Balance Of Payments Statistics By Tarun Das

Official Economic Statistics by Tarun Das

Lectures on Balance of Payments Statistics (BOP) _______________________________________________ _

Professor Tarun Das1

UN Statistical Institute for Asia and Pacific Chiba, Japan 20-24 August 2007

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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 [email protected]/ [email protected]

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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 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15

Analytical framework BOP Accounting Principals Flows and Positions Accounting System Current and Capital Account Time of Recording of Flows Accrual Accounting Valuation Aggregation and Netting Symmetry of Reporting Derived Measures Major Classifications of BOP Balance of Payments: Standard Components BOP Workout Session on Three Gap Model 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.

2. 3.

Develop a comprehensive understanding of the basic concepts, analytical framework, database, methodology, uses, applications and limitations of economic statistics. Develop skills and capabilities for analytical presentation, networking and teamwork through group workout sessions. 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 PaymentsBasic 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 (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

(1) (2) (3) (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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Official Economic Statistics by Tarun Das 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 Where TB = trade balance SIB = service and income balance TRANB = current transfer balance

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(8)

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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Official Economic Statistics by Tarun Das 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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Official Economic Statistics by Tarun Das 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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Official Economic Statistics by Tarun Das 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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Official Economic Statistics by Tarun Das 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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Official Economic Statistics by Tarun Das 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 13

Official Economic Statistics by Tarun Das 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. 14

Official Economic Statistics by Tarun Das

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 15

Official Economic Statistics by Tarun Das 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. 16

Official Economic Statistics by Tarun Das

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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Official Economic Statistics by Tarun Das 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. 18

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 20

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.

21

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.

22

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-àvis 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

23

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

24

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.

25

Official Economic Statistics by Tarun Das Balance of Payments: Standard Components 1. Current Account A. Goods and services a. Goods 1. General merchandise 2. Goods for processing 3. Repairs on goods 4. Goods procured in ports by carriers 5. Nonmonetary gold 5.1 Held as a store of value 5.2 Others b. Services 1. Transportation 1.1 Sea transport 1.1.1 Passenger 1.1.2 Freight 1.1.3 Other 1.2 Air transport 1.2.1 Passenger 1.2.2 Freight 1.2.3 Other 1.3 Other transport 1.3.1 Passenger 1.3.2 Freight 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.

B. Income 1. Compensation of employees 2. Investment income 2.1 Direct investment 2.1.1 Income on equity 2.1.1.1 Dividends and distributed branch profits*** 2.1.1.2 Reinvested earnings and undistributed branch profits*** 2.1.2 Income on debt (interest) 2.2 Portfolio investment 2.2.1 Income on equity (dividends) 2.2.2 Income on debt (interest) 2.2.2.1 Bonds and notes 2.2.2.2 Money market instruments and financial derivatives 2.3 Other investment C. Current transfers 1. General government 2. Other sectors 2.1 Workers’ remittances 2.2 Other transfers

26

Official Economic Statistics by Tarun Das

2. Capital and Financial Account A. Capital account 1. Capital transfers 1.1 General government 1.1.1 Debt forgiveness 1.1.2 Other 1.2 Other sectors 1.2.1 Migrants’ transfers 1.2.2 Debt forgiveness 1.2.3 Other 2. Acquisition/disposal of nonproduced, nonfinancial assets 1. B. Financial account 1. Direct investment 1.1 Abroad 1.1.1 Equity capital 1.1.1.1 Claims on affiliated enterprises 1.1.1.2 Liabilities to affiliated enterprises 1.1.2 Reinvested earnings 1.1.3 Other capital 1.1.3.1 Claims on affiliated enterprises 1.1.3.2 Liabilities to affiliated enterprises 1.2 In reporting economy 1.2.1 Equity capital 1.2.1.1 Claims on direct investors 1.2.1.2 Liabilities to direct investors 1.2.2 Reinvested earnings 1.2.3 Other capital 1.2.3.1 Claims on direct investors 1.2.3.2 Liabilities to direct investors 2. Portfolio investment 2.1 Assets 2.1.1 Equity securities 2.1.1.1 Monetary authorities 2.1.1.2 General government 2.1.1.3 Banks 2.1.1.4 Other sectors 2.1.2 Debt securities 2.1.2.1 Bonds and notes 2.1.2.1.1 Monetary authorities 2.1.2.1.2 General government 2.1.2.1.3 Banks 2.1.2.1.4 Other sectors 2.1.2.2 Money market instruments 2.1.2.2.1 Monetary authorities 2.1.2.2.2 General government 2.1.2.2.3 Banks 2.1.2.2.4 Other sectors

