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U.S. international transactions, first quarter 1989.

THE U.S. current-account deficit increased to $30.7 billion in the first quarter of 1989 from $28.7 billion in the fourth quarter of 1988. The increase was more than accounted for by an $8.0 billion decrease in net receipts on service transactions, a decrease that was largely due to a shift from currency-translation-related capital gains to capital losses in income on U.S. direct investment abroad. The merchandise trade deficit decreased $4.4 billion to $27.6 billion. Net unilateral transfers decreased $1.6 billion to $3.4 billion.

In the capital accounts, U.S. official reserve assets increased $4.0 billion, in contrast to a $2.3 billion decrease; the increase was mostly due to intervention purchases of foreign currencies. Foreign official assets in the United States increased $6.9 billion, compared with $10.6 billion.

In the private capital accounts, both U.S. bank claims on foreigners and U.S. bank habilities to foreigners increased. Appreciation of the dollar in the first quarter contributed to increased demand by foreigners for dollar-denominated claims and a slow-down in the increase in foreigncurrency-denominated claims. Much of the increase in U.S. banks' dollar liabilities funded the increase in claims and a strong increase in U.S. credit demand; liabilities payable in foreign currencies decreased slightly.

In securities transactions, net foreign purchases of U.S. Treasury securities increased, and purchases of other U.S. bonds remained strong, because of both high interest rates and appreciation of the dollar. Foreigners had small net sales of U.S. stocks. Net U.S. purchases of foreign securities slowed.

Outflows for U.S. direct investment abroad were smaller, mostly due to lower reinvested earnings. Inflows for foreign direct investment in the United States, mostly for acquisitions, remained strong but were below the unusually high level of the fourth quarter.

The statistical discrepancy (errors and omissions in reported transactions) was an inflow of $13.4 billion, in contrast to an outflow of $19.4 billion.

The technical notes that follow the text describe revisions to the estimates of U.S. international transactions. Substantial improvements have been made to the private services accounts.

U.S. dollar in exchange markets

In the first quarter, the dollar appreciated 3 percent on a trade-weighted quarterly average basis against the currencies of 10 industrial countries and 2 percent against the currencies of 22 OECD countries and 4 newly industrialized countries in the Far East.

The appreciation of the dollar that began in mid-December continued in January because of a tightening in monetary conditions and rising shortterm interest rates in the United States, optimism that the new administration and Congress would make progress toward reducing the Federal budget deficit, and unwinding of hedges against dollar depreciation built up in the fourth quarter. Bidding for dollars became quite strong, especially against the German mark, leading to coordinated intervention sales of dollars against marks and interest rate increases in Europe.

After depreciating somewhat in midFebruary, the dollar again appreciated in late February and March, following a further tightening in monetary conditions and increases in U.S. interest rates while key European rates were unchanged. Several rounds of coordinated intervention, mostly purchases of marks but also of yen, followed.

The dollar appreciated 3 to 4 percent on a quarterly average basis against the German mark and the other European Monetary System (EMS) currencies. It appreciated 3 percent against the British pound, reflecting heightened concern about British inflation and a rising current-account deficit.

The dollar appreciated 3 percent against the Japanese yen, reflecting a widened differential (in favor of the dollar) in short-term interest rates and strong reflows back into dollar assets once the fourth-quarter depreciation of the dollar against the yen had halted. The political scandal in Japan probably contributed to depreciation of the yen.

The U.S. dollar appreciated 8 percent against the Australian dollar, which has become a more important international currency in recent years. The Australian dollar weakened, despite intervention by Australian authorities, because of a rising currentaccount deficit and expectations that further depreciation would be necessary to reduce the trade gap.

The U.S. dollar depreciated 1 percent against the Canadian dollar. Interest rates in Canada rose strongly during the quarter, during which 3-month rates reached their highest level in 5 years.

Against the currencies of the four newly industrialized countries in the Far East, the dollar depreciated 3 percent against both the South Korean won and the Taiwan dollar and 2 percent against the Singapore dollar, and it was unchanged against the Hong Kong dollar.

Merchandise trade

The merchandise trade deficit decreased to $27.6 billion in the first quarter from $32.0 billion in the fourth, as exports increased more rapidly than imports. Both exports and imports rose to record levels.

Exports.-Exports increased $4.8 billion, or 6 percent, to $88.5 bilhon. Both agricultural and nonagricultural exports increased strongly. The cumulative effect of dollar depreciation since 1985 and strong economic activity abroad have spurred export expansion since the first quarter of 1987; exports are up 55 percent in value and 46 percent in volume. During the same period, the share of U.S. goods production that was exported increased to a record 20.2 percent from 15.9 percent, and export growth accounted for 58 percent of the increase in total U.S. goods production.

