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Foreign transactions in the national income and product accounts: an overview.

Foreign Transactions in the National Income and Product Accounts: An Overview

THIS article presents the conceptual basis and framework of foreign transactions in the U.S. national income and product accounts (NIPA's), describes the presentation of the estimates, and summarizes the sources and methods used to prepare them.

Conceptual Basis and Framework

As described in "An Introduction to National Economic Accounting" in the March 1985 SURVEY OF CURRENT BUSINESS, the national economic accounts can be viewed as aggregations of accounts belonging to the individual transactors in the economy. The basic approach used in national economic accounting is to group economic transactors into sectors and to set up uniform types of accounts that show the broad categories of economic transactions in which the sectors engage. Four sectors are commonly distinguished: Business, household, government, and foreign. For each sector, a set of three accounts is created: A production account, which records the production attributable to that sector; an appropriation account, which records the sources of the sector's income, its current outlays, and its saving; and a saving-investment account, which records the sector's gross saving, net increase in assets, and net increase in liabilities. Taken together, these sector accounts constitute a double-entry system in which an outlay recorded in one account for one sector is also recorded as a receipt in another account, either for the same sector or for another sector.

The NIPA's, which are designed to display the value and composition of national output and the distribution of incomes generated in its production, are a configuration of the sector accounts just described. In summary form, they consist five accounts: (1) The national income and product (NIP) account, which is a consolidation of the four sector production accounts and the business appropriation account; (2) the personal income and outlay account, which is the household appropriation account; (3) the government receipts and expenditures account, which is the government appropriation account; (4) the foreign transactions account, which is a consolidation of the foreign appropriation account and the foreign saving-investment account; and (5) the gross saving and investment account, which is a consolidation of the saving-investment accounts of the business, household, and government sectors. The five accounts, with entries for 1985, are shown in table 1. (The NIPA estimates in tables 1,2,3, and 5 are those shown in the July 1986 issue of the SURVEY OF CURRENT BUSINESS. The balance of payments estimates in tables 3 and 5 are those shown in the June 1986 SURVEY.)

Recording of foreign transactions in the NIPA's

Each entry in the foreign transactions account, shown as account 4, has a counterentry in one of the other accounts. (The numbers is parentheses following the entries identify the counterentries in the other accounts.) The foreign transactions entries and their counterentries, which are shown in boldface in the discussion that follows, are defined later in the article.

The NIP account.--Exports of goods and services and imports of goods and services--and their difference, net exports of goods and services--enter the NIP account through the production accounts of the business and the foreign sectors. The business production account covers exports and imports of goods and non-factor services; the foreign production account covers exports and imports of factor services.

Business output is recorded in the business production account both in terms of goods and services (on the right side) and in terms of income payments and other costs arising from production (on the left side). Output in terms of goods and services is recorded as the sum of purchases by final users--business (on capital account), persons (households and the nonprofit institutions serving them), government, and foreigners--plus the change in business inventories. Because the value of imports is reflected in purchases by final users and inventory change, imports must be deducted to arrive at domestic output. This deduction is accomplished by recording imports as a negative entry in the business production account.

The foreign production account is shown in table 2 as the difference between two production accounts, one of which records output produced abroad by U.S. residents, and the other, output produced within the United States by foreigners. In the first account, the sale to foreigners of factor services is entered on the right side; incomes arising from these sales, which are paid to U.S. residents by foreigners--compensation of employees, dividends, undistributed corporate profits retained abroad by foreign affiliates of U.S. corporations, and interest--are entered on the left side. In the second account, the purchase from foreigners of factor services is entered on the right side; incomes arising from these purchases, which are paid by U.S. residents to foreigners--compensation of employees, dividends, undistributed corporate profits retained in the United States by foreign corporations, and interest--are entered on the left side. The difference between these two accounts is the NIPA foreign production account. Gross foreign product, called either product or income originating in the rest of the world, is measured by U.S. recipts of factor income from foreigners less U.S. payments of factor income to foreigners.