2.1.2.3 Financial derivatives 2.1.2.3.1 Monetary authorities 2.1.2.3.2 General government 2.1.2.3.3 Banks 2.1.2.3.4 Other sectors 2.2 Liabilities 2.2.1 Equity securities 2.2.1.1 Banks 2.2.1.2 Other sectors 2.2.2 Debt securities 2.2.2.1 Bonds and notes 2.2.2.1.1 Monetary authorities 2.2.2.1.2 General government 2.2.2.1.3 Banks 2.2.2.1.4 Other sectors 2.2.2.2 Money market instruments 2.2.2.2.1 Monetary authorities 2.2.2.2.2 General government 2.2.2.2.3 Banks 2.2.2.2.4 Other sectors 2.2.2.3 Financial derivatives 2.2.2.3.1 Banks 2.2.2.3.2 Other sectors 3. Other investment 3.1 Assets 3.1.1 Trade credits 3.1.1.1 General government 3.1.1.1.1 Long-term 3.1.1.1.2 Short-term 3.1.1.2 Other sectors 3.1.1.2.1 Long-term 3.1.1.2.2 Short-term 3.1.2 Loans 3.1.2.1 Monetary authorities 3.1.2.1.1 Long-term 3.1.2.1.2 Short-term 3.1.2.2 General government 3.1.2.2.1 Long-term 3.1.2.2.2 Short-term 3.1.2.3 Banks 3.1.2.3.1 Long-term 3.1.2.3.2 Short -term 3.1.2.4 Other sectors 3.1.2.4.1 Long-term 3.1.2.4.2 Short-term

1.

27

Official Economic Statistics by Tarun Das

Balance of Payments: Standard Components Capital and Financial Account 3.1.3 Currency and deposits 3.1.3.1 Monetary authorities 3.1.3.2 General government 3.1.3.3 Banks 3.1.3.4 Other sectors 3.1.4 Other assets 3.1.4.1 Monetary authorities 3.1.4.1.1 Long-term 3.1.4.1.2 Short-term 3.1.4.2 General government 3.1.4.2.1 Long-term 3.1.4.2.2 Short-term 3.1.4.3 Banks credits 3.1.4.3.1 Long-term 3.1.4.3.2 Short-term 3.1.4.4 Other sectors 3.1.4.4.1 Long-term 3.1.4.4.2 Short-term 3.2 Liabilities 3.2.1 Trade credits 3.2.1.1 General government 3.2.1.1.1 Long-term 3.2.1.1.2 Short-term 3.2.1.2 Other sectors 3.2.1.2.1 Long-term 3.2.1.2.2 Short-term 3.2.2 Loans 3.2.2.1 Monetary authorities 3.2.2.1.1 Use of Fund credit and loans from the Fund 3.2.2.1.2 Other long-term 3.2.2.1.3 Short-term 3.2.2.2 General government 3.2.2.2.1 Long-term 3.2.2.2.2 Short-term 3.2.2.3 Banks 3.2.2.3.1 Long-term 3.2.2.3.2 Short-term 3.2.2.4 Other sectors 3.2.2.4.1 Long-term 3.2.2.4.2 Short-term 3.2.3 Currency and deposits 3.2.3.1 Monetary authorities 3.2.3.2 Banks 3.2.4 Other liabilities 3.2.4.1 Monetary authorities 3.2.4.1.1 Long-term 3.2.4.1.2 Short-term 3.2.4.2 General government 3.2.4.2.1 Long-term 3.2.4.2.2 Short-term

3.2.4.3 Banks 3.2.4.3.1 Long-term 3.2.4.3.2 Short-term 3.2.4.4 Other sectors 3.2.4.4.1 Long-term 3.2.4.4.2 Short-term 4. Reserve assets 4.1 Monetary gold 4.2 Special drawing rights 4.3 Reserve position in the Fund 4.4 Foreign exchange 4.4.1 Currency and deposits 4.4.1.1 With monetary authorities 4.4.1.2 With banks 4.4.2 Securities 4.4.2.1 Equities 4.4.2.2 Bonds and notes 4.4.2.3 Money market instruments/ derivatives 4.5 Other claims

Selected Supplementary Information 1. Liabilities for foreign authorities’ reserves 1.1 Bonds and other securities 1.2 Deposits 1.3 Other liabilities 2. Exceptional financing transactions 2.1 Transfers 2.1.1 Debt forgiveness 2.1.2 Other intergovernmental grants 2.1.3 Grants received from Fund subsidy A/C 2.2 Direct investment 2.2.1 Investment associated with debt 2.2.2 Other 2.3 Portfolio investment: 2.4 Other investment—liabilities* 2.4.1 Drawings on new loans by authorities 2.4.2 Rescheduling of existing debt 2.4.3 Accumulation of arrears 2.4.3.1 Principal on short-term debt 2.4.3.2 Principal on long-term debt 2.4.3.3 Original interest 2.4.3.4 Penalty interest 2.4.4 Repayments of arrears 2.4.4.1 Principal 2.4.4.2 Interest 2.4.5 Rescheduling of arrears 2.4.5.1 Principal 2.4.5.2 Interest