As shown in charts 3 and 4, export increases have been broadly based by major commodity category. However, the pattern of price increases has varied considerably. Price increases have been moderate in three categories where finished manufactures are predominant (automotive products, consumer goods, and capital goods other than computers, peripherals, and parts), at or slightly below increases in the fixed-weighted price index for all goods production. Prices have fallen sharply for computers, peripherals, and parts, a category where rapid productivity and technological improvements have occurred. In contrast, prices in categories where raw materials and semifinished products are heavily represented (foods, feeds, and beverages, and industrial supplies and materials excluding nonmonetary gold) have increased rapidly. These increases in commodity prices have reflected the worldwide increase in such prices, as the brisk pace of economic activity in the United States and other major industrial economies has steadily increased demand for basic commodities and as the lower dollar has increased U.S. producers' leeway to raise prices (chart 5).

In the first quarter, agricultural exports increased $1.1 billion, or 11 percent, to $10.9 billion, the highest level since the second quarter of 1981; volume increased 10 percent. Most of the increase was accounted for by wheat and corn shipped to the Soviet Union under a U.S. export promotion program. With the exception of a small price increase for wheat, prices of all major commodities decreased.

Nonagricultural exports increased $3.7 billion, or 5 percent, to a record $77.6 billion; volume increased 3 percent. Industrial supplies and materials increased $1.3 billion to $21.9 billion; fuels and lubricants accounted for more than one half of the increase. Consumer goods increased $1.0 billion to $7.7 billion; manufactured durables increased strongly. Capital goods increased $0.9 billion to $30.9 billion; there was a $0.7 billion increase in nonelectric machinery-in spite of a $0.5 billion decrease in computers, peripherals, and parts-and a $0.4 billion increase in civilian aircraft, engines, and parts. Automotive products increased $0.3 billion to $8.8 billion, mostly to Canada. Nonagricultural foods, feeds, and beverages increased $0.2 billion to $0.9 bilhon, entirely because of an increase in exports of fish and shellfish, which have been strong for the past six quarters, to a record $0.8 billion.

Imports.-Imports increased only $0.4 billion to $116.1 bilhon; volume decreased 1 percent. The value of imports increased mainly because of a sharp increase in petroleum prices; the volume of both petroleum and nonpetroleum imports decreased.

During the past two years, although imports of capital goods have increased strongly, increases in other commodities have dearly moderated, especially on a volume basis (charts 6 and 7). Much of the slowdown reflects the cumulative impact of depreciation of the dollar since 1985, although this impact recently may have lessened somewhat as the dollar has strengthened and as foreign exporters have increased productivity. Increases in import penetration of the U.S. economy have slowed: The import share of real gross domestic purchases reached 20.3 percent in the third quarter of 1987 and has changed little since, standing at 20.8 percent in the first quarter of 1989.

In the first quarter, nonpetroleum imports decreased $1.2 billion, or 1 percent, to $105.3 billion; volume decreased 1 percent. Consumer goods decreased $0.8 billion to $24.6 billion, mostly textile apparel and household goods from the Far East. Automotive products decreased $0.5 billion to $22.8 billion, entirely from areas other than Canada. A buildup in U.S. dealers' inventories contributed to a drop in imports of cars and of parts and accessories from Japan and West Germany, In contrast, imports of cars from Canada rebounded 10 percent from a relatively low fourth quarter. Industrial supplies and materials and capital goods each increased slightly, to $20.4 billion and $26.9 billion, respectively.

Petroleum imports increased $1.6 billion, or 18 percent, to $10.8 billion; volume decreased 3 percent. The average price per barrel increased sharply to $15.53 from $12.85. Price increases largely reflected market expectations that OPEC members-and several important non-OPEC member oil producers-would restrain production to help sustain higher prices. Import volume decreased and domestic inventories increased as U.S. consumption fell.

Balances by area.-The $4.4 bilhon decrease in the merchandise trade deficit was centered in the industrial countries and the newly industrialized countries (NIC's) in the Far East.

The deficit with the industrial countries decreased $4.4 bilhon to $16.0 bilhon: The deficit with Western Europe decreased $2.8 billion to $1.0 billion, the lowest since the third quarter of 1983, as exports increased and imports decreased; the deficit with Japan decreased $2.2 billion from an unusually high fourth quarter, as exports rebounded following a decrease and imports retreated from their record level.

The deficit with the NIC's decreased $2.2 billion to $5.8 bilhon, more than accounting for a $1.1 billion decrease, to $8.6 billion, in the deficit with developing countries other than OPEC members. The deficit with the NIC's was unusually large in the last half of 1988, in part because imports increased sharply prior to the removal of the General System of Preference tariff advantages for the NIC's that was effective January 1989. The deficit with other non-OPEC developing countries increased, reflecting an increase in imports.

The deficit with OPEC members increased $1.4 billion to $3.1 billion, largely because of higher petroleum prices.

Service transactions

Net service receipts were $0.4 billion in the first quarter, compared with $8.4 bilhon in the fourth. Receipts decreased $5.8 billion to $54.1 billion; the decrease was more than accounted for by lower receipts of income on U.S. direct investment abroad. Payments increased $2.2 billion to $53.7 billion.

