The Pink Book and the Rest of the World Flashcards
What is the balance of payments?
- “The balance of payments summarises transactions between residents of a country and non-residents during a period. The Pink Book summarises the economic transactions of the UK with the rest of the world over time. It can be broken into three components: the current account, the capital account, and the financial account.
- In effect, C and C are flows of stuff and F is the flow of financial assets
- Current account + capital account + financial account = 0
- This is bc since everything is paid for, every purchase or sale has a corresponding flow of money
The current account?
- The current account shows the flows of goods and services that comprise international trade, the cross-border income flows associated with the international ownership of financial assets, and current transfers between residents and non-residents. The sum of the balances on these accounts is known as the current account balance.
- 3 components –
- A.) balance of trade X-M
- B.) net primary income – from interest, profits, dividends from foreign investment, migrant remittances
- C.) net secondary income – spending military aid, overseas development aid etc.
- UK normally has a current account deficit – pink book 2019
- Has been getting worse since 1997
Current account deficit is reflected in net financial flows
For example, foreign banks buying government treasuries or private investors in the stock market
Or British banks selling off foreign shares or US treasuries
Capital account?
- The capital account consists of capital transfers and the acquisition or disposal of non-produced, non-financial assets.
- Capital transfers and the acquisition or disposal of non-produced, non-financial assets
- Sale/transfer of patents, copyrights, franchises, leases and other transferable contracts, and goodwill (brands etc.), transfer of ownership of fixed assets
Sum of capital and current account?
- The sum of the current account balance and capital account balance indicates whether the economy is a net lender to the rest of the world (in surplus) or a net borrower from the rest of the world (in deficit).
Financial account?
- The financial account shows the net acquisition or net incurrence of financial assets and liabilities and is the counterpart to the current account and capital account. It records how the country is financing its borrowing from, or lending to, the rest of the world.
- Records how the country is financing its borrowing from, or lending to, the rest of the world
- Used to be included in capital account
International Investment Position?
- The international investment position (IIP) records the stock position of financial investments. It shows at the end of the period the value of the stock of financial assets of residents of an economy that are claims on non-residents and the value of the stock of financial liabilities of residents of an economy to non-residents. The difference between the assets and liabilities in the IIP represents either a net claim on, or a net liability to, the rest of the world. “
Double entry basis of account?
- 2 sides to every transaction
- The sum of credits should equal the sum of debits
- But in practice due to measurement errors (e.g., when do you record the transaction), do not add to 0
- (if there is an exam question on this – would be looking at difficulty of this)
Challenges with double entry basis of account?
Timing differences: There can be discrepancies in the timing of when a transaction is recorded in the exporter’s accounts versus the importer’s accounts, leading to timing differences in the balance of payments.
Valuation issues: Accurately valuing transactions can be challenging, especially when dealing with complex international trade arrangements, such as barter transactions or transfer pricing within multinational corporations.
Asymmetries in reporting: Different countries may have varying methodologies and data sources for compiling their balance of payments, which can lead to asymmetries in the reporting of the same transaction.
Unrecorded transactions: Some economic activities, such as informal cross-border trade, smuggling, or illegal activities, may not be fully captured in the balance of payments data, leading to underestimation of certain transactions.
Services trade: Measuring trade in services can be more complex than trade in goods, as services are often intangible and can be difficult to quantify and value accurately.
Capital account transactions: Accurately recording and classifying capital account transactions, such as foreign direct investment, portfolio investment, and financial derivatives, can be challenging due to the complexity of these transactions.
UK trade and the world?
- UK has been a big trading nation for a long time
- Fairly open – measured by net exports as % of GDP
- Smaller countries tend to trade more – larger more self sufficient
- Left out some ‘entrepot’ countries that re-export imported foods – usually tax hub or tax havens – Luxembourg, Estonia, Singapore
- Net trade often small in UK – main exception is Germany
- Puzzle – sum of all trade deficits across countries should equal zero, but it doesn’t
- Globally, G-T + I-S = 0, if countries move to larger public deficits G-T, then I-S goes down
International trade data?
- Because countries collect and treat trade data differently – get discrepancies
- Many sources – World Bank, IMF, WTO, Eurostat etc.
Reasons for differences - international trade data?
- Underlying records – is trade measured from national accounts data rather than directly from custom/tax records?
- Import and export valuation – are transactions value at FOB or CIF prices?
- Inconsistent attribution of trade partners – how is the origin and final destination of merchandise established?
- Difference between goods and merchandise – how are re-importing, re-exporting, and intermediary merchanting transactions recorded?
- Exchange rates – how are values converted from local currency units to the currency that allows international comparisons
- Differences between general and special trade system – how is trade recorded for custom-free zones
- Other issues – time of recording, confidentiality policies, product classification, deliberate mis-invoicing for illicit purposes (for tax evasion for example)
2 approaches to measuring trade?
1.) Relies on estimating trade from customs records, often complementing or correcting figures with data from enterprise surveys and administrative records associated with taxation – the main manual providing guidelines for this approach is the IMTS
2.) Relies on estimating trade from macroeconomic data, typically national accounts – main manual providing the guidelines is the BPM6, drafted in parallel with SNA2008 – idea is recording changes in economics ownership
What is the price recorded for a transaction/shipment?
- According to BPM6, imports and exports should be recorded in the BOP accounts on a free on board (FOP) basis, meaning using prices including all charges up to placing the goods on board a ship at the port of departure
- Many countries stick to FOB for exports and use CIF (Cost, Insurance and Freight) for imports, including the costs of transportation
International Investment Position - detailed?
- Measures the stock of
assets/liabilities at the end of period, and is the sum of the opening balance, financial flows and other changes – ONS pink book - UK residents, firms and other institutions have large holdings of foreign assets – likewise, foreign residents hold large amounts of UK financial assets – IIP is the difference between the 2
- If positive, we own more than we owe
- Since 2008, UK IIP is negative
- IIP measured in £ sterling, hence is foreign assets in other currencies, changes of exchange rates will affect IIP – volatile currency changes can be driving factors behind changes in UK assets/liabilities
Publication cycle?
UK trade – monthly
* 6 week delay
* Don’t say how much as a % of GDP
* Lots of detail – precious metals, unspecified goods, balancing item
Main points:
The underlying total trade deficit (goods and services), excluding non-monetary gold and other precious metals, widened £4.0 billion to £6.5 billion in Quarter 4 (Oct to Dec) 2019, largely because of trade in services.
The trade in services surplus narrowed £5.1 billion in Quarter 4 2019 largely because of the inclusion of GDP balancing adjustments. Excluding GDP adjustments and precious metals, the total trade deficit widened by a lesser £1.0 billion to £2.0 billion
Exports of precious metals increased by £11.2 billion, while imports fell by £2.1 billion in Quarter 42019, leading the total trade balance (including non-monetary gold and other precious metals) to increase by £9.3 billion from a deficit of £3.4 billion to a surplus of £5.9 billion.
The trade in goods deficit, excluding unspecified goods (which includes non-monetary gold) narrowed with EU countries and widened with non-EU countries.
Removing the effect of inflation, the total trade deficit in volume terms, excluding unspecified goods, widened by £4.3 billion to £4.1 billion in Quarter 4 2019.
The total trade deficit narrowed by £0.5 billion to £29.3 billion in 2019, with a £9.7 billion narrowing of the trade in goods deficit, largely offset by a £9.2 billion narrowing of the trade in services surplus.