The consolidation of the foreign production account with the production accounts of the domestic sectors--households and government, as well as business--yields a measure of total output. This measure--gross national product (GNP)--represents the output produced by factors of production supplied by residents of the United States; it includes output produced abroad by U.S. residents, and it excludes that part of domestic output produced by factors of production supplied by foreigners. On the right side of the NIP account, the consolidation of the foreign production account with the business production account yields measures of total exports and total imports that include goods and both factor and nonfactor services. (In the presentation of the NIP account, the difference between exports and imports is shown as "net exports.") On the left side, the consolidation places the income payments and other costs arising from production on a national basis: Each income type consists of income of U.S. residents only, wherever the income is earned--that is, within the boundaries of the United States and abroad.

In order that the expenditure components in the NIP account provide the correct basis for establishing outlays and saving in each sector, the imports recorded in the business of production account include some that are not inputs to current U.S. production. For example, expenditures in foreign countries by

individuals traveling or working abroad are included in both imports and personal consumption expenditures to reflect the outlyas of U.S. households wherever they occur. Likewise, expenditures in foreign countries by U.S. Government installations abroad are included in both imports and government purchases to reflect U.S. Government outlays wherever they occur. For a similar reason, sales of used equipment to the United States by foreigners are included in both imports and gross private domestic fixed investment. In addition, sales of used equipment to foreigners by the United States are included both in exports and, as a deduction, in gross private domestic investment.

Personal income and outlay account.--In this account, personal transfer payments to foreigners (net), a component of personal outlays, are on the left side.

Government receipts and expenditures account.--In this account, both transfer payments to foreigners (net) and interest paid to foreigners are components of government expenditures on the left side.

Foreign transactions account.--This account records the transactions of foreigners with U.S. residents. Imports of goods and services, transfer payments from persons and government to foreigners (net), interest paid by government to foreigners, and net foreign investment sum to payments to foreigners, on the right side. Exports of goods and services and capital grants received by the United States (net) sum to receipts from foreigners, on the left side.

Gross saving and investment account.--In this account, net foreign investment is a component of gross investment, on the left side. Net foreign investment--the increase in U.S. claims on foreigners less the increase in U.S. liabilities to them--appears in this account because these claims and liabilities do not cancel in consolidation as they do when both parties are U.S. residents. Capital grants received by the United States (net) appear as a component of gross saving, on the right side.

Relation of the NIPA's to the balance of payments accounts

The NIPA foreign transactions account is esentially a condensed version of the balance of payments accounts for the United States, recast to show payments and receipts in T-account form. The balance of payments accounts (BPA's) record international economic transactions, that is, economic transactions between residents of the United States and residents of the rest of the world. Except for a few definitional and statistical differences, the BPA's provide the basis for the foreign transactions entries in the NIPA's.

Most international economic transactions involve the exchange of one good, service, or financial asset for another; thus, two entries--of opposite sign--are required to record the transaction. In the BPA's, the United States can be viewed as paying for its imports with exports of goods and services, with increases in U.S. liabilities to foreigners, or with decreases in U.S. claims on them. Similarly, the United States can be viewed as being paid for its exports with imports of goods and services, with increases in U.S. claims on foreigners, or with decreases in U.S. liabilities to them. When the transaction does not represent the exchange of one good, service, or financial asset for another, but a transfer for which no payment is required, the actual transfer is recorded as one entry and an imputed entry, of opposite sign, as another entry. These imputed entries, which are generally called unilateral transfers, maintain the inherent double-entry accounting balance.

Table 3, with entries for 1985, shows the derivation of the NIPA foreign transactions account from the BPA's. Panel A of table 3 shows international transactions in the summary BPA presentation, which is titled "U.S. International Transactions." Positive entries record the transfers of real resources and financial assets from U.S. residents to foreign residents: (1) Exports of goods and services (line 1), (2) decreases in U.S. assets abroad (line 6), and (3) increases in foreign assets in the United States (line 7). Negative entries record the transfer of real resources and financial assets from foreign residents to U.S. residents: (1) Imports of goods and services (line 2), (2) increases in U.S. assets abroad (line 6), and (3) decreases in foreign assets in the United States (line 7).