Receipts of income on U.S. direct investment abroad decreased to $9.1 billion from $16.6 billion. A shift from capital gains to capital losses, mostly related to currency translation, more than accounted for the decrease. Operating earnings remained strong, up $0.2 billion to $13.1 billion.

Payments of income on foreign direct investment in the United States increased $0.2 billion to $4.2 billion.

Receipts of income on other private investment abroad increased $1.4 billion to $16.5 billion, reflecting both higher interest rates and strong increases in bank claims on foreigners. U.S. Government receipts decreased $0.2 billion to $1.2 billion.

Payments of income on other private investment in the United States increased $1.2 billion to $18.0 billion, reflecting both higher interest rates and a continued increase in bank liabilities. U.S. Government payments increased $0.4 billion to $8.1 billion because of higher interest rates and large foreign purchases of U.S. Treasury securities.

Travel receipts decreased $0.3 billion to $7.8 billion and travel payments increased $0.1 billion to $8.4 billion. Passenger fare receipts were unchanged at $2.3 billion and passenger fare payments increased $0.2 bilhon to $2.2 billion. These developments reflected a slowdown in receipts from overseas visitors to the United States and a pickup in U.S. travel overseas.

Other transportation receipts increased $0.2 billion to $5.0 billion. Freight receipts were boosted by the strong increase in the volume of merchandise exports. Am increase of $0.3 billion to $5.1 billion in other transportation payments reflected higher foreign port service outlays by U.S. airlines.

Receipts from foreigners for other private services increased $0.5 bilhon to $6.8 billion. Receipts of commissions on securities transactions increased moderately, reflecting a pickup in stock transactions. Payments for other private services increased slightly to $3.1 billion.

Both transfers under U.S. military agency sales contracts, at $2.2 billion, and direct defense expenditures abroad, at $3.7 billion, were virtually unchanged.

Unilateral transfers

Net unilateral transfers decreased $1.6 billion to $3.4 billion in the first quarter. Fourth-quarter transfers had been boosted by large U.S. Government grants to Israel.

U.S. assets abroad

U.S. assets abroad increased $31.8 billion in the first quarter, compared with an increase of $32.6 billion in the fourth quarter.

U.S. official reserve assets.-U.S. official reserve assets increased $4.0 billion, in contrast to a $2.3 billion decrease. Intervention purchases of German marks and Japanese yen in exchange markets contributed to a $4.1 billion increasein foreign currency holdings.

Claims reported by banks.-U.S. claims on foreigners reported by U.S. banks increased $22.6 billion, compared with an increase of $30.9 billion.

U.S. banks' own claims payable in dollars increased $15.4 billion, compared with $13.2 billion. Claims on Japan increased $10.6 billion, compared with $2.9 billion; most of the increase occurred early in the first quarter when the dollar appreciated against the yen after a period of sharp depreciation.

Increases in claims payable in dollars on other countries were moderate; large reductions in claims on Western Europe and the Caribbean in January, largely repayment of heavy fourthquarter borrowing, partly offset large increases to the same areas in February and March. Increased claims on Western Europe and the Caribbean reflected a pickup in demand for dollars related to appreciation of the dollar; the increased claims also funded lending back to the United &ates to meet a surge in commercial and industrial loans and an increase in loans to finance acquisition activity, as the steep rise in the U.S. prime rate caused a switch toward Libor-based loans.

U.S. banks' dollar claims for domestic customers' accounts increased $6.0 billion, compared with $11.4 billion. U.S. money market mutual funds, which have received substantial domestic inflows partly because of the difficulties of the savings and loan industry, made large deposits abroad.

Claims payable in foreign currencies increased $1.2 bilhon, compared with $6.3 billion. Claims on Japan fell, in contrast to a large increase in the fourth quarter, as investor preferences shifted toward dollar- denominated assets.

Foreign securities.-Net U.S. purchases of foreign securities were $2.6 billion, compared with $3.0 billion, as a moderate decrease in purchases of bonds was partly offset by an increase in purchases of stocks.

Net U.S. purchases of foreign bonds were $1.2 billion, compared with $1.9 billion. Net purchases of outstanding bonds decreased. Rising interest rates and appreciation of the dollar made foreign bonds less attractive, especially in comparison with short-term securities (chart 8). In Germany, net sales increased to $1.2 bilhon from $0.5 billion and gross transactions fell more than 40 percent, perhaps partly related to imposition of a 10-percent withholding tax on interest income. In contrast, net purchases of Canadian and British bonds continued, sustained by high and stable interest rates and appreciation of the Canadian dollar.

New foreign bonds issued in the United States decreased slightly to $1.6 billion. Rising interest rates and inflation concerns limited investor interest to issues of highly rated borrowers, almost entirely governments. Issues from Canada remained strong, reflecting lower rates in the United States than in Canada.

