Use of Trade Statistics for National Accounts

1. Chapter 5 Use of external trade statistics for national accounts EN/ADM/2014/Pres/08 Clementina Ivan-Ungureanu Expert Group Meeting on the Use of Administrative Data in National Accounts 23-27 June 2014 Kigali, Rwanda

2. Content of the presentation • Introduction • Accounting principles and concepts • The international accounts • Bridge table for the RoW accounts

3. Introduction • The SNA measures the activity within the domestic economy; in addition to it, the SNA records the exchanges between the domestic economy and the rest of the world (RoW) sector. • The main data source that describes the international transactions used for building accounts for the RoW sector is the BoPs. • The 2008 SNA and BPM 6th edition

4. Introduction • Definition The balance of payments is a statistical statement that summarizes transactions between residents and nonresidents during a period. It consists of the goods and services account, the primary income account, the secondary income account, the capital account, and the financial account. Source: “Balance of Payments and Investment Position Manual” 6th edition (BPM6), chapter 2 : Overview of the Framework.

5. Accounting principles and concepts- economic territory • Economic territory = area under the effective economic control of a single government. The term economic territory refers to: • The area (geographic territory) under the effective administration and economic control of a single government; • Any free zones, including bonded warehouses and factories under customs control;

6. Accounting principles and concepts- economic territory (cont.) • The national air-space, territorial waters and the continental shelf lying in international waters, over which the country enjoys exclusive rights; • Territorial enclaves (i.e. geographic territories situated in the rest of the world and used, under international treaties or agreements between States, by general government agencies of the country (embassies, consulates, military bases, scientific bases, etc.)

7. Accounting principles and concepts- economic territory (cont.) • Deposits of oil, natural gas, etc. in international waters outside the continental shelf of the country, worked by units resident in the territory as defined in the preceding sub-paragraphs

8. Accounting principles and concepts- residence • Residence • The primary criterion for deciding whether a transaction belongs in the BoPs is the residency of the two actors involved in the transaction. • Definition The residence of each institutional unit is the economic territory with which it has the strongest connection, expressed as its center of predominant economic interest. Source: “Balance of Payment and Investment Position Manual”, 6th edition, chapter 4: Economic Territory, Units, Institutional Sectors and Residence

9. Accounting principles and concepts- residence ( cont.) 1. A corporation or quasi-corporation is considered as resident if it maintains at least one establishment where it plans to operate over a long period of time, e.g. at least one year. 2. A household is resident when it maintains a dwelling that the members of the household treat and use as their principal residence.

10. Accounting principles and concepts- residence ( cont.) • An institutional unit is resident: • some location, dwelling, place of production, or other premises on which or from which the unit engages and intends to continue engaging, either indefinitely or over a finite but long period of time, in economic activities and transactions on a significant scale. • Each institutional unit is a resident ofone and only one economic territory determined byits center of predominant economic interest.

11. Accounting principles and concepts- residence ( cont.) • When a corporation, or unincorporated enterprise, maintains a branch, office or production site in another country in order to engage in production over a long period of time , but without creating a subsidiary corporation for the purpose, the branch, office or site is considered to be a quasi-corporation resident in the country in which it is located;

12. Accounting principles and concepts- residence ( cont.) • Owners of land, buildings and immovable structures in the economic territory of a country, or units holding long leases on either, are deemed always to have a centre of economic interest in that country, even if they do not engage in other economic activities or transactions in the country. All land and buildings are therefore owned by residents. • Extraction of subsoil resources can only be undertaken by resident institutional units. An enterprise that will undertake extraction is deemed to become resident when the requisite licences or leases are issued, if not before;

13. Accounting principles and concepts- residence ( cont.) Special cases for considering households still resident: - Students continue to be resident in the territory in which they were resident prior to studying abroad; - Patients going abroad for the purpose of medical treatment; - Crews of ships, aircraft, oil rigs, space stations etc. that operate outside a territory or across several territories;

14. Accounting principles and concepts- residence ( cont.) - Diplomats, military personnel and other civil servants employed abroad in government enclaves; - Cross-border workers, who maintain their principal dwelling in the national territory; - Refugees, when they do not change their home territory regardless of their legal status or intention to return.

15. Accounting principles and concepts- institutional units • The concept of an institutional unit is the same in the 2008 SNA and BPM6 Definition: An institutional unit is an economic entity that is capable, in its own right, of owning assets, incurring liabilities and engaging in economic activities and in transactions with other entities.

16. Accounting principles and concepts- institutional units (cont.) • Classification by industry, called ‘functional classification’ represents the production process and the flows experienced by goods and services produced in the economy. • Classification by institutional sector where the units are defined according to their economic behavior, economic function and economic objectives.

