50. Accumulation activity of the total economy and domestic institutional sectors is portrayed, in the SNA, in the capital and financial accounts. The capital account shows (i) sources of financing accumulation (saving and net capital transfers) on the changes in liabilities side; (ii) the composition of investment (gross or net) which takes into account the consumption of fixed capital (capital formation) on the changes in assets side; and (iii) acquisitions less disposals of nonproduced, nonfinancial assets. Changes in net worth that result from saving and net capital transfers represent the sum of sources of financing accumulation. The balancing item between sources of financing and the sum of net capital formation and net purchases of nonproduced, nonfinancial assets constitutes net lending/net borrowing for each sector and the nation as a whole. Net capital transfers (capital transfers receivable less capital transfers payable) for each sector contain both intersectoral flows and transactions with the rest of the world. Within the total economy, however, intersectoral flows cancel each other so that the net flow constitutes transactions relating only to the rest of the world. In the balance of payments, net lending/net borrowing for the total economy corresponds to the sum of the current account balance and the balance on capital account transactions within the capital and financial account. The measure of net lending/net borrowing for the total economy also represents net financial investment vis-à-vis the rest of the world. In the integrated accounts, net lending/net borrowing for the total economy is equivalent to amounts shown in columns for the rest of the world. However, because the rest of the world columns are viewed from the perspective of nonresidents and balance of payments accounts are viewed from that of the compiling economy, changes in assets of the rest of the world represent changes in liabilities of the compiling economy, and vice versa.

51. According to the guidelines for residence (see Chapter 4), transactions in land can only take place between resident entities. When a nonresident entity (other than a foreign government or international organization acquiring land for use as an extraterritorial enclave) acquires land in the domestic economy, the acquisition is considered a financial investment (included in net incurrence of liabilities) in a notional resident enterprise.

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

53. 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
(X–M = balance on goods and services in the balance of payments)
CAB=X – M + NY+NCT
GNDY=C + G + I + CAB
GNDY – C – G=S
S=I + CAD
S – I=CAB

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

54. 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 appropriate reference periods.

55. The difference between the sum of assets and the sum of liabilities equals the net worth of the economy and the sectors. In the integrated accounts, financial assets and liabilities recorded in columns for the total economy are an aggregation of the financial assets and liabilities of individual sectors; balance sheet accounts of a nation as a whole are not fully consolidated. If accounts were fully consolidated, the financial assets and liabilities of domestic sectors would cancel each other, and the economy’s financial assets and liabilities would refer to the stock of external assets and liabilities (the international investment position). From that perspective, the national wealth or net worth of an economy consists of its stock of nonfinancial assets plus the net international investment position (stock of external assets minus stock of external liabilities). The IIP also may be derived from the integrated accounts column for assets and liabilities of the rest of the world. As the IIP viewpoint is that of the compiling economy, the assets of the rest of the world represent liabilities of the compiling economy and vice versa.

56. Appendix 1 contains a discussion of the relationship of (i) various SNA accounts pertaining to the rest of the world to (ii) balance of payments accounts and the IIP. Because there is concordance between the underlying principles of the two systems, the focus of Appendix 1 is on classification issues and ways of constructing bridges to derive relevant national accounts flows and stocks from balance of payments accounts and the IIP.

INTEGRATED ECONOMIC ACCOUNTS – CURRENT ACCOUNTS
USES
AccountsTotalGoods and services (resources)S.2 Rest of worldS.1 Total economyS.15 Nonprofit institutions serving householdsS.14 HouseholdsS.13 General governmentS.12 Financial coporationsS.11 Nonfinacial corporations
I.



PRODUCTION/EXTERNAL ACCOUNT OF GOODS AND SERVICES
II.1.1



GENERATION OF INCOME ACCOUNT
II.1.2.



ALLOCATION OF PRIMARY INCOME ACCOUNT
II.2



SECONDARY DISTRIBUTION OF INCOME ACCOUNT
II.3



REDISTRIBUTION OF INCOME IN KIND ACCOUNT
II.4



USE OF INCOME ACCOUNT
RESOURCES
CodeTransactions and Balancing ItemsS.11 Nonfinancial corporationsS.12 Financial corporationsS.13 General governmentS.14 HouseholdsS.15 Nonprofit institutions serving householdsS.1 Total economyS.2 Rest of the worldGoods and services (uses)TotalAccounts
P.7Imports of goods and servicesI.



PRODUCTION/EXTERNAL ACCOUNT OF GOODS AND SERVICES
P.6Exports of goods and services
P.1Output
P.2Intermediate consumption
D.21-D.31Taxes less subsidies on products
B.1g/B.1*gValue added, gross/Gross domestic product
K.1Consumption of fixed capital
B.1nVALUE ADDED, NET/NET DOMESTIC PRODUCT
B.11EXTERNAL BALANCE OF GOODS AND SERVICES
D.1Compensation of employeesII.1.1



GENERATION OF INCOME ACCOUNT
D.2-D.3Taxes less subsidies on production and imports
D.21 -D.31Taxes less subsidies on products
D.29-D.39Other taxes less subsidies on production
B.2gOperating surplus, gross
B.3gMixed income, gross
B.2nOPERATING SURPLUS, NET
B.3nMIXED INCOME, NET
D.4Property incomeII.1.2.