Net U.S. purchases of foreign stocks increased $0.1 billion to $1.3 billion. Purchases in Japan continued, as Japanese stock indexes rose to record levels; a sharp increase in stock prices in the United Kingdom helped sustain purchases there. An increase in prices in Canada, primarily of oil and metals stocks, contributed to small net purchases in contrast to net sales throughout 1988.

Direct investment.-Net outflows for U.S. direct investment abroad were $3.7 billion compared with $8.9 billion. The shift from capital gains of $4.1 bilhon in the fourth quarter to capital losses of $3.8 billion in the first quarter-both mostly currency translation related-more than accounted for a decrease in reinvested earnings. Equity capital inflows increased; one large inflow resulted from the sale of a petroleum subsidiary in Canada. Net intercompany debt outflows decreased; the largest outflow was to the Canadian subsidiary of a U.S. manufacturer for the purchase of a Canadian paper products company.

Foreign assets in the United States

Foreign assets in the United States increased $49.1 billion in the first quarter, compared with an increase of $80.8 billion in the fourth.

Foreign official assets.-Foreign official assets in the United States increased $6.9 billion, compared with an increase of $10.6 billion. Net purchases of U.S. Government securities slowed to $5.3 billion from $12.6 billion; Treasury bills and certificates shifted to net sales, and purchases of Treasury bonds increased.

By area, foreign official assets of industrial countries increased $1.4 billion, compared with $5.6 billion. Assets of OPEC members increased $6.8 billion-the first substantial increase since 1982-compared with $0.8 billion. Assets of other developing countries decreased $1.0 billion in contrast to a $4.3 billion increase.

Liabilities reported by banks.-U.S. habilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, increased $10.4 billion, compared with $32.2 billion. Banks' own habilities payable in dollars increased $10.4 billion, compared with $23.9 bilhon. Most of the increase in liabilities in the first quarter was to Japan. Japanese investment preferences shifted toward liquid U.S. dollar assets, especially in March, reflecting renewed appreciation of the dollar and rising short-term U.S. interest rates.

U.S. banks' own dollar liabilities to all other countries increased much less than in the fourth quarter. Interbank liabilities decreased sharply in January as U.S. banks repaid large fourth-quarter increases in liabilities to Western European and Caribbean financial centers and as domestic funding costs fell relative to foreign interest rates. However, liabilities increased strongly in both February and March, as foreign-owned banks in the United States funded a step-up in loan demand in the United States. The increase in liabilities helped fund increases in domestic (U.S.) commercial and industrial lending, in acquisitionrelated credits, and in the previously mentioned increase in U.S. banks' claims on foreigners.

Liabilities payable in foreign currencies decreased $0.2 bilhon, compared with an increase of $9.7 billion. The decrease was largely associated with the decrease in demand for foreign currency claims by Japan.

U.S. Treasury securities.-Net foreign purchases of U.S. Treasury securities increased to $8.8 billion from $5.3 billion; the first quarter level is the highest level in five years and the second highest level reached in a quarter. Sharply higher interest rates on bills and short- and medium-term bonds, appreciation of the dollar, and a flight to quality away from some riskier corporate bonds contributed to the large net purchases. Net purchases from Western Europe increased to $4.5 billion from $0.1 billion; British purchases increased to $2.2 billion from $0.7 billion. Japanese purchases also increased. In contrast, high bond rates in Canada and appreciation of the Canadian dollar resulted in a shift to net sales by Canadians.

Other U.S. securities.-Net foreign purchases of U.S. securities other than U.S. Treasury securities were $8.6 billion, compared with $6.9 bilhon. Net sales of stocks slowed considerably. Bond purchases decreased moderately but remained strong.

Net foreign sales of U.S. stocks were $0.1 billion, compared with $2.2 billion. Rising stock prices and appreciation of the dollar attracted purchases from several Westem European countries and from the Caribbean. In contrast, net sales by Switzerland and Japan increased. The sales by Japan may have reflected changes in Japanese taxes and new regulatory restrictions on investment trusts and on investment accounts of nonfinancial corporations as well as realization of gains at the end of the Japanese fiscal year.

Net foreign purchases of U.S. bonds were $8.7 billion, compared with $9.0 billion. Rising interest rates and inflation concerns reduced the volume of new issues abroad by U.S. corporations, as borrowers shifted to more short-term funding and as lenders were wary of falling bond prices. Investor concerns about the quality of some highly leveraged corporate bonds may also have restrained new corporate issues. In contrast, net foreign purchases of U.S. agency bonds nearly doubled to $3.3 billion; the largest purchases were from Japan and the United Kingdom.