Unilateral transfers (the imputed entries) are recorded on three lines in panel A. On line 4, U.S. Government grants are recorded with a negative sign as entries that offset positive entries for exports of goods and services or transfers of financial assets to foreigners (decreases in U.S. assets abroad or increases in foreign assets in the United States) for which no payment is required. These grants are shown net because similar transfers to the U.S. Government from foreigners, recorded as positive entries, offset negative entries for imports or transfers of financial assets from foreigners (increases in U.S. assets abroad or decreases in foreign assets in the United States). In a similar manner, on line 5, imputed entries are recorded for remittances, pensions, and other transfers from U.S. residents to foreigners, again on a net basis. On line 8, allocations of special drawing rights, which are reserve assets received by the United States from the International Monetary Fund (IMF), are recorded with a positive sign as imputed entries; they offset negative entries for increases in U.S. assets abroad arising from the IMF allocations.

The last numbered line in panel A shows the statistical discrepancy (line 9). It is the sum of the other entries, with sign reversed, so that the total of all the entries in the account is zero; the statistical discrepancy is the sum of errors and omissions in recording the other transactions in the account.

The addendum to the panel is the balance on current account, which can be derived either as the sum of entries for exports, imports, and unilateral transfers or, with sign reversed, as the sum of the entries for the net increase in U.S. assets abroad, the net increase in foreign assets in the United States, allocations of special drawing rights, and the statistical discrepancy.

Panel B of table 3 shows the BPA entries from panel A rearranged in a configuration similar to the NIPA foreigh transactions account. Exports and allocations of special drawing rights are shown as receipts from foreigners, on the left side; imports, U.S. Government grants and other unilateral transfers (net) to foreigners, and increases in foreign assets in the United States and less the statistical discrepancy) are shown as payments to foreigners, on the right side.

Panel C of table 3 shows how the NIPA foreign transactions account is constructed by modifying the BPA entries. The differences between the NIPA and BPA entries, called reconciliation items in the table, reflect different publication and revision schedules, different treatment of the U.S. territories, and--most importantly--different treatment of certain transactions. The first source of difference arises because the NIPA estimates incorporate BPA revisions with lags. The second arises because the NIPA's exclude Puerto Rico and U.S. territories from the definition of the United States, while the BPA's include them. The third arises because the two sets of accunts treat the following types of transactions differently: Nonmonetary gold; capital gains (or losses) in direct investment income; imputed interest paid to foreigners, interest payments by the U.S. Government to foreigners, allocations of special drawing rights and other NIPA capital transfers; and "other items," a set of specific adjustments each of which affects only a few years.

Treatment of foreign transactions in

aggregate NIPA measures

The definitions of several aggregate NIPA measures of output and of expenditures differ with respect to the treatment of foreign transactions.

GNP measures output on a national basis; that is, it includes the output produced in the foreign sector. It is defined as the market value of the goods and services produced by labor and property supplied by U.S. residents, before deduction of allowances for consumption of fixed capital (depreciation). Output also can be measured on a domestic basis, that is, excluding the output produced in the foreign sector. Gross domestic product (GDP), therefore, measures the output of goods and services produced by labor and property located in the United States.

Output can also be measured after deduction of allowances for the consumption of fixed capital--that is, on a net basis. Two such measures are net national product and net domestic product; these measures, like GNP and GDP, differ by the output produced in the foreign sector. All the above output measures are in terms of the market value of goods and services. Output can also be measured in terms of the factor cost of goods and services produced; two such measures are national income and domestic income, which also differ by the output produced in the foreign sector.

Gross domestic purchases and final sales to domestic purchasers differ from their counterparts--GNP and final sales--by net exports. These expenditure aggregates can be used to measure the demand by U.S. residents for goods and services wherever produced.