ALLOCATION OF PRIMARY INCOME ACCOUNT
B.5gBalance of primary incomes, gross/National income, gross
B.5nBALANCE OF PRIMARY INCOMES NET/NATIONAL INCOME, NET
D.5Current taxes on income, wealth, etc.II.2



SECONDARY DISTRIBUTION OF INCOME ACCOUNT
D.61Social contributions
D.62Social benefits other than social transfers in kind
D.7Other current transfers
B.6gDisposable income, gross
B.6nDISPOSABLE INCOME, NET
D.63Social transfers in kindII.3



REDISTRIBUTION OF INCOME IN KIND ACCOUNT
B.7gAdjusted disposable income, gross
B.7nADJUSTED DISPOSABLE INCOME, NET
B.6gDisposable income, grossII.4



USE OF INCOME ACCOUNT
B.6nDISPOSABLE INCOME, NET
P.4Actual final consumption
P.3Final consumption expenditure
D.8Adjustment for the change in net equity of households in pension funds
B.8gSaving, gross
B.8nSAVING, NET
B.12CURRENT EXTERNAL BALANCE
INTEGRATED ECONOMIC ACCOUNTS—ACCUMULATION ACCOUNTS
CHANGES IN ASSETS
AccountsTotalGoods and services (resources)S.2 Rest of worldS.1 Total economyS.15 Nonprofit institutions serving householdsS.14 HouseholdsS.13 General governmentS.12 Financial coporationsS.11 Nonfinacial corporations
111.1



CAPITAL ACCOUNT
111.2



FINANCIAL ACCOUNT
111.3.1.



OTHER CHARGES IN VOLUME OF ASSETS ACCOUNT
111.3.2



REVALUATION ACCOUNT
CHANGES IN LIABILITIES AND NET WORTH
CodeTransactions and Balancing ItemsS.11 Nonfinancial corporationsS.12 Financial corporationsS.13 General governmentS.14 HouseholdsS.15 Nonprofit institutions serving householdsS.1 Total economyS.2 Rest of the worldGoods and services (uses)TotalAccounts
B.8SAVING, NETIII.1



CAPITAL ACCOUNT
B.12CURRENT EXTERNAL BALANCE
P.51Cross fixed capital formation
K.1Consumption of fixed capital (-)
P.52Changes in inventories
P.53Acquisitions less disposals of valuables
K.2Acquisitions less disposals of nonproduced, nonfinancial asset
D.9Capital transfers, receivable
D.9Capital transfers, payable (-)
B.10.1CHANGES IN NET WORTH DUE TO SAVING AND CAPITAL TRANSFERS
B.9NET LENDING (+)/NET BORROWING (-)
FNet acquisition of financial assetsIII.2



FINANCIAL ACCOUNT
FNet incurrence of liabilities
F.1Monetary gold and SDRs
F.2Currency and deposits
F.3Securities other than shares
F.4Loans
F.5Shares and other equity
F.6Insurance technical reserves
F.7Other accounts receivable/payable
K.3 through Other volume changes, total K.10 andIII.3.1.



OTHER CHANGES IN VOLUME OF ASSETS ACCOUNT
K.12
K.3Economic appearance of nonproduced assets
K.4Economic appearance of produced assets
K.5Natural growth of non-cultivated biological resources
K.6Economic disappearance of nonproduced assets
K.7Catastrophic losses
K.8Uncompensated seizures
K.9Other volume changes in nonfinancial assets n.e.c.
K.10Other volume changes in financial assets and liabilities n.e.c.
K.12Changes in classifications and structure
Of which
ANNonfinancial assets
An 1Produced assets
AN 2Nonproduced assets
AFFinancial assets/liabilities
B.10.2CHANGES IN NET WORTH DUE TO OTHER CHANGES IN VOLUME OF ASSETS
K.11Nominal holding gains/lossesIII.3.2



REVALUATION ACCOUNT
ANNonfinancial assets
AN.1Produced assets
AN.2Nonproduced assets
AFFinancial assets/liabilities
B.10.3CHANGES IN NET WORTH DUE TO NOMINAL HOLDING GAINS (+)/LOSSES (-)
INTEGRATED ECONOMIC ACCOUNTS—BALANCE SHEETS
ASSETS
AccountsTotalGoods and services (resources)S.2 Rest of worldS.1 Total economyS.15 Nonprofit institutions serving householdsS.14 HouseholdsS.13 General governmentS.12 Financial coporationsS.11 Nonfinacial corporations
IV.1



OPENING BALANCE SHEET
IV.2



CHANGES IN BALANCE SHEET
IV.3

CLOSING BALANCE SHEET
LIABILITIES
CodeTransactions and Balancing ItemsS.11 Nonfinancial corporationsS.12 Financial corporationsS.13 General governmentS.14 HouseholdsS.15 Nonprofit institutions serving householdsS.1 Total economyS.2 Rest of the worldGoods and services (uses)TotalAccounts
ANNonfinancial assetsIV.1



OPENING BALANCE SHEET
AN.1Produced assets
AN.2Nonproduced assets
AFFnancial assets/liabilities
B.90NET WORTH
Total changes in assetsIV.2



CHANGES IN BALANCE SHEET
ANNonfinancial assets
AN.1Produced assets
AN.2Nonproduced assets
AFFinancial assets/liabilities
B.10CHANGES IN NET WORTH, TOTAL
B.10.1SAVING AND CAPITAL TRANSFERS
B.10.2OTHER CHANGES IN VOLUME OF ASSETS
B.10.3NOMINAL HOLDING GAINS (+)/LOSSES (-)
AN.1Nonfinancial assetsIV.3



CLOSING BALANCE SHEET
AN.2Produced assets
AFNonproduced assets
Financial assets/liabilities
B.90NET WORTH

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