Direct investment.-Inflows for foreign direct investment in the United States were $14.4 billion, compared with record inflows of $23.0 billion in the fourth quarter. Equity capital inflows for acquisitions continued but, at $4.2 billion, they were substantially below the $13.5 billion in the fourth quarter when many large acquisitions occurred. Intercompany debt inflows increased to $8.6 billion from $8.2 billion. A large increase in intercompany debt to the United Kingdom was mostly related to the purchase of a U.S. food manufacturing company. Although intercompany debt inflows related to acquisitions of U.S. companies remained strong in the first quarter, they were partly offset by numerous drawdowns of debt built up in the fourth quarter for acquisition purposes. Reinvested earnings were $1.6 billion, compared with $1.3 billion.

Technical Notes

As is customary each June, estimates of U.S. international transactions are revised to incorporate new source data and improved methodologies. Several major improvements were introduced this year.

(1) Other private service receipts and payments for 1986-88 incorporate the results of the recently completed benchmark and annual followon surveys of selected service transactions with unaffiliated foreigners. The new estimates, the culmination of one phase of a program to improve estimates of international service transactions, provide greatly expanded coverage of service transactions and much greater detail by type of transaction. The new estimates raise other private service receipts $5,201 million and other private service payments $3,088 million in 1988.

(2) 'Navel and passenger fare receipts and payments for 1984-88 incorporate results of a survey administered by the United States Travel and Tourism Administration (USTTA). The estimates replace those based on BEA surveys that had been discontinued and brought forward by interim estimation techniques. The new estimates raise travel and passenger fare receipts $12,353 million and travel and passenger fare payments $7,772 million in 1988.

(3) Estimates of foreign students' expenditures in the United States and U.S. students' expenditures abroad are incorporated for 1981-88. Previously, they had not been included in the accounts. The estimates are based on information about characteristics of the student populations and students' expenditures for tuition and other living expenses. The new estimates for education raise other private service receipts $4,111 million and other private service payments $555 million in 1988.

(4) Noninterest income earned by banks is reclassified from portfolio income receipts to other private service receipts beginning with estimates for 1986. The amount of income reclassified is $1,995 million in 1988.

(5) Commissions on securities transactions are revised for 1987-88. Although the basic methodology introduced 2 years ago is unchanged, information on key parameters has been updated. The changes reduce commission payments $401 milhon and reduce commission receipts $126 million in 1988.

(6) The Harmonized System (HS) now provides the basic commodity classification categories from which estimates of merchandise exports and imports are developed. Adoption of this system, mandated by legislation, ensures international comparability in the commodity classification of exports and imports. BEA has converted these codes into the end-use classification system used in the presentation of the national and international accounts in a manner that maintains historical continuity of the commodity detail in the end-use system from 1978 to the present.

The sections that follow describe these changes and several others that affected the estimates. In addition, the numbering of the tables for the standard balance of payments presentation has been changed to permit the incorporation of a new table. The previous tables 1 and 2 are now combined into a single table-table 1. This year it presents annual estimates of U.S. international transactions for 1960-88 and quarterly estimates (both unadjusted and adjusted for seasonal variation) for 1983-88. In that table, affiliated and unaffiliated fees and royalties have been combined into a single line for receipts and into a single line for payments, as have the lines for affiliated and unaffiliated other private services. Table 2 (previously table 3) presents annual merchandise trade estimates for 1978-88 and quarterly estimates for 1987-88. Table 3, the new table, provides estimates of selected service transactions. This table, as well as tables 4-10, present account and area detail for annual estimates for 1986-88 and quarterly estimates for 1987-88. Table 10 has been changed to present area detail for Australia; the combined grouping of Australia, New Zealand, and South Africa has been dropped, and New Zealand and South Africa are now included in "Other countries in Asia and Africa". Table 10a presents selected country detail for annual estimates for 1986-88; the estimates for Australia have been moved to table 10.

Seasonal adjustment factors-for the current-account items that show seasonal patterns; for repayments on U.S. Government credits and other longterm assets other than official reserve assets; and for U.S. direct investment abroad-were recalculated by extending through 1988 the period used to derive the factors.

Other private services

Estimates of other private service transactions with unaffiliated foreigners have been revised significantly. The results are presented along with other selected service- transactions in table 3. Major improvements to other private services with unaffiliated foreigners include (a) coverage for the first time of many business, professional, and technical services, and improved measurement of telecommunications services and of insurance services (lines 20, 21, 22 and 43, 44, 45); (b) a reclassification of certain bank income from portfolio income to other private services (line 19); (c) coverage for the first time of education services (lines 18 and 41); and (d) an updating of key parameters used in the estimation of commissions on securities transactions. These and other improvements are discussed in the paragraphs that follow.

Business, professional, and technical services.-Estimates of many business, professional, and technical services for 1986-88 have been developed from a BEA benchmark survey for 1986 and annual follow-on surveys of selected service transactions with unaffiliated foreigners. The new surveys provide greater detail by type of transaction than was previously available and they expand coverage of receipts to such key areas as computer and data processing services; installation, maintenance, and repair of equipment; and management and consulting services (table F). The surveys also provide first-time coverage of payments for many types of services, presented by the same categories as for receipts. Estimates of telecommunications benefited from new survey data on channel leasing and enhanced services. Estimates of primary insurance, based largely on survey data, were prepared for the first time to supplement existing estimates of reinsurance transactions.'