Command-basis GNP is a measure of what the United States could purchase with its current production. It is a variant of constant-dollar GNP, in which the net export component is adjusted for the terms of trade, the latter defined in the NIPA's as the ratio of the implicit price deflator for exports to the implicit price deflator for imports. Command-basis GNP reflects the fact that although a change in the price of imports relative to the price of exports does not directly change production, it does change the quantity of foreign goods and services that the United States could purchase with the proceeds from a given quantity of exports. The net exports component of command-basis GNP is obtained by deflating exports by the implicit price deflator for imports rather than by the specific export price deflators used in deriving the constant-dollar export component of GNP.

Definitions

The aggregate measures mentioned earlier require that the geographic area covered by the United States and "U.S. resident" be defined. In the NIPA's, the United States consists of the 50 States (before 1960, Alaska and Hawaii were not included), the District of Columbia, and U.S. military installations, embassies, and consulates abroad; U.S. territories and Puerto Rico are considered part of the rest of the world. (The BPA's, in contrast, include U.S. territories and Puerto Rico in the United States.)

In the NIPA's, U.S. residents are individuals, governments, business enterprises, trusts, associations, and similar institutions that are physically located in the United States, and that have resided, or expect to reside, in this country for 1 year or more. U.S. Government employees and military personnel abroad are considered to be residents of the United States, rather than of the foreign country (or U.S. territory or Puerto Rico) to which they are posted. Business enterprises resident in the United States include U.S. affiliates of foreign companies.

The rest of the world consists of foreign residents who are transactors with U.S. residents. International institutions located in the United States and foreign nationals employed by their home governments in the United States are residents of the rest of the world. Foreign affiliates of U.S. companies are residents of the rest of the world.

The definitions of the entries in the foreign transactions account are shown in the accompanying box.

Presentation of the Estimates

NIPA tables

The estimates of foreign transactions are published in the NIPA tables, which appear in the SURVEY (and reference volumes cited therein). Table 4 indicates the location, by NIPA table number, of the various annual and quarterly estimates of foreign transactions in current dollars, and, where applicable, of estimates in constant dollars and of the corresponding price indexes. Annual measures generally cover 1929 to the present; quarterly measures in current dollars generally cover the first quarter of 1946 to the present; and quarterly measures in constant dollars generally cover the first quarter of 1947 to the present.

Annual and seasonally adjusted quarterly estimates of the foreign transactions account are shown, in current dollars, in NIPA table 4.1. In this table, exports and imports are shown in the level of detail indicated below, where "merchandise" refers to goods and "other services" to nonfactor services (such as transportation, engineering services, and royalties and license fees): Exports of goods and services Merchandise Durable goods Nondurable goods Services Factor income Other Imports of goods and services Merchandise Durable goods Nondurable goods Services Factor income Other

Annual and seasonally adjusted quarterly estimates of exports and imports, in constant dollars, are in NIPA table 4.2. Merchandise exports and imports by end-use category--essentially a market-category grouping--in current and constant dollars, are in NIPA tables 4.3 and 4.4, respectively. Fixed-weighted price indexes are shown in NIPA tables 7.14 and 7.15. Quarterly current-dollar totals, not seasonally adjusted, for the foreign transactions account are shown in NIPA table 9.5. (Table 4 also indicates the location of the foreign transactions estimates in the NIPA tables that feature total GNP and the accounts for the domestic sectors in which foreign transactions are counterentries.)

Annual estimates of output originating in the rest of the world, in current dollars, are in NIPA tables 1.7 and 6.1 for GNP; in NIPA table 1.12 for net national product; and in NIPA tables 1.12, 1.15, and 6.3B for national income. Constant-dollar estimates of output originating in the rest of the world are in NIPA tables 1.8 and 6.2 for GNP; in NIPA table 1.3 for net national product; and NIPA table 1.13 for national income. (NIPA tables 1.7, 6.3B, and 1.8 also contain quarterly estimates.) Annual current-dollar estimates of the types of income originating in the rest of the world are in NIPA tables 1.15, 6.4B, 6.5B, 6.12, 6.13, 6.17B, 6.18B, 6.21B, 6.22B, and 6.23B.

