Download Session 13. National income and the balance of payments

Module H5 Session 13
Session 13. National income and the balance
of payments
Learning objectives
At the end of this session the students will be able to



list the main components of the balance of payments
define the elements of the SNA generation of income account
derive “national disposable income” and other income statistics from the GDP
Introduction
The following aggregates are all slightly different national accounting aggregates.



Gross domestic product (GDP)
Gross national income (GNI)
Gross national disposable income (GNDI)
The differences all relate to flows in the balance of payments, which we shall look at first.
Balance of payments
Balance of payments statistics are important for managing the economy, especially in
relation to the rest of the world. The domestic economy is often affected by what is
happening in the external transactions. As the “rest of the world account” the balance of
payments also forms an integral part of the SNA.
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Module H5 Session 13
The following are the main components of the balance of payments system
Balance of Payments: Standard Components
For every component there will be a credit and a debit entry.
1. Current Account
A. Goods and services
a. Goods
(various possible classifications)
b. Services
1. Transportation
2. Travel
3. Communications services
4. Construction services
5. Insurance services
6. Financial services
7. Computer and information services
8. Royalties and license fees
9. Other business services
10. Personal, cultural, and recreational services
11. Government services n.i.e.
B. Income
1. Compensation of employees
2. Investment income
C. Current transfers
1. General government
2. Other sectors
2. Capital and Financial Account
A. Capital account
1. Capital transfers
2. Acquisition/disposal of non-produced, non-financial assets
B. Financial account
1. Direct investment
2. Portfolio investment
3. Other investment
4. Reserve assets
Source: Balance of Payments Manual (Fifth edition) International Monetary Fund, 1993
The category of “income” is more commonly know as “factor income”, as it refers to
income derived from the factors of production (labour and capital), either earned abroad
(credit) or paid to non-residents (debit). Investment income includes interest payable on
loans received from abroad. It does not include the repayment of loans, which is a
financial transaction classified under component 2B-3. Other investment. Overall, the
balance of payments figures should balance, but usually there is a line in the statistics for
“net errors and omissions”.
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Module H5 Session 13
Balance of Payments: Namibia
This table shows the balance of payments for Namibia.
Balance of payments (N$ million)
Merchandise trade balance
Exports fob
Imports fob
Services (net)
Credit
Debit
Compensation of employees (net)
Credit
Debit
Investment income (net)
Credit
Debit
Current transfers in cash and kind (net)
Credit
Debit
Current Account Balance
2,002
-2,183
11,278
13,461
390
2,849
-2,459
-14
45
-59
252
1,371
-1,118
2,895
3,206
-310
1,341
2,003
-3,481
9,463
-12,944
1,050
3,115
-2,065
-31
53
-83
531
1,570
-1,039
3,467
3,670
-203
1,537
2,004
-1,829
11,761
-13,590
352
3,058
-2,706
-27
56
-83
639
1,492
-853
4,304
4,529
-225
3,439
2,005
-1,688
13,149
-14,837
277
2,615
-2,338
-23
67
-90
-79
1,495
-1,574
4,262
4,548
-286
2,748
Net capital transfers
Credit
Debit
Direct investment
Abroad
In Namibia
Portfolio investment
Assets
Liabilities
Other investment - long term
Assets
Liabilities
Other investment - short term
Assets
Liabilities
Capital & financial account excl reserves
429
431
-2
1,969
57
1,912
-4,441
-4,310
-132
612
-204
816
410
154
256
-1,021
510
512
-3
1,204
79
1,125
-4,792
-4,621
-171
418
-9
426
406
29
377
-2,254
498
501
-3
1,602
143
1,459
-5,430
-5,298
-133
-501
-91
-410
151
396
-245
-3,680
505
509
-3
2,293
80
2,213
-6,639
-6,685
46
238
-211
448
489
499
-9
-3,114
-221
98
-98
-144
-862
822
153
-88
88
380
14
-14
Net errors and omissions
Overall balance
Reserve assets
Source: Bank of Namibia, Annual Report, 2006, Windhoek, Namibia
Exercise 1
Check that all the sub-totals and totals are equal to the sum of there components (except
for possible rounding error).
One figure is this table has been deliberately misprinted. Can you spot it?
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GDP by income category
The SNA generation of income account shows how gross value added (or GDP) generates
certain types of income. It could be presented like this:
Code
D1
D2
D3
K1
B2
B3
Uses
Compensation of employees
Taxes on production and imports
(less subsidies)
Consumption of fixed capital
Operating surplus, net
Mixed income, net
Total GDP
762
191
222
247
432
1,854
Code
B1
D21
D31
Resources
Gross value added
Taxes on products
(less subsidies)
Total GDP
1,721
133
1,854
The categories are defined as follows
Compensation of employees is the total remuneration, in cash or in kind, payable by an
enterprise to an employee in return for work done by the latter during the accounting
period.
Taxes on production and imports are “taxes on products” and “other taxes on production”.
Taxes on products consist of taxes, including value added tax, payable on goods and
services when they are produced, delivered, sold, transferred or otherwise disposed of by