Reclassification of noninterest income of banks.-Noninterest income of banks has been reclassified from portfolio income (table 1, line 13) to other private service receipts, where it is included as a component of financial services (table 1, line 9, and table 3, line 19). Noninterest income includes estimates for fees received by banks on bankers' acceptances, commercial letters of credit, standby letters of credit, undrawn funds under commitment, and items for collection. The reclassification was effected because this income was more similar to other types of service income than to retums (interest eamed) on portfoho investments. The coverage of the estimate is incomplete in that it does not include all types of fees, largely because source data that can be organized into a framework appropriate for the international accounts are not available. As part of financial services, noninterest income is combined with commissions and fees on securities and commodities transactions. The amount reclassified was $1,995 milhon in 1988. No estimates of payments are included in the accounts at the present time because source data appropriate for the international accounts are not available.

Royalties and license fees.-Beginning in 1987, estimates of receipts and payments of royalties and license fees with unaffiliated foreigners are available by type of intangible property. The estimates, developed from the expansion of an existing survey, include royalties and license fees related to industrial processes; books, records, and tapes; trademarks; broadcasting and recording of live performances and events; and franchising (table G). Similar detail for transactions with affliated foreigners is not available.

Beginning in 1986, certain management fees received from or paid to unaffiliated foreigners, amounting to less than $25 million for receipts and less than $5 million for payments, have been removed from royalties and hcense fees (table 1, lines 8 and 23) and have been included in other private services (table 1, lines 9 and 24, and table 3, lines 13 and 36).

Repairs and alterations.-The value of repairs and alterations of equipment physically exported from, and imported into, the United States was transferred (reclassified) from the merchandise trade accounts and added to estimates of the installation, maintenance, and repair of equipment in the other private service accounts,

Expenditures and receipts of students.-New estimates have been developed for foreign students' expenditures in the United States (receipts) and for U.S. students' expenditures abroad (payments) for 1981-88. No estimate of these transactions has previously been included in the accounts. Receipts are entered in other private services in table 1, line 9, and are shown separately in table 3, line 18. Payments are entered in other private services in table 1, line 24, and are shown separately in table 3, line 41.

For the estimates of foreign students' expenditures in the United States, foreign students are defined as individuals enrolled in institutions of higher education in the United States who are not U.S. citizens, immigrants, or refugees. The population of students is obtained from an annual survey of about 2,900 U.S. accredited institutions conducted by the Institute for International Education (IIE); the response rate is about 95 percent. Characteristics of the population used in the estimates include the geographic area of origin (residence), type of institution (public or private), enrollment status (part-time or full-time), and academic level of institution (2-year, 4-year, or university).

Estimates of expenditures for tuition and for room and board are developed from annual surveys of most accredited institutions, conducted by the College Board and adjusted by the Center for Education Statistics, U.S. Department of Education, and matched by BEA to the characteristics of the student population. Data on living expenses are based on Bureau of Labor Statistics estimate s of low-income level family budgets in metropolitan and nonmetropolitan areas, reduced to a single person and adjusted for inflation. These receipts are shown separately in table 3, hne 18.

Other transactions in the current account partly offset these receipts. Surveys of the foreign student population by IIE indicate that most of their education is financed from sources abroad. A small amount of their education, however, is financed from sources within the United States-through scholarships from colleges, universities, private corporations, or other nonprofit institutions. These payments to foreigners are entered as private remittances in table 1, line 34. Financial contributions (grants) from the U.S. Government are already included in the accounts (table l, line 32) and are not separately identifiable. In addition, wages eamed from employment, also developed from the IIE survey, are entered in other private service payments, table 1, hne 24.

The estimates of U.S. students' expenditures abroad are obtained in a manner similar to that for foreign students' expenditures in the United States. A student is defined as anyone who receives academic credit for studying abroad from an accredited institution of higher education in the United States. The population of students is obtained from a biennial survey of about 2,900 U.S. institutions conducted by the IIE; the response rate is about 65 percent. BEA makes an estimate of nonresponse to the survey. Characteristics of the population used in the estimates include country of study, type of institution (public or private), and academic level of institution in the United States (2-year, 4year, or university).

Most students who earn academic credit abroad do so through a U.S. institution that has established a formal study abroad program with institutions of higher education abroad. The payments students make to U.S. colleges and universities for tuition and for room and board are assumed to be forwarded to the foreign institution. Estimates are developed from an annual survey of most accredited U.S. institutions conducted by the College Board and adjusted by the Center for Education Statistics, U.S. Department of Education. A small number of students who study abroad make their own arrangements with foreign institutions, yet they still receive academic credit from a U.S. institution. These students are assumed to pay the same tuition as those enrolled in a formal program of a U.S. institution. A separate estimate of living expenses for these students is developed by constructing a ratio between U.S. and foreign living costs, which then is multiplied by the low-income level family budget series developed for foreign students who study in the United States. Payments for both groups of students are shown separately in table 3, line 41.

