THE BALANCE OF PAYMENTS OF THE UNITED STATES Concepts, Data Sources, and Estimating Procedures May 1990 U.S. DEPARTMENT OF COMMERCE Robert A. Mosbacher, Secretary Michael R. Darby, Under Secretary for Economic Affairs BUREAU OF ECONOMIC ANALYSIS Allan H. Young, Director Carol S. Carson, Deputy Director For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402 Introduction The balance of payments is a statistical summary of in- planations of the basic concepts, de®nitions, and general ternational transactions. These transactions are de®ned methodological issues and includes brief discussions of as the transfer of ownership of something that has an how the balance of payments estimates are used in con- economic value measurable in monetary terms from resi- structing the statement on the international investment dents of one country to residents of another. The transfer position of the United States and how the balance of pay- may involve (1) goods, which consist of tangible and visible ments estimates are incorporated into the U.S. national commodities or products, (2) services, which consist of in- income and product accounts. The underlying concepts, tangible commodities that are produced, transferred, and data sources, and estimating procedures pertaining to the consumed at the same time, (3) income (which is some- balance of payments transactions that constitute the cur- times classi®ed in ªservicesº), and (4) ®nancial claims on, rent and capital accounts are discussed in parts II and III, and liabilities to, the rest of the world, including changes respectively. in a country's reserve assets held by the central monetary authorities. Generally, a transaction is the exchange of one asset for anotherÐor one asset for several assetsÐ but it may also involve a gift, which is the provision by one party of something of economic value to another party Changes Introduced in June 1990 without something of economic value being received in return. As this volume went to press, BEA introduced several changes in estimation procedures and the presentation of data. The major International transactions are recorded in the balance changes are noted below. of payments on the basis of the double-entry principle 1. Capital gains and losses associated with currency trans- used in business accounting, in which each transaction lation adjustments have been removed from receipts of gives rise to two offsetting entries of equal value so income on U.S. direct investment abroad and from the that, in principle, the resulting credit and debit entries reinvested earnings component of U.S. direct investment always balance. Transactions are generally valued at capital ¯ows. These gains and losses arise because of market prices and are, to the extent possible, recorded changes, from the end of one accounting period to the next, in exchange rates applied in translation of foreign af®liates' when a change of ownership occurs. Transactions in assets and liabilities from foreign currencies into dollars. goods, services, and unilateral transfers constitute the This rede®nition recognizes that these gains and losses are current account, and transactions in ®nancial assets and more appropriately classi®ed as valuation adjustments to liabilities constitute the capital account. the direct investment position than as income and capital The International Monetary Fund, which strives for ¯ows in the international accounts. international comparability, de®nes the balance of pay- 2. The term ªservicesº has been rede®ned to exclude invest- ment income. Receipts and payments of investment income ments as ªa statistical statement for a given period are now shown in a position of importance equal to services showing (1) transactions in goods, services, and income in the presentation of estimates. Services are de®ned to between an economy and the rest of the world, (2) changes include only services such as travel, other transportation, of ownership and other changes in that economy's mone- and business, professional and technical services. Corre- tary gold, special drawing rights (SDR's), and claims on sponding changes have been made to the partial balances published by BEA to emphasize that the basic building and liabilities to the rest of the world, and (3) unrequited blocks of the current account are merchandise trade, serv- transfers and counterpart entries that are needed to ices, investment income, and unilateral transfers. The balance, in the accounting sense, any entries for the fore- balance on goods, services, and income is equivalent to going transactions and changes which are not mutually the previous balance on goods and services. This redef- inition aligns the terms more closely with general usage offsettingº [16]. and with concepts employed in the International Mone- Balance of payments estimates for the United States tary Fund's Balance of Payments Manual and the United are prepared by the Bureau of Economic Analysis (BEA), Nation's System of National Accounts. U.S. Department of Commerce, on a quarterly basis. The 3. U.S. military grants of goods and services (line 30) have methodology used by BEA in constructing the balance of been combined with other U.S. Government grants (line payments statement is described in this volume, which 32). Transfers of goods and services under U.S. military is divided into three parts. Part I provides detailed ex- grants (line 15) have been combined with transfers under U.S. military agency sales contracts (line 4). For more details on these and other changes introduced in June 1990, see the technical notes in ªU.S. International Trans- actions, First Quarter 1990º in the June 1990 SURVEY OF CURRENT NOTE.ÐBracketed numbers in the text refer to items in the ªSources,º BUSINESS. at the end of the publication. xiii Part I CONCEPTS AND STRUCTURE Concepts, De®nitions, and Principles 1 Concept of Economy tends to return in a reasonable period of time. Another exception is that of individuals and members of their im- An economy consists of economic entities that have a mediate families who reside outside the United States as closer degree of association with a given territory than a result of employment by the U.S. Government, such as with any other. For the U.S. balance of payments, diplomats, consular of®cials, and members of the armed the economy consists of the 50 States, the District of forces; they are considered U.S. residents, regardless of Columbia, the Commonwealth of Puerto Rico, American their length of stay elsewhere. The third exception is that Samoa, Guam, Midway Island, the Virgin Islands, Wake of American students who are enrolled in a course of study Island, and all other U.S. territories and possessions. U.S. at foreign educational institutions; they are considered Government military, diplomatic, consular, and other non- U.S. residents, regardless of how long they study abroad. military installations abroad are considered to be within Similarly, an owner or employee of a foreign business en- the U.S. economy, and their operations are regarded as an terprise who is residing temporarily in the United States extension of U.S. Government domestic operations. in order to further the enterprise's business is not consid- ered a U.S. resident. Aliens who work in the United States for foreign embassies, consulates, or other missions, and 2 Concept of Resident foreign students enrolled at American educational insti- tutions are also not considered U.S. residents, regardless There are two criteria for drawing the distinction between of how long they stay in the United States. residents and nonresidents: (1) The person has a center of economic interest (i.e., consumes, produces, or otherwise participates in economic activities) in a given country and 2.2 Business enterprises and nonpro®t (2) resides, or expects to reside, for 1 year or more in that organizations country. As mentioned below, there are a few exceptions to these criteria; they involve cases where a person re- Business enterprises and nonpro®t organizations are sides outside his or her country of residence, but remains considered residents of the country in which they are subject to that country's jurisdiction (e.g., military and located, operated, organized, incorporated, or controlled diplomatic personnel). ®nancially. U.S. resident organizations consist of all Thus, U.S. residents are those persons residing and pro®t-making and nonpro®t organizations established un- pursuing economic interests in the United States; nonres- der local U.S. laws; their foreign branches, subsidiaries, idents are those residing and pursuing economic interests and agencies are considered residents of the countries outside the United States. The term ªU.S. residentº in which they are located. Similarly, all branches, (or ªU.S. personº) is interpreted broadly to include (1) subsidiaries, and agencies of foreign pro®t-making and individuals residing permanently in the United States, nonpro®t organizations that operate in the United States (2) business enterprises and nonpro®t organizations es- are considered U.S. residents. A foreign branch is an tablished under U.S. laws, including proprietorships, unincorporated business af®liate established in a foreign partnerships, and corporations, and (3) Federal, State, country to conduct the business of the parent company and local governments, together with their agencies and in the parent's name; it is not a separate legal entity. A subdivisions. International organizations are treated as foreign subsidiary is a business af®liate established and a separate category and are not considered residents of incorporated in a foreign country under local laws; it is a any country. separate legal entity from the parent company. Transac- tions between parent companies and their unincorporated 2.1 Individuals and incorporated af®liates are recorded in the U.S. bal- ance of payments as transactions between residents and In general, individuals are considered residents of the nonresidents.