Introduction to the Conceptual Framework

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Introduction to the

Conceptual Framework

Workshop on the new

Balance of Payments and

International Investment

Position Statistics Manual –

BPM6

Beirut

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Scope of International Accounts

The International accounts for an economy summarize

the economic relationships between residents of that economy and the rest of the world. They comprise:

 The international investment position (IIP), the stock of

financial assets and liabilities compiled on a specific date;

 _{The balance of payments, a statement that systematically}

summarizes economic transactions for a specific time period; and

 The other changes in financial assets and liabilities account

covering other flows, such as valuation changes that

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Scope of an Economy

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Definition of the International

Investment Position

 The international investment position (IIP) is a

statistical statement that shows at a point in time the value of financial assets of residents of an economy comprised of claims on nonresidents and gold bullion held as reserve assets; and the liabilities of an

economy to nonresidents.

 The difference between the assets and liabilities is the

net position and represents either net claims on or net liabilities to the rest of the world.

 The consolidated balance sheet for the nation

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Definition of the International

Investment Position



The IIP relates to different points in time, and

has an opening value (beginning of the period)

and a closing value (or end of the period).



The integrated IIP statement reconciles the

opening and closing value of the IIP through

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Illustrative Example of the IIP



Suppose an investor purchases 10 units of

foreign bonds at a unit price of US$5 million.

Suppose at the time of the transaction, the

exchange rate between the U.S. dollar and the

domestic currency was US$1=1.2 domestic

currency units. Let us also assume that at the

beginning of the period the exchange rate was

US$1 = 1 domestic currency units. At the end of

the period, the price of the foreign bonds

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Illustrative Example of the IIP

Foreign

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Definition of the Balance of

Payments



The balance of payments is a statistical

statement in double entry format that

summarizes transactions in goods, services,

primary and secondary income, and

financial items between residents and

nonresidents. Since each transaction in the

balance of payments is recorded as

consisting of two entries of equal and

opposite sign, the sum of the entries is

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Accounting Convention for

International Accounts

 The accounting convention underlying the

international accounts derives from broad

bookkeeping principles. To understand the accounting system for international accounts, three bookkeeping principles can be distinguished:

 Vertical double-entry bookkeeping also known simply

as double-entry bookkeeping used in business accounting.

 Horizontal double-entry bookkeeping;

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Accounting Convention for

International Accounts



Vertical double entry

 Under a vertical double-entry bookkeeping, each

transaction leads to at least two entries,

traditionally referred to as a credit entry and a debit entry, in the books of the transactor. This principle ensures that the total of all credit entries and that of all debit entries for all transactions

are equal, thus permitting a check on the

consistency of accounts for a single unit. Vertical double-entry bookkeeping also ensures the

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Accounting Convention for

International Accounts



Horizontal double-entry

 This concept is useful for compiling accounts that

reflect the mutual economic relationships between different institutional units in a

consistent way. If a 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 consistency of recording for each transaction

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Accounting Convention for

International Accounts



Quadruple double-entry

The simultaneous application of both the vertical and horizontal double-entry bookkeeping results in a quadruple bookkeeping system underlying the recording in the national accounts and the

international accounts.

 It deals in a coherent way with multiple

transactors or groups of transactors each of which practices vertical double-entry bookkeeping.

 A single transaction between two counterparties

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Accounting Convention for

International Accounts



International accounts deal with interactions

among a multitude of units in parallel and thus

require special care from a consistency point of

view.



E.g. a liability of one unit is mirrored in a financial

asset of another unit. Consequently, they should

be identically valued, allocated in time, and

classified, to avoid inconsistencies in aggregating

data into regional or global totals.



Even though international accounts, show data for

one economy’s flows and positions with

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BOP of an Individual Economy Uses

Double Entry Accounting System

 The basic accounting convention for an economy’s

BOP statement is that every recorded transaction is represented by two entries with exactly equal values.