their producers plus taxes and duties on imports that become payable when goods enter
the economic territory by crossing the frontier or when services are delivered to resident
units by non-resident units.
Other taxes on production consist mainly of current taxes on the labour or capital
employed in the enterprise, such as payroll taxes or current taxes on vehicles or buildings.
Consumption of fixed capital represents the reduction in the value of the fixed assets used
in production during the accounting period resulting from physical deterioration, normal
obsolescence or normal accidental damage.
The operating surplus measures the surplus or deficit accruing from production before
taking account of any interest, rent or similar charges payable on financial or tangible nonproduced assets borrowed or rented by the enterprise, or any interest, rent or similar
receipts receivable on financial or tangible non-produced assets owned by the enterprise;
(note: for unincorporated enterprises owned by households, this component is called
"mixed income").
Source: http://unstats.un.org/unsd/sna1993/glossary.asp?letter=O
Few developing countries have accurate figures relating to these categories of income
because of the difficulty in measuring them. In developed countries, compensation of
employees is usually based mainly on information from pay-as-you-earn (PAYE) tax or
social security contribution records. However, because such systems only cover employees
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of formal sector businesses, in developing countries this source of information is not very
adequate because the coverage is limited.
Estimating the consumption of fixed capital is also a challenge, and depends on
assumptions about the life length of the assets. Operating surplus and mixed income is
usually estimated as a residual.
National income aggregates
The SNA concept of gross national income (GNI) used to be known as gross national
product (GNP) especially in the United States of America. It can easily be derived from
the GDP and the “income” component (1B) of the balance of payments. Income credits
are added and debits subtracted.
Gross national disposable income (GNDI) is a SNA concept closely related to GNI. It
is derived from GNI and the “current transfers” component (1C) of the balance of
payments. Credits of current transfers are added and debits subtracted.
GNDI, in turn, may be split between consumption expenditure and (gross) national
saving. By deducting estimates of the consumption of fixed capital, all of the above
measures may be expresses as “net” instead of “gross”.
“Real” income
The SNA makes an important distinction between something measured “at constant
prices” and the “real” value of a flow such as income. Income and similar flows in the
system, not being the value of specific goods or services, cannot be measured “at constant
prices” in the usual way. Such flows may nevertheless be measured “in real terms” by
deflating their values by prices indices in order to measure their real purchasing power over
a selected basket of goods and services. The selection of the basket may not be obvious,
however, and differing baskets may even be appropriate for the units paying and receiving
the same money. In particular, changes in the purchasing power of GDP will differ from
changes in GDP at constant prices if there are changes in the “terms of trade”. If the
terms of trade change in your favour, it means that export prices have increased more than
import prices. This means that, for the same volume of production, you could buy more
imports than before.
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Module H5 Session 13
GDP by income category
In Namibia, estimates are made of GDP by income category, with net operating surplus
(including mixed income) as a residual
Gross domestic product by income
Current prices - N$ million
Compensation of employees
Consumption of fixed capital
Net operating surplus (& mixed income)
2002
12,012
4,073
13,793
2003
13,051
5,303
12,525
2004
13,903
5,932
12,878
2005
14,477
6,651
13,645
Gross domestic product at factor cost
29,878
30,879
32,713
34,773
Taxes on production and imports
Subsidies
Gross domestic product at market prices
3,582
-552
32,908
3,104
-140
33,842
3,681
-213
36,181
4,056
-269
38,560
Source: Central Bureau of Statistics (quoted in Bank of Namibia, Annual Report, 2006)
Exercise 2
Using the balance of payments data complete the following table: (Primary income is the sum
of the BOP categories “compensation of employees” and “investment income”.)
Current prices - N$ million
Gross domestic product at market prices
Primary incomes (net)
Gross national income
Current transfers in cash and kind (net)
Gross national disposable income
2002
2003
2004
2005
32,908
33,842
36,181
38,560
239
501
612
-102
33,147
34,343
36,793
38,458
2,896
3,467
4,304
4,262
36,043
37,810
41,097
42,720
Has GDNI risen faster than, slower than or about the same as GDP over this period?
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Module H5 Session 13
Quality note
Interestingly, these results do not agree with those published in the same publication:
Discussion point
It seems the figures for primary incomes do not agree with those in the balance of
payments table. Check this out. What are the likely reasons for this difference?
What lesson can be learnt from this?
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