Exports and imports in current and constant prices 1

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1 Exports and imports in current and constant prices 1 Introduction This paper continues the series dedicated to extending the contents of the Handbook Essential SNA: Building the Basics 2. The aim of this paper is to provide some background to understand the compilation of two tables included in the Minimum Requirement Data Set (MRDS), the first data set that a country must have before it can claim to have implemented SNA: GDP by expenditure at current prices; GDP by expenditure at constant prices. To understand how these tables are compiled for exports and imports of goods and services and what data sources are required to do so, much of the paper is used to outline the expenditure approach to GDP compilation as applied to the case of exports and imports. A previous paper in this series has examined the compilation of the two MRDS tables in general terms 3. In the current paper we will apply these general observations to the particular case of exports and imports. What are exports and imports? Exports consist of transactions in goods and services from residents to non-residents. Analogously, imports are transactions in goods and services from non-residents to residents. The residence of an institutional unit is the economic territory with which it has the strongest connection, expressed as its center of predominant economic interest (SNA 26.36). The place of residence need not be the place of work. So cross-border workers, i.e. employees who cross borders to undertake a job, still have their residence determined by the location of their principal dwelling. The defining characteristic of exports and imports of goods is that a transaction occurs when there is a change of ownership of goods between residents and non-residents and not whether or not there are also corresponding physical movements of goods across borders. Goods that change location from one economy to another but do not change economic ownership do not appear in imports and exports. Thus goods sent abroad for processing, or returned after processing, do not appear as imports and exports of goods; only the fee agreed for processing appears as a service (SNA 26.50). SNA also identifies some special cases. For example, merchanting is the process whereby a unit in economy X purchases goods from economy Y for sale in economy Z. In this case the goods legally change ownership but do not physically enter the economy where the owner is resident. The SNA convention is that the acquisition of such goods intended for resale are shown as negative exports. When the goods are sold, they are shown as positive exports. If the acquisition and sale take place in different accounting periods, the negative export in the first accounting period is offset by an 1 This paper was developed by DevStat Servicios de Consultoría Estadística in consortium with ICON Institute, under the project Essential SNA: Building the Basics, supported by EUROSTAT, for which information can be found at the following link: 2 Henceforth called the Handbook ; this paper is based on the second (2012) edition; it can be found at the following link: 3 Annual GDP by expenditure approach in current and constant prices: main issues 1

2 increase in inventories of goods for resale, even though those goods are held abroad. In the accounting period of the sale, the exports recorded for their sale are offset by a withdrawal from inventories (SNA 14.73) 4. Another special case worth mentioning is the case of re-exports. These are foreign goods (goods produced in other economies and previously imported with a change of economic ownership) that are exported with no substantial transformation from the state in which they were previously imported. Re-exports increase the figures for both imports and exports, for some countries to a quite considerable extent. Goods that have been imported and will be re-exported in the next accounting period are recorded in inventories of the resident economic owner. Exports of services consist of all services rendered by residents to non-residents. Included are expenditures by foreign tourists in the economic territory of a country. Imports of services consist of all services rendered by non-residents to residents. Included are purchases of services made by residents while travelling abroad for business or pleasure. Valuation of exports and imports Exports of goods must be valued free on board (FOB) at the border of the exporting country. The FOB price includes: the value of goods at basic prices; trade and transport services to the border; taxes minus subsidies on products, if any (there is no VAT on exports, but there may be special export taxes). Imports are usually valued CIF (i.e. they include cost, insurance and freight) at the point of entry into the importing economy. CIF value at the border of the importing country is equal to the FOB value at the border of the exporting country plus all transport and insurance services between the borders delivered by residents and non-residents. Excluded are the cost of transport from the border of the importing economy to the premises of the importer. This way, CIF values for individual goods are equivalent to basic values of the same domestic goods. One must be careful to avoid double recording of transport and insurance services. If these services are rendered by non-residents they may be included in the imports of market services as recorded in the Balance of Payments. If these services are rendered by residents they are included in the domestic output of these services. Total imports may therefore be higher than they should be because these services may be included in the CIF values for goods and in the imports of services. In the framework of Supply Use Tables there exists a special CIF/FOB adjustment, to ensure that total imports are valued FOB, the equivalent valuation to basic prices for domestic output. The rest of the world account in the SNA In SNA, transactions between a resident unit and the rest of the world are recorded as if the units in the rest of the world were another sector of the economy (the ROW sector). The production and generation of income accounts contain only domestic transactions but all other accounts may have 4 See also the following paper in this series: ISIC 4 and its application rules, including the example of outsourcing 2