 Each transaction is reflected as a credit and a debit entry.  In conformity with business and national accounting, in the

balance of payments, the term:

 Credit is used to denote a reduction in assets or an

increase in liabilities, and

 Debit is used to denote a reduction in liabilities or an

increase in assets.

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The Compiling Economy Records

Credit (CR) entries for:



exports of goods



provision of services



provision of factors of production to

another economy



financial items reflecting a reduction in

the economy’s external assets, or

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The Compiling Economy Records

Debit entries (DR) for:



imports of goods,



acquisition of services, use of production

factors provided by another economy,



financial items reflecting an increase in

assets or a decrease in liabilities.



N.B. The financial account records net

acquisitions of assets and net incurrence of

liabilities but their interpretation in relation

to the rest of the BOP follows the

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Elaboration of the Definition of

the Balance of Payments

The balance of payments registers transactions

between an economy’s residents and residents of

the rest of the world.

 A transaction is an interaction between two institutional

units that occur by mutual agreement or through the operation of the law and involves an exchange of value.

 Mutual agreement means that there is prior knowledge and

consent by the institutional units.

 Transactions imposed by force of law are applicable mainly

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Elaboration of the Definition of

the Balance of Payments

 Although taxes or penalties are imposed on individual

units by administrative or judicial decisions, there is collective recognition and acceptance by the

community to pay taxes and penalties.

 Transactions reflect the creation, transformation,

exchange, transfer, or extinction of economic value.

 By the nature of international accounts, internal (i.e.,

intra-unit) transactions are not recorded. However, following the residency criteria, transactions between a branch and its parent enterprise are shown as

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Elaboration of the Definition of

the Balance of Payments

 When a notional enterprise is created for holding land

and associated buildings by nonresident owners,

transactions between the nonresident owners and the notional enterprise are considered interactions between institutional units.

 Transactions between two resident institutional units in a

transferable external asset are domestic transactions and therefore excluded from the coverage of the BOP.

 The sectoral change in the holdings of external assets

resulting from domestic transactions are nonetheless shown in the IIP. The changes in positions are

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Elaboration of the Definition of

the Balance of Payments

 Most transaction can be clearly observed as the way they

take place also reflects the underlying economic

relationship. However, some transactions (as they appear to the institutional units) do not reflect the underlying

economic relationships, hence need to be rearranged so that the accounts portray economic reality.

 Rerouting (e.g. social security contributions paid by

employers directly to a retirement scheme) and partioning (e.g. interest received from or paid to financial

intermediaries) are the two types of rearrangements employed in the international accounts.

 Transactions of agents―transactions in the underlying

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Coverage of the Balance of

Payments



Many international transactions

recorded in the BOP do not involve

payments of money.



The inclusion of transactions other

than those involving money payments

constitute the principal difference

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Categories of Transactions

Exchanges: provision and acquisition of

economic values is two-sided.



Exchanges of goods and services for

financial items.



Payments for, or receipt of primary income

on, the factors of production.



Barter (exchange of goods and services

for other goods and services).



Exchanges of financial items for other

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Categories of Transactions



Secondary income and capital transfers:

Transactions involving secondary income

and capital transfers differ from exchanges

in that one transactor provides an economic

value to another transactor but does not

receive an equivalent value in return.



The lack of economic value on the one side

must be balanced by an entry referred to in

BOP and national accounts as secondary

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Imputation of Transactions



Imputation of transactions refers to

constructing entries in the accounts when no

separate transactions are identified by the

parties involved. As a general rule transactions

are to be imputed only in specific cases:



Retained earnings of direct investment

enterprises are attributed to direct investors as

if the retained earnings had been distributed in

proportion to direct investors’ ownership of the

equity and then reinvested by them in the

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Imputation of Transactions



Investment income earned on technical

reserves held by insurance corporations is

deemed to be payable to policyholders who are

then deemed to pay this income back to

insurance corporations as premium

supplements even though in terms of actual

cash flows the property income is retained by

the insurance corporations.



Retained earnings of investment funds are

treated as if they were distributed to

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