17. Accounting principles and concepts- ownership • The current account, which records transactions in goods and services, factor income flows and transfers, is in principle compiled when ownership change takes place or service is rendered. • There are no longer any exceptions to the recording basis of the change of economic ownership. However, there is a different presentation in the case of merchanting.

18. Accounting principles and concepts- Records • Principle of double-entry book-keeping : every transaction involves a credit and debit entry. • Credit = a positive sign and cover the exports of goods and services, investment income receipts, and transfers received • Debit = a negative sign, include imports of goods and services, investment income payments and transfer payments; acquisitions of foreign assets and payments of liabilities are debit entries and represent outflows of funds.

19. Accounting principles and concepts- Records ( cont.) • The international accounts for an economy are to be compiled on a vertical double-entry bookkeeping basis from the perspective of the residents of that economy. • The total of all credit entries and that of all debit entries for all transactions are equal

20. Accounting principles and concepts- time of recording of flows • The accrual basis is used in the international accounts as well as in national accounts. • Based on it, the flows are recorded at the time when economic value is created, transformed, exchanged, transferred, or extinguished.

21. Accounting principles and concepts- valuation • The transactions in BoPs are valued at market prices; • Market prices for transactions are defined as amounts of money that willing buyers pay to acquire something from willing sellers.

22. International accounts • International accounts cover: • current accounts: • goods and services account, • the primary income account and • the secondary income account 2. accumulation accounts and 3. balance sheets.

23. Current accounts:Goods and services account • Records external transactions in goods and services. The goal of this account is the point at which goods and services are exchanged between a resident and a nonresident • International merchandise trade statistics (IMTS) are the main data source for general merchandise in the goods and services account. The international standards for merchandise trade data are set out in United Nations International merchandise trade statistics: Concepts and Definitions (2010) closely linked to the BoPsM6.

24. Goods and services account (cont.) • Adjustments to source data may be needed to accounts for coverage, timing, valuation, and classification that do not meet balance of payments guidelines. • Type of adjustments: • IMTS use a CIF-type valuation for imports, while the BoPs use a uniform FOB valuation for both exports and imports • goods sent abroad for processing without a change of ownership are not covered in the goods account ; the manufacturing services performed on these goods by a processor in another processing economy are covered in its services account

25. Current accounts Primary income account • The primary income account shows the amounts receivable and payable abroad in return for providing / obtaining use of labour, financial resources or natural resources to / from non-residents. • Types: • Income associated with the production process: (i)compensation of employees, which represents the income for the contribution of labor inputs to the production process; (ii) taxes and subsidies on products and production, which are related to production, too; • Income associated with the ownership of financial and other non-produced assets as: (i) property income which is the return for providing financial assets and renting natural resources;(ii) investment income, the return for providing financial assets, which consists of dividends and withdrawals from income of quasi corporations, reinvested earnings, and interest.

26. Current accounts Secondary income account • The secondary income account records current transfers between residents and non-residents. Current transfers are transactions in which real or financial resources that are likely to be consumed immediately or shortly are provided without the receipt of equivalent economic values in return. • Examples: workers’ remittances, donations, official assistance and pensions.

27. (b) Capital and financial account • The capital account in the international accounts shows (i) capital transfers receivable and payable between residents and nonresidents and (ii) the acquisition and disposal of non-produced, non-financial assets between residents and nonresidents • Measures external transactions in capital transfers, and the acquisition and disposal of non-produced, non-financial assets (such as trademarks and brand names).

28. (b) Capital and financial account (cont.) • The financial account records transactions in financial assets and liabilities between residents and non-residents. It shows how an economy's external transactions are financed. Transactions in the financial account are classified by function (i.e. the purpose of the investment) into: • direct investment, • portfolio investment, • financial derivatives, and • other investment and reserve assets

29. RoW account and international accounts 1. BoPs Credits = SNA resources BoPs Debits = SNA uses 2. RoW are presented from the point of view of the nonresident units BoPs presents the same transactions from the point of view of resident units 3. BoPs includes a balancing item for each account showing the excess of credits over debits

30. RoW account and international accounts (cont.) 4. BoPs - goods are presented at an aggregated level while services are covered in detail SNA is strictly consistent with CPC 5. BoPs- primary income account includes: the compensation of employees, property income, payments of taxes on production payable by a resident to another government and subsidy receivable by a resident from another government

31. RoWs account and international accounts (cont.) 6. The entries in the secondary income account of BoPs are mainly current transfers and correspond exactly to those in the secondary distribution of income account in the 2008 SNA.

32. RoW accounts • Definition The rest of the world consists of all non-resident institutional units that enter into transactions with resident units, or have other economic links with resident units. Source: The 2008 SNA, European Commission, IMF, OECD, UN, World Bank, 2009, Chapter 4: Institutional units and sectors, point 4.172.

41. Points for discussions • Use of BoPs for NA estimation – countries experience • Adjustments for unrecorded international trade • Goods sent abroad for processing • Merchanting