Balance of Payments Manual

Chapter

IX. Structure and Characteristics of the Current Account

Author(s):
International Monetary Fund
Published Date:
November 2005
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182. The standard components and coverage of the current account and the capital and financial account are discussed in Chapter 8; coverage of the current account is referred to in paragraphs 152 through 171. As presented in this Manual, the current account is in concordance with SNA coverage of external accounts for goods and services, primary incomes, and current transfers. (See Chapter 3.) Because the net balance on the current account constitutes an integral part of the measure of an economy’s saving, the net balance can be viewed as one meaningful indicator of an economy’s saving and spending behavior. To the extent that national saving exceeds or falls short of net domestic investment (net capital formation), the net balance on current transactions (current external balance in the SNA), on net capital transfers, and on acquisition or disposal of nonproduced, nonfinancial assets represents the amount of an economy’s net foreign investment or net lending or borrowing vis-à-vis the rest of the world.

Characteristics and Classification

183. As presented in this Manual, the structure of the current account contains most of the components traditionally included. The structure of the account has, however, significantly altered—with regard to major classifications and specific components—from that presented in the fourth edition. The structure remains in accord with the considerations stated in Chapter 8, paragraph 143.

184. Goods usually comprises the largest category of transactions that, for the most part, involve changes of ownership between residents and nonresidents. The scope of this classification has been expanded from that in the fourth edition to include—in addition to general merchandise, which covers most movable goods—(i) the movement of goods for processing (when no change of ownership occurs); (ii) the value of repairs on goods (not the value of the movement of goods undergoing repair); and (iii) goods procured in ports by nonresident carriers. In addition, nonmonetary gold is specified under goods as a sub-item to be identified, if feasible, as gold to be held as a store of value or as other (industrial) gold. Further detailed subdivisions of goods (commodity end-use categories, for example) often are desirable for analytical purposes and are provided in the balance of payments publications of many countries.

185. Services is the second major category of the current account. Both the production of, and international trade in, services differ from production and trade related to goods. International trade in goods is conducted separately from production. For example, goods may be produced in one economy and subsequently delivered to residents, who may or may not be known when production occurs, of another economy. In contrast, the production of a service is linked to an arrangement made—between a particular producer in one economy and a particular consumer or group of consumers in another—prior to the time that production occurs. Thus, international trade in services is closely linked with international production of services, as the production process itself involves a resident and a nonresident. Nonetheless, the boundary between goods and services is sometimes blurred; items classified as goods may include some element of services and vice versa.

186. As presented in this Manual, services covers traditional items (such as travel and transportation) that were included in the fourth edition presentation and items (such as communications, financial and computer services, royalties and license fees, and many types of other business services) that are becoming increasingly important in international transactions. In contrast to the treatment in the fourth edition, in this Manual, transactions in services are clearly separated from income transactions. This treatment is in accordance with the SNA; allows, to the extent practicable, for linkage with the CPC; and better serves to facilitate international negotiations concerning issues pertaining to services.

187. Transportation (the first item listed among services) comprises freight services, together with supporting and auxiliary services, by all modes of transportation for the movement of goods and the international carriage of passengers. (Transportation does not cover the carriage, within an economy, of nonresident passengers by resident carriers.) There is a close interrelationship between freight services and goods and, in some instances, such services may not be subject to clear distinctions from goods. There may be analytical interest in both separate and inclusive treatment of the two for purposes of various domestic and international comparisons. Passenger transportation is closely linked with travel, in which some related services are included. Transportation subsumes, with the exception of freight insurance, the shipment and other transportation items as presented in the fourth edition of the Manual. Freight insurance is now included with insurance services. (See Chapter 13, paragraphs 255 through 257.) The new grouping should facilitate international comparisons and is in accord with other statistical systems.

188. Travel differs from other components of services in that it is a demand-oriented activity. The traveler (consumer) moves to the location of the economy that provides the goods and services desired. Travel is subdivided into two major components: business and personal.

189. Treated as part of a residual item in the fourth edition of the Manual, other services are accorded increased prominence in the fifth edition. Both the structure and classification of the specific other services are related to the importance attached to these items by international bodies [e.g. in the General Agreement on Tariffs and Trade (GATT)] as a basis for negotiations and by analysts involved with domestic and international aspects of trade, production, and related issues. Although the significance of these services varies widely in the international accounts of countries, the structure provides a ready reference for items likely to assume increasing importance in international transactions.

190. Income comprises compensation of employees and investment income (covering direct investment income and other dividends and interest). This treatment of income as a separate component of the current account accords with that in the SNA; tightens the links between income and financial account flows and between the balance of payments and the international investment position; and increases the analytical usefulness of the international accounts.

191. Current transfers are grouped separately from goods, services, and income because the former are generally conceived as showing distinctive characteristics. The distinction between real resources and transfers, however, may sometimes be rather arbitrary. For example, receipts by an economy from certain individuals working abroad are classified either as current transfers or as compensation of employees, the classification depends on how long the individuals have stayed in the countries where they are working. The Manual and the SNA define a current transfer in the same way, and the disaggregation of transfers into current transfers and capital transfers—a departure from previous editions—aligns with SNA treatment and with various analytical presentations. This change removes inconsistencies in the use and meaning of the term current as it concerns transactions and balancing items in the Manual and the SNA. (The distinction between current transfers and capital transfers is discussed in Chapter 15.)

Gross Recording, Valuation, and Time of Recording

192. In the current account, gross outflows from and gross inflows to the economy should, in principle, be recorded as credits and debits, respectively. Individual components are defined in such a way that entries would be made on a gross basis. This emphasis on gross recording in the current account stems from the fact that credit and debit entries for many specific types of current transactions are seldom related in a causal way. For example, even though provision and acquisition of travel services are included in the single component for travel, provision of travel services has, from an economic standpoint, little connection with the acquisition by the same economy of such services. Moreover, gross figures are utilized in contexts other than the analysis of balance of payments developments. In general, gross transactions recorded in the current account are often indicators of the relative importance of particular items within an economy and of the relative importance of various economies in international transactions. Gross transactions recorded in the current account are therefore used to compare economies and to provide weights for aggregation. Also, gross figures provide a better basis for analysis of changes in net balances. Two specific applications important for the IMF represent the use of gross figures: (i) Valuation of the SDR is based on a basket of currencies selected in consideration of the issuing countries’ shares in world exports of goods and services and weighted in broad proportion to those shares, (ii) The relative size of an IMF member’s gross transactions in the current account is one factor used to determine the relative quota of a Fund member.

193. Exceptions to the general rule of gross recording are sometimes made because of the practical difficulty of collecting certain information on a gross basis (e.g., some transportation services) or because of netting procedures used to derive certain estimates. These considerations are discussed in appropriate chapters. Nonetheless, gross recording remains the principle for recording transactions in the current account and, in general, is more useful than net recording for balance of payments and other analyses.

194. Principles and practices dealing with valuation and time of recording for current account transactions are discussed in chapters 5 and 6 respectively, and in chapters 10 through 15.

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