Annual estimates of the reconciliation items and the relation, by component, of NIPA foreign transactions to the corresponding BPA entries are in NIPA table 4.5; quarterly estimates, for exports, imports, and net exports only, are shown in the SURVEY, in the third month of each quarter, in Reconciliation and Other Special Tables.

Annual and quarterly constant-dollar estimates of command-basis exports are in NIPA table 1.11; the associated implicit price deflator is shown in table 7.8.

Annual and quarterly estimates of the export and import components of auto and truck output are in NIPA tables 1.17 and 1.19 in current dollars and in NIPA tables 1.18 and 1.20 in constant dollars.

Annual estimates of services furnished to foreigners without payment by financial intermediaries except life insurance carriers and private noninsured pension plans are in NIPA table 8.9.

Annual estimates of the items in personal consumption expenditures (PCE) for foreign travel and other, net, are shown in NIPA tables 2.4 and 2.5, in current and constant dollars, respectively. These items (1) include in PCE the expenditures by U.S. residents while traveling or working abroad and (2) exclude from PCE the expenditures by foreigners traveling or working in the United States and remittances in kind to foreigners.

Schedule

The quarterly NIPA estimates of foreign transactions are prepared 15 days after the end of the quarter, revised a month later (the 45-day estimate) and revised again the following month (the 75-day estimate). No further revisions are made in the quarterly estimates until the annual revisions, which usually occur each July and cover the 3 most recent years. Following the third annual revision, no further revisions are made in the estimates until the comprehensive revisions, which usually occur every 5 years.

Summary of Sources and Methods

Current-dollar estimates

Except for a few reconciliation items prepared from other sources, the BPa's are the source of the current-dollar 75-day and annual estimates of NIPA foreign transactions. The 75-day NIPA estimates are based on the preliminary BPA estimates that are prepared in the third month after the end of a quarter. These preliminary BPA estimates are published quarterly in the "U.S. International Transactions" articles in the March, June, September, and December issues of the SURVEY. (Because no further revisions are made in the NIPA estimates until the annual revision, revised BPA estimates for the preceding quarter, which also are published in these issues of the SURVEY, are not incorporated.) Each June, revisions to the BPA estimates, generally covering the 4 most recent years, are published; these revisions reflect the incorporation of new or revised source data, updated seasonal factors, and occasional changes in definitions and estimation procedures. The BPA revisions for the 3 most recent years are incorporated into the NIPA's in July; those for earlier years, only during the comprehensive revisions of the NIPA's.

The source data for foreign transactions available for the 15-day and the 45-day NIPA estimates are incomplete. In the case of exports and imports of merchandise, data are available only with a lag on the revised statistical month basis, which is used in the preliminary BPA merchandise estimates because it more nearly approximates the actual month of exit or entry than do data on the statistical month basis. For merchandise exports, the 15-day estimate is based on monthly data on the revised statistical month basis for the first month of the quarter, data on the statistical month basis for the second month, and a judgmental estimate for the third month; the 45-day estimate is based on data on the revised statistical month basis for the first 2 months of the quarter and on the statistical month basis for the third month. For merchandise imports, the 15-day estimate is based on data on the revised statistical month basis for the first month of the quarter and on judgmental estimates for the second and third months; the 45-day estimate is based on data on the revised statistical month basis for the first 2 months of the quarter and on a judgmental estimate for the last month. In the case of exports and imports of services, the 15- and 45-day NIPA estimates are largely judgmental.

The BPA estimates are based on the following major bodies of source data, which are summarized below: (1) Census Bureau tabulations of merchandise trade information, (2) BEA surveys, (3) Treasury Department tabulations of reports on international capital movements, (4) reports by U.S. Government agencies to BEA, and (5) other sources. Table 5 shows which of these major bodies of data are used as the principal sources for the estimates of each component of the foreign transactions account.