28

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 3.1 Portfolio investment income 3.1.1 Monetary authorities 3.1.2 General government 3.1.3 Banks 3.1.4 Other sectors 3.2 Other (than direct investment) income 3.2.1 Monetary authorities 3.2.2 General government 3.2.3 Banks 3.2.4 Other sectors 3.3 Other investment (liabilities) 3.3.1 Drawings on long-term trade credits 3.3.2 Repayments of long-term trade credits 3.3.3 Drawings on long-term loans 3.3.4 Repayments of long-term loans

4. Services sub-items 4.1 Travel (personal) 4.1.1 Health-related 4.1.2 Education-related 4.1.3 Other 4.2 Miscellaneous business, professional, and technical services 4.2.1 Legal, accounting, management consulting, and public relations 4.2.2 Advertising, market research, and public opinion polling 4.2.3 Research and development 4.2.4 Architectural, engineering, and other technical services 4.2.5 Agricultural, mining, and on-site processing 4.2.6 Other

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 29

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 30

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

31

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

32

Official Economic Statistics by Tarun Das 2. The following data relate to the Balance of Payments Situation of India during 2005-06 Items 1 Merchandise Exports f.o.b. 2 Merchandise Imports c.i.f. 3. Net travel services 4. Net transportation services 5.Net software and other non-factor services 6. Inward FDI flows 7. Outward FDI flows 8. Net Portfolio investment 9.Factor incomes, net 10.Private transfers, net 11.Official transfers, net 12.External assistance, net 13. Ext. comm. borrowing, net 14. Short-term credit, net 15. Banking capital, net 16. Other capital flows, net 17. Foreign exchange reserves at the beginning of the year

US$ Billion

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

104.8 156.3 1.4 -1.2 22 7.7 2.0 12.5 -5.6 24.1 0.2 1.4 1.6 1.7 1.4 1.4 130.9

Official Economic Statistics by Tarun Das

Exercise-3 India's Balance of Payments (US$ Million) Items 1 Merchandise Exports Merchandise Imports Software services receipts Software services payments

200607 2 127,090 191,995 31,300

Business services receipts Business services payments Transfers receipts Transfers payments Foreign Direct Investment, net Portfolio Investment, net Investment income receipts Investment income payments External Assistance, net

2,502 31,065 28,951 28,861 1,446 8,437 7,062 8,574 12,856 1,770

Ext.commercial borrowing, net NRI Deposits, net Short-term Credits, net Other capital inflows Travel receipts Travel payments Transportation receipts Transportation payments Insurance receipts Insurance payments Government n.i.e. receipts Government n.i.e. payments Employee's compensation, net

16,084 3,895 3,275 4,421 9,423 7,235 8,069 8,857 1,200 641 273 417 -564

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

162650 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$ Million 1 2 2.1 2.1.1

Goods balance Net invisibles Invisibles receipts Services

2.1.2

Income

2.1.3

Transfers

2.2 2.2.1 2.2.2 2.2.3 3 4 5 6

Invisibles payments Services Income Transfers Current account balance Foreign investment Non-debt capital flows Other capital flows

7 8 9 10

Total capital flows Net balance of payments Build up of foreign exchange End-year foreign.exch.reserves

35

As % of GDP

Official Economic Statistics by Tarun Das BOP Workout Session -1

Items 1.GNP 2.Public Expend (PubExp) 3.Private Expend (PvtExp) 4.Public Invest (PubInv) 5.Private Invest (PvtInv) 6.Public savings (PubSav) 7.Private savings (PvtSav) 8.Taxes less subsidies (T) 9.Exports of goods & services (X) 10.Imports of goods and services (M)

(Rupees billion) 27459 3121 17353 1802 5680 284 7695 2402 4078 4434

Given above data, estimate the following: GDP at current market prices (GDP) = PubEXP+PvtEXP+PubINV+PvtINV+X-M Net factor income from abroad (NFI) = GNP - GDP Current account balance (CAB) = X - M + NFI Private Investment-Savings gap Public Investment-Savings gap Overall Investment-Savings gap Private account balance (PVTAB) = CAB, verified Public account balance (PUBAB) PVTAB + PUBAB = CAB, verified

36

27600 -141 -497 -2015 1518 -497 2024 -2521 -497

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 -64,905 55,296 118,201 81,330

As % of GDP -7.3 6.2 13.2 9.1

1 2 2.1 2.1.1

Goods balance Net invisibles Invisibles receipts Services

2.1.2

Income

8,010

0.9

2.1.3

Transfers

28,861

3.2

2.2 2.2.1 2.2.2 2.2.3 3 4 5

Invisibles paymets Services Income Transfers Currence account balance Foreign investment Non-debt capital flows

62,905 48,603 12,856 1,446 -9,609 15,499

7.0 5.4 1.4 0.2 -1.1 1.7 1.7

6

Other capital flows

7

Total capital flows

8

Net balance of payments

9

Build up of foreign exchange

10

15,499 29,445 44,944 35,335 35,335 197,985

End-year foreign.exch.reserves

37

3.3 5.0 4.0 4.0 22.2

Official Economic Statistics by Tarun Das

38