3 entries for ROW. For example, in the allocation of primary income account there are property income transactions with ROW, with property income either flowing in to the country or out of the country. Transactions for ROW are recorded from the point of view of the rest of the world. A resource for ROW is a use for the total economy and vice versa. E.g. imports are a resource for ROW, just as output is for the domestic economy. Similarly, exports are a use item for ROW. If a balancing item such as the external balance of goods and services (imports minus exports) is positive, it means a surplus of ROW and a deficit of the total economy, and vice versa if the balancing item is negative. Balance of Payments The balance of payments (BOP) is another set of accounts for ROW, closely related to the SNA accounts for ROW. The BOP is compiled in accordance with the sixth edition of the Balance of Payments Manual (BPM6) from the IMF. In the BOP all international monetary transactions at a specific period of time conducted by both the private and public sectors are accounted for in order to determine how much money is going in and out of a country. Whereas the ROW account in SNA is drawn up from the perspective of the rest of the world, BPM6 looks at the same stocks and flows from the point of view of the domestic economy. Thus the BPM6 entries are the mirror image of the SNA entries relating to the rest of the world. If a country has received money, this is known as a credit, and if a country has paid or given money, the transaction is counted as a debit. Also, in the context of BPM6, stock levels are usually referred to as positions and the balance sheet accounts for all financial assets and liabilities where one party to the arrangement is non-resident is called the international investment position. Usually, the BOP is calculated every quarter and every calendar year. The BOP is divided into three main categories: the current account, the capital account and the financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction. The current account is used to record exports and imports of goods and services. When combined, goods and services together make up a country's balance of trade. It is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports. Receipts from income-generating assets such as stocks (in the form of dividends) are also recorded in the current account. The last component of the current account is transfers. These are credits that are mostly worker's remittances, which are salaries sent back to the home country of a national working abroad, as well as foreign aid that is directly received. The capital account is where all international capital transfers are recorded. Included here are monetary flows arising from debt forgiveness (the write-off of debt by mutual agreement of debtor and creditor) and the transfer of assets by migrants leaving or entering a country. In the financial account, international monetary flows related to investment in business, real estate, bonds and stocks are recorded. Also included are government-owned assets such as foreign reserves, gold, special drawing rights (SDRs) held with the International Monetary Fund, private assets held abroad, and direct foreign investment. Assets owned by foreigners, private and official, are also recorded in the financial account. 3

4 Theoretically, the overall balance of the BOP should be zero, meaning that credits and debits should be equal. But in practice this is rarely the case and the BOP can be a very useful instrument to tell from which part of the economy the discrepancies are stemming. Data and classifications The main source of information for exports and imports of goods is the customs statistics pertaining to the export and import of goods, with a very detailed breakdown by products. However, these statistics are based on administrative registers, which usually records all merchandise that crosses the border of a country, regardless of the type of transaction. Therefore some adjustments may be necessary, e.g. for merchandise that crosses the border without being imports (goods in transit, goods for embassies, military bases or other enclaves within a country s borders, etc.), or for merchandise that does not cross the border but are imports (e.g. goods purchased by a country's embassies, military bases or other enclaves in other countries). International standards for merchandise trade statistics can be found in the manual International Merchandise Trade Statistics: Concepts and Definitions (IMTS) (United Nations, 1998). IMTS uses a CIF-type (cost, insurance and freight) valuation for imports. It should be noted that BPM6 uses a uniform FOB valuation for both exports and imports in the BOP. For exports and imports of goods there are a number of classifications relevant for national accounts. The Standard International Trade Classification (SITC) has been in use since It covers all goods that enter international trade. The classification structure consists of five levels comprising 10 sections, 67 divisions, 261 groups, 1,033 subgroups, and 3,121 items at the five digit level. The SITC was last revised in 1986 with the release of SITC Rev. 3 and no further revisions are planned. The Harmonized Commodity Description and Coding System (HS) or Harmonized System, as it is commonly known, was introduced in 1988 by the World Customs Organization, as a replacement for SITC. The HS is the system recommended by the United Nations Statistical Commission for the compilation and dissemination of merchandise trade statistics and is now widely used by most countries. The classification is revised frequently to take account of changing conditions of international trade. In the HS, goods are classified primarily according to the component material or the type of product, degree of processing, function, and economic activity. Goods are classified under 21 main sections, which are further subdivided into 97 chapters, 1,241 headings, and 5,113 subheadings. Descriptions are common across all countries down to the six-digit level; however, for statistical or tariff purposes, countries are allowed to include additional digits on a country specific basis. The classification by Broad Economic Categories (BEC) classifies goods by economic classes distinguishing food, industrial supplies, capital equipment, consumer durables, and consumer nondurables. It was designed to convert goods classified by the SITC according to the three broad enduse classes of consumption goods, intermediate goods, and capital goods commonly used in compiling national accounts statistics. Like the SITC, the UN does not expect to release additional updates of the BEC. 5 The information on classification for goods chiefly comes from Measuring Trade in Services, A training module produced by WTO / OMC, November