Census Bureau mechandise trade statistics.--Monthly Census Bureau tabulations of administrative documents that exporters and importers must file with the U.S. Customs Service are the basis of the annual and quarterly BPA estimates of merchandise exports and imports. The Census Bureau tabulations, which are described in table 6, require several adjustments for coverage and valuation to conform them to BPA requirements. Since the first quarter of 1985, the BPA's have used the data tabulated on the "revised statistical month" basis for current estimates, replacing them in june of the following year with data tabulated on the actual month of exit or entry. (In addition, estimates for 1983 and 1984 were revised in 1985 to reflect the actual month of exit or entry.) Estimates before 1983 required a timing adjustment, made by BEA, to account for transfers of goods recorded in Census data in one period but actually shipped in another. The Census Bureau statistics also provide quantity indicators used in estimating other transportation services and unit-value indexes used in preparing some of the constant-dollar NIPA estimates of exports and imports.

BEA surveys.--BEA surveys are used in estimating receipts and payments of income on direct investment, other services receipts and payments, and private remittances and other transfers. (Direct investment is defined as ownership of at least 10 percent of the voting stock of, or an equivalent interest in, an affiliate located in another country.) Most of these surveys, summarized in table 7, collect data from private organizations, primarily businesses, that engage in transactions with foreign residents on their own behalf or on behalf of others; the major exceptions are the travel surveys, which collect information from U.S. residents visiting Canada and Mexico. Income on direct investment and services receipts from, and payments to, affiliated foreigners are obtained from quarterly surveys linked to periodic benchmark surveys (censuses). The other surveys, which are primarily either quarterly or annual, are not linked to benchmarks.

Treasury international capital reporting system.--Data from the international capital reporting system are used, in combination with representative yields from other sources, in the BPA estimates of receipts and payments of income on other private investment and of payments of income to nonresident holders of U.S. government securities. This system, which is administered by the Federal Reserve Bank of New York for the U.S. Department of the Treasury, provides monthly and quarterly data on holding of and on transactions in portfolio investment--investment in the form of debt instruments, equity positions of less than 10 percent, and other claims and liabilities. Covered are (1) purchases and sales of longterm securities and (2) amounts of outstanding claims and liabilities reported by banks and nonbanking concerns; the system is summarized in table 8.

Directive No. 19 reports.--All U.S. Government agencies engaged in international transactions are required to report these transactions quarterly to BEA, under Office of Management and Budget Directive No. 19. These data are used in the estimates of foreign military sales and direct defense expenditures; receipts of, and payments for, purchases of miscellaneous services; interest paid to and received from foreigners; and U.S. Government grants, pensions, and other transfers.

Other source data.--A variety of published and unpublished source data are used in the BPA estimates of other services. These data include information from U.S. Government budgetary documents; Federal Deposit Insurance Corporation and Federal Reserve Board data on ownership of deposits; data from international organizations, foreign central banks, and forein statistical offices; and data from trade associations and various other international transactors. For travel, estimates of numbers of travelers from the U.S. Immigration and Naturalization Service are combined with estimates of average expenditures. The estimates of average expenditures have been from BEA surveys; in the future, those for overseas travel will be from the U.S. Travel and Tourism Administration. These other source dta are also used in preparing estimates of the NIPA reconciliation items and in the constant-dollar estimates.

Constant-dollar estimates

Most constant-dollar estimates of NIPA exports and imports are prepared by deflation of detailed current-dollar estimates; the others are prepared by extrapolation of base-year values.

The data used to deflate the NIPA current-dollar estimates include export and import price indexes prepared by the Bureau of Labor Statistics (BLS); monthly export and import unit-value indexes prepared by the Census Bureau; consumer price indexes prepared by BLS and by foreign statistical agencies; and implicit price deflators calculated from other NIPA estimates. Table 9 shows the price indexes that are used for the deflation of each component of exports and imports. The BLS export and import price indexes, which are for the third month of the quarter, are interpolated to obtain quarterly averages for the 75- and 45-day estimates. For the 15-day estimate, 1 month of the Census unit-value indexes is used to extrapolate the BLS indexes for the quarter.
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Author:Tice, Helen Stone; Moczar, Louis J.
Publication:Survey of Current Business
Date:Nov 1, 1986
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