Official Economic Statistics - Part-1 - GFS and BOP Statistics by Tarun Das

Official Economic Statistics by Tarun Das
Lectures on
Official Economic Statistics
Part-1
Government Finance Statistics (GFS)
Balance of Payments Statistics (BOP)
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Professor Tarun Das1
UN Statistical Institute for Asia and Pacific

Chiba, Japan
20-24 August 2007
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Professor Tarun Das teaches Public Policy and Research Methodology to the MBA students at
the Institute for Integrated Learning in Management (IILM), New Delhi. Presently, he is working at
Ulaanbaatar, Mongolia as Glocom Inc. (USA) Expert on Strategic Planning under an ADB Project
on Governance Reforms in the Ministry of Finance, Government of Mongolia. Earlier he worked
as Economic Adviser in the Ministry of Finance and Planning Commission, Government of India.
For any clarification, contact das.tarun@hotmail.com/ das5delhi@yahoo.co.in
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ACKNOWLEDGEMENTS
Professor Tarun Das teaches Public Policy and Research Methodology to the MBA students at
the Institute for Integrated Learning in Management (IILM), New Delhi. Presently, he is working at
Ulaanbaatar, Mongolia as Glocom Inc. (USA) Expert on Strategic Planning under an ADB Project
on Governance Reforms in the Ministry of Finance, Government of Mongolia. Earlier he worked
as Economic Adviser in the Ministry of Finance and Planning Commission, Government of India.
These lectures were prepared by the author at the IILM, New Delhi for the training of the Indian
Statistical Service and Indian Economic Service. The lectures have been modified to some extent
to suit the needs of statistical officers from various countries participating the training program at
the UN Statistical Institute of Statistics for Asia and Pacific (SIAP), Chiba, Japan.
The lectures are broadly based on various IMF publications and manuals on these topics. It is
needless to indicate that these lectures express personal views of the author which may not
necessarily reflect the views of the organisations he is associated with. The author is fully
responsible for any omissions or errors in these lecture notes.
Author would like to express his deepest gratitude to Ms. Davaasuren Chultemjamts, Director,
UNSIAP and Dr. Kulshreshtha, Professor (Statistics), UNSIAP for providing an opportunity to
deliver these lectures to the participants of the Third Group Training Course in Analysis,
Interpretation and Dissemination of Official Economic Statistics during 20-24 August 2007 at
UNSIAP, Chiba, Japan.
Author is also grateful to the Ministry of Finance, Government of Mongolia, particularly to Mr.
Batjargal, Director General, Fiscal Policy and Co-ordination Department for granting necessary
permission to deliver these lectures.
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Contents
1. Brief profile of the resource person (page-5 and 75)
2. Course outline, scope, objectives and pedagogy (page-6 and 76)
3. Government Finance Statistics (GFS) (pages 7-44)
3.1 Flows and Stocks

3.2 Other economic flows
3.3 GFS 1986 and Components of Govt Operations
3.4 Accounting rules and Accrual Accounting
3.5 Data Coverage and Sub-Sectors
3.6 Analytical Frameworks for GFSM 2001
3.7 GFSM 2001 Implementation
3.8 Valuation
3.9 Differences between GFS 1986 and GFS 2001
3.10 Derived measures
3.11 Classification of Outlays by Function of Government (COFOG)
3.12 Case Study- Indian GFS
3.13 GFS Workout Session on Mongolian GFS
3.14 GFS Workout Session on Australian GFS
4. Balance of Payments (BOP) Statistics (pages 45-70)
4.1 Analytical framework

4.2 BOP Accounting Principals
4.3 Flows and Positions
4.4 Accounting System
4.5 Current and Capital Account
4.6 Time of Recording of Flows
4.7 Accrual Accounting
4.8 Valuation
4.9 Aggregation and Netting
4.10 Symmetry of Reporting
4.11 Derived Measures
4.12 Major Classifications of BOP
4.13 Balance of Payments: Standard Components
4.14 BOP Workout Session on Three Gap Model
4.15 BOP Workout Session on Indian BOP
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5. Monetary and Financial Statistics (MFS) (pages 77-92)
5.1 Basic concepts

5.2 Sectorization and classifications
5.3 Valuation
5.4 Time of recording
5.5 Aggregation, consolidation and netting
5.6 Analytical Framework
5.7 SNA 1993 and the Structure of Accounts
5.8 Relation between macro-economy and financial sectors
5.9 Domestic economy and rest of the world
5.10 Balance Sheets
5.11 Broad Money Supply
5.12 Money Supply- A Case Study for India
5.13 Workout Session on Money Supply and Demand
6. Productivity Analysis (pages 93-108)
6.1 Production Function