5 Data for exports and imports of services come from the BOP. In BPM6, the following 12 main service categories are identified and broken down into a list of standard and supplementary components: Manufacturing services on physical inputs owned by others Maintenance and repair services not included elsewhere Transport Travel Construction Insurance and pension services Financial services Charges for the use of intellectual property not included elsewhere Telecommunications, computer and information services Other business services Personal, cultural and recreational services Government goods and services not included elsewhere It should be noted that Travel is somewhat different from the other service categories. Travel does not refer to a particular service and covers expenses for goods and services (including accommodation, food, souvenirs, etc.) acquired by a person in the country visited. The Extended Balance of Payments Services Classification (EBOPS, currently version 2010) consists of a further breakdown of these BOP service components into more detailed sub-items. Like the BPM6 services classification, EBOPS 2010 is primarily a product-based classification. Exports and imports in constant prices To compile exports and imports in constant prices we need suitable deflators. For goods, ideally, these would be actual export and import prices, based on the prices actually charged by exporters of goods, in the case of exports, or paid by consumers, in the case of imports. However, these are costly to produce and represent a burden on respondents. Instead many countries resort to unit value indices (UVIs), which are readily available from trade statistics being derived as the ratio of value to volume (weight or quantity). However, even at the most detailed level of trade classification they can often include a range of different products, each being of similar description but possibly being of different quality. One possibility is to construct more homogeneous UVIs by taking into account the country of origin (or destination) 6. UVIs are clearly unsuitable for products that are unique or change quickly in specification. For exports it may be possible to use producer price indexes (PPIs) for deflation. Some countries specifically collect PPIs for exports. An improvement would be to adjust these for exchange rate movements between the domestic currency and that of the countries to which the exports are going to. 6 As the Handbook on price and volume measures mentions (p.52): For product groups that are sufficiently homogeneous over time, UVIs can also be considered B methods. The volatility of the UVIs should be examined as a test for suitability rather than simply relying on the understanding of the content of any particular trade group. 5

6 An alternative approach for imports is to use the export prices from trade partner countries where the imports are coming from. Imports need to be broken down by product group and country to make best use of this method. Adjustments are necessary to account for exchange rate movements. Concluding remarks This paper set out to provide some background on the methodology of compiling for exports and imports the MRDS tables on expenditures in current and constant prices. With this paper we have completed our review of the compilation of GDP by the expenditure approach in current and constant prices, consisting of the three major components: final consumption expenditure, gross capital formation, and net exports. Having now devoted papers in this series to production approach and expenditure approach, both in current and constant prices, it should now be clear what the main MRDS tables 7 are and how they should be compiled. In the next paper we will integrate the production approach and expenditure approach into one framework: the Supply Use table. To find out more, Essential SNA: Building the Basics (2012 edition), Chapter 7 The 2008 SNA, European Commission, IMF, OECD, UN, World Bank, 2009, Chapter 15 Price and volume measures Handbook on price and volume measures Eurostat, Luxembourg See Handbook, table II.4, p.38 6