The coverage of students in these estimates has been narrowly defined to include only those who receive academic credit from a U.S. institution. The estimates do not include students who may participate in study-abroad programs of U.S. institutions but who do not receive academic credit. Nor do the estimates include those individuals who visit the United States or those U.S. residents who go abroad to study on a more casual basis. This student population is much larger than that discussed previously, and the expenditures and airfares paid are included indistinguishably in the travel and passenger fare accounts. In principle, overlap between the other private service accounts and travel and passenger fare accounts could occur, although current survey techniques for the travel and passenger fare accounts make it unlikely that any significant overlap exists in practice.

Commissions on securities transactions.-Commissions on securities transactions (table 1, part of lines 9 and 24, and table 3 , part of lines 19 and 42) were revised for 1987-88 to reflect the general lowering of commission rates that has occurred in the past several years and to incorporate new information on transfer taxes abroad. For U.S. transactions in foreign securities, underwriting fees on new Eurobond issues were reduced, as were commission rates on foreign stocks. Some transfer tax rates on stock transactions abroad were reduced and others were introduced. Commission rates on transactions in Canadian securities were reduced to reflect a larger share of institutional trading relative to retail trading. For foreign transactions in U.S. securities, commission rates on U.S. stocks were reduced. These changes reduce U.S. payments $401 minion and reduce U.S. receipts $126 million in 1988. Travel and passenger fares

Travel and passenger fare receipts (table 1, lines 5 and 6, and table 3, lines 2 and 3) and payments (table 1, lines 20 and 21, and table 3, lines 25 and 26) have been revised for 1984-88 to include the results of a new travel survey administered by the United States Travel and Tourism Administration (USTTA) and designed in part to meet balance of payments estimation needs. The survey is conducted aboard a randomly chosen sample of scheduled flights departing the United States of those U.S. and foreign flag carriers who voluntarily choose to participate in the survey. About 70 percent of the U.S. carriers and 35 percent of the foreign carriers participate. Sample results are expanded to universe estimates to account for nonresponse of passengers on each sampled flight, for coverage of all flights on each major airline route, and for all international routes. The basis for the expansion is the number of passengers departing the United States obtained from the Immigration and Naturalization Service (INS).

Receipts.-For U.S. travel receipts, average travel receipts from each major area or country overseas (defined to exclude Canada and Mexico), which are developed from the survey, are multiplied by the number of visitors from each major area or country, obtained from data from the INS. The sum of all major areas and countries is the estimate of overseas travel receipts. For those who travel on a tour package, only expenditures on land are included as travel receipts; the airfare paid to U.S. carriers is included in passenger fare receipts.

The procedure is similar for U.S. passenger fare receipts. Average passenger fares, which are developed from the survey, are multiplied by the number of foreign visitors on U.S. flag carriers from each major area or country, obtained from data from the INS, and the results are summed. In order to develop an adequate measure of average passenger fares, it was necessary to combine the average fares on both U.S. and foreign flag carriers, even though, in principle, only the average fare on U.S. flag carriers should be used in the estimates.

Although overall coverage is improved from the earlier BEA surveys, coverage of individual areas or countries in the new survey is highly uneven in quality. The unevenness is due in part to the voluntary participation of air carriers and cannot be compensated for fully in the estimation procedure. The unevenness is reflected in the overseas totals, which are the sum of the individual area and country estimates.

Payments.-For U.S. travel payments, average travel payments from each major area or country overseas, which are developed from the survey, are mulitplied by the number of travelers to each major area or country, obtained from data from the INS, and the results summed. Information on single and multiple destinations of travelers, also developed from the survey, served as the basis for the allocation of expenditures abroad. For tours, an estimate of commissions paid to U.S. travel agents and tour operators was deducted before the computation of travel payments was made, and the airfare included in tour packages that was paid to foreign carriers was removed and placed in passenger fare payments.

For U.S. passenger fare payments, average passenger fares, which are developed from the survey, are multiphed by the number of travelers on foreign flag carriers to each major area or country, obtained from data from the INS, and the results summed. In order to develop an adequate measure of average passenger fares, it was necessary to combine the average fares on both U.S. and foreign flag carriers, even though, in principle, only the average fare on foreign flag carriers should be used in the estimates. Use of only the average fare for foreign flag carriers would have resulted in a substantial understatement of passenger fare payments. Like receipts, the overseas totals reflect the unevenness in quality of area and country detail.

The survey questionnaire for payments asks how much travelers departing the U.S. intend to spend while abroad; thus it is a survey of intended rather than of actual expenditures. The relationship between intended and actual expenditures is unknown. Consequently, for balance of payments purposes, the estimates of payments may be less rehable than those of receipts.