6.2 Equilibrium of the Firm
6.3 Cobb-Douglas Production Function
6.4 Total factor productivity
6.5 Growth accounting
6.6 Solow residual
6.7 Regression analysis and the Solow residual
6.8 Critique of the measurement in rapidly developing economies
6.9 Multifactor Productivity
6.10 Application of Index methods
6.11 Workout Session on Productivity in Japan
7. Answers to Workout Sessions (pages 109-127)
Selected References
Lecture notes have been prepared mainly on the basis of the following IMF Publications
and Manuals:
Government Finance Statistics (GFS) 1986
Government Finance Statistics Manual (GFSM) 2001
Government Finance Statistics (GFS) Yearbook 2006
Monetary and Financial Statistics Manual (MFSM) 2007
Monetary and Financial Statistics (MFS): Compilation Guide 2007
International Financial Statistics (IFS)
Balance of Payments Manual 2005
Balance of Payments Statistics Yearbook 2006
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Profile of the Resource Person Prof. Tarun Das
• Professor Tarun Das teaches Public Policy and Research Methodology to

the MBA students at the Institute of Integrated Learning in Management
(IILM), 3 Lodhi Institutional Area, New Delhi-110003, India.
• Presently, he is working at Ulaanbaatar, Mongolia as Glocom Inc. (USA)

Expert on Strategic Planning under an ADB Project on Governance
Reforms in the Ministry of Finance, Government of Mongolia. Earlier he
worked as Economic Adviser in the Ministry of Finance and Planning
Commission, Government of India.
• Work Experience: 35 yrs as Development Economist in the government

of India: Last assignments: Economic Advisor, Planning Commission
(1986-1988) and Economic Adviser, Min of finance (1986-2006)
• Country Co-coordinator for the IMF Govt Finance Statistics, Special

Data Dissemination Standards, World Bank Global Development
Finance (1990-2003), the Commonwealth Secretariat Debt Recording
and Management System for India (1998-2003).
• Worked as Consultant to the World Bank (Washington), ADB (Manila),

UNDP (New York), UNESCAP (Bangkok), ILO (Geneva), UNCTAD
(Geneva), UNITAR (Geneva), Global Development Network (GDN)
(Washington), UN Commission for Africa (Addis Ababa).
• Worked on Fiscal Management for the governments of Cambodia,

Indonesia, Lao PDR, Mongolia, Nepal, Philippines and Samoa.
• Member of Govt. Delegate to World Bank, ADB, IMF, UNCSD, WTO.
• Research/Teaching Interest: Macro Econometric Modeling and Policy

Planning, Research Methodology, Public Policy, Economic Reforms,
Poverty, Inequality, Transport Modeling, Public Debt and External Debt.
• Dr. Das is a widely traveled person and possesses diversity in skills in

teaching, training, research, policy planning and modeling. He has
published a number of books and papers on economic statistics, structural
reforms, fiscal policies, management of public debt and external debt,
transport modeling, poverty and inequality, foreign investment, technology
transfer and privatisation strategy.
• Qualifications: MA in Econ. (Gold Medalist), Calcutta University, 1969.

Ph. D. in Econ, as Commonwealth Scholar, East Anglia Univ., England, 1977.
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Course Outline, Scope, Objectives and Pedagogy
Background
The consultant, an expert in the field of Economic, Financial and Government Statistics will cover select
topics in Economic Statistics, namely: Government Finance Statistics (6 sessions), Monetary and Financial
Statistics (4 sessions), BOP/Rest of the World Sector(6 sessions), and Productivity analysis (4 sessions) by
conducting lecture and workshop sessions during 20-24 August 2007. These lectures form part of the wider
Third Group Training Course in Analysis, Interpretation and Dissemination of Official Statistics, 2007 at
U.N. Statistical Institute for Asia and the Pacific, Chiba.
Objectives
The course aims to strengthen the capability of the national statistical services to take part in the process of
improving their economic statistics and quality of analysis, interpretation and dissemination of official
statistics. The consultant is expected to impart training to help participants understand select topics of the
systems of economic accounts, specifically the system of Government Finance Statistics, Monetary and
Financial Statistics, Balance of Payment Statistics, and Productivity analysis for their countries
Learning Outcome
1. Develop a comprehensive understanding of the basic concepts, analytical framework, database,
methodology, uses, applications and limitations of economic statistics.
2. Develop skills and capabilities for analytical presentation, networking and teamwork through
group workout sessions.
3. More emphasis will be laid on understanding basic concepts, methodology, techniques, and their
uses and limitations for various situations, rather than formal proofs and derivation of formula.
Pedagogy
1. Teaching techniques will consist of formal lectures, case studies, practical and workout sessions,
and preparation and presentation of group project reports.
2. Selected case studies would be given so as to facilitate participants to relate to theoretical concepts
with real life situations in economic analysis, policy formulation and planning. The students would
present and discuss these case studies in the class.
3. Participants will be provided with complete course material well in advance. To make classroom
presentations by the resource person more meaningful and effective, participants are required to
come prepared and collect related information and data from journals, newspapers and websites,
and participate actively in classroom sessions.
4. In order to develop teamwork and networking capabilities, students are encouraged to participate
actively in group discussions and workout sessions.
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Government Finance Statistics – Basic Concepts
Professor Tarun Das
1. Flows and Stocks