Because of the newness of the source data, the estimates are subject to considerable revision. Major problems occurred in establishing comparability of survey results before and after the first quarter of 1985, when procedures in USTTA's survey were changed.

Merchandise trade

Harmonized trade.-Publication of merchandise trade data for the first quarter of 1989 incorporates, for the first time, the Harmonized System (HS) codes introduced by the United States in January 1989. The HS now provides the basic commodity classification categories from which estimates of exports and imports are developed. Previously, a seven-digit system provided the basic categories from which estimates were developed, and that system was unique to the United States.

The HS is an international classification system of goods designed to be used by exporters, importers, customs agencies, and data collection agencies throughout the world. It was developed by the Customs Cooperation Council of Brussels, Belgium. Its purpose is to facilitate comparability between exports and imports. The HS accomplishes this by establishing a common six-digit code for exports and for imports so that, at the six-digit level, goods will be classified in the same way in those countries that adopt the system. Each country can add to the six-digit codes to meet its administrative or statistical requirements. The United States has implemented a tendigit code system, with 14,000 codes for imports and 8,000 codes for exports.

The HS codes have been converted into end-use commodity classification codes-the coding system used in the presentation of the international and national accounts. The conversion permits continuity of estimates of exports and imports and their commodity detail to be maintained from 1978 to the present. The end-use system had been significantly revised and expanded last year both to improve its usefulness and to prepare for the introduction of the new HS codes. (See the technical notes in the June 1988 SURVEY.)

In two instances, the HS differs radically from the old seven-digit system, and in these instances some discontinuities in estimates by end-use category exist. The first instance involves the distribution of parts within a class of goods. For example, the seven-digit system distinguished between parts for passenger cars, trucks, tractors, or aircraft; this separation was maintained in the end-use system. The HS, however, does not distinguish between parts for different types of transportation vehicles. Thus, in the end-use system, these parts all had to be assigned to a single major use. For example, all spark plugs are now assigned to automotive engines and parts (end-use code 30200), even though some may be used for trucks, tractors, or motorcycles. One case in which the HS improved the classification and assignment of parts (components) is that of components that were previously classified indistinguishably with computers. The HS now provides separate codes for components of computers (end-use code 21301) and for components of business machines (end-use code 21500). As a result of this change, $150 million was removed from computers, peripherals, and pasts in the first quarter of 1989 and added to business machines.

A second instance in which a difference exists between the seven-digit system and the HS is in the treatment of residual ("other") categories. The composition of commodities included in many of the residual end-use categories may have changed greatly, even though the total dollar value of transactions included in the end-use category changed little.

A concordance sorted by five-digit end-use codes that shows the new tendigit HS codes and the old sevendigit codes is available, enabling users to establish or maintain historical continuity."

Undocumented exports to Canada.-The growth of undocumented U.S. exports to Canada in the past 2 years has highlighted the need to find a means to distribute these exports by end-use commodity category. Under normal procedures, this distribution would have been made during regular reconciliation meetings between the Census Bureau and Statistics Canada. However, detailed reconciliation work has not been undertaken by the Census Bureau since 1986 while the Census Bureau plans for the exchange of data between the two agencies that will begin in 1990. Until now, BEA has had to apply the results of the 1986 reconciliation to 1987 and 1988 estimates of U.S. exports to Canada.

BEA has therefore developed its own distribution by end-use category for 1987 and 1988, and the results are incorporated into estimates presented in this issue of the SURVEY. The new method uses the detailed commodity classification of Canadian imports published by Statistics Canada and permits BEA to distribute the missing documents to the most detailed end-use category rather than to major groups only. This is done by rearranging the Canadian data into the end-use system, deriving a ratio of each category to total Canadian imports, and then applying that ratio to total undocumented exports in the U.S. data. The advantage of the new method is that it allows for changes in commodity distribution patterns based on the most recent information on trade data. Table H presents the differences between the old and new distributions for 1987 and 1988.

Sales of fish.-Exports of fish caught within the 200-mile limit established as U.S. territorial waters were added for 1986-88 as a balance of payments adjustment to the trade data provided by the Census Bureau (table 1, line 2, and table 2, part of hne A7). Fish caught by U.S. residents within the territorial waters and sold to foreigners on the high seas are U.S. exports even though the fish do not pass through U.S. customs areas. Data on these sales are now available for the first time from the National Oceanic and Atmospheric Administration. Sales were $205 million in 1988.

Direct defense expenditures

Direct defense expenditures abroad (table 1, hne 19) were revised for 1980-83 to reflect revised source data and improved measurement of pay to U.S. personnel stationed abroad. The average annual revision was $245 million. Similar revisions had been made last June for 1984-87.
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Title Annotation:includes 26 tables, graphs
Author:Krueger, Russell C.
Publication:Survey of Current Business
Date:Jun 1, 1989
Words:7751
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