All of the data recorded in the GFS system are either flows or stocks. Flows are monetary values of
units that occur within an accounting period. Stocks refer to a unit’s value at a particular point of time.
For example, receipts and expenditure are flows whereas outstanding public debt is a stock.
Flows and stocks recorded in the GFS system are integrated, which means that all changes in stocks
can be fully explained by the flows. The following relationship is valid for each stock:
S¹ = Sº+ F or F = S¹ - Sº
Where Sº = values of a specific stock at the beginning of an accounting period

S¹= values of a specific stock at the end of an accounting period
F = Net value of all flows during the period that affected that particular stock.
Types of flows
Flows reflect the creation, transformation, exchange, transfer, or extinction of economic value. They
involve changes in the volume, composition, or value of a unit’s assets, liabilities, and net worth. A
flow can be a single event, such as a cash payment for the purchase of goods, or the cumulative value
of a set of events occurring during an accounting period, such as the continuous accrual of interest
expense on a government bond. All flows are classified as transactions or as other economic flows.
A transaction has the following characteristics:

(a) It is an interaction between two units by mutual agreement or by force of law such as
interest payments, tax and non-tax revenues. Although most transactions take place
between two units, in some cases there may be internal transactions such as inventories.
(b) Every transaction is either an exchange or a transfer. A transaction is an exchange if one

unit provides a good, service, asset or labor to a second unit and receives something of the
same value in return. Compensation of employees, purchases of goods and services, interest
expense, the sale of an office building, and all internal transactions are exchanges.
(c) A transaction is a transfer if one unit provides a good, service, asset, or labor to a second
unit without receiving anything of any value in return, such as government subsidies, grants,
and social assistance benefits to the people.
(d) All taxes and duties are treated as transfers even though the units making these
payments may receive some benefits provided by the government receiving the taxes. Non-
life insurance premiums and claims are also treated as transfers. Non-life insurance
includes social security schemes and employer social insurance schemes for government
employees that do not provide retirement benefits.
(e) All transactions can also be classified as monetary or non-monetary. A non-monetary

transaction must be assigned a monetary value as the GFS system deals only with flows
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and stocks expressed in monetary terms. Non-monetary transactions can be either two party
transactions or internal transactions, and they can be exchanges or transfers. Barter, in-
kind remuneration, in-kind payments, in-kind transfers are non-monetary
transactions.
(f) Some transactions are not recorded in the form in which they appear to take place. Instead
they are modified to bring out their underlying economic relationships more clearly.
Rerouting, partitioning, and reassignment are the three types of modifications
employed in the GFS system.
(g) Rerouting is required when the actual party to a transaction does not appear in the
accounting records because of administrative arrangements. For example, government
makes contributions directly to the employees’ retirement schemes. For proper accounting
purpose, it is necessary to reroute these payments so that the government is seen as paying
to the employees, who then are deemed to make payments of the same amount to the
retirement schemes.
(h) Partitioning is the division of a single transaction between two parties into two or more
transactions for recording in the GFS. For example, when a government unit acquires a
fixed asset under a financial lease, the periodic lease payments need to be partitioned into
two transactions, a repayment of principal and a payment of interest.
(i) Reassignment is required when a unit acts as an agent for another unit. For example, for
convenience one government unit may collect taxes and then transfers some or all of the
taxes to another government unit. In some cases, the collecting unit retains a small portion
of the tax collected as collection expenses. The amount retained is treated as the sale of a
service by the collecting unit.
Differences with SNA 1993
The treatment of some activities in the GFS system differs from their treatment in the 1993 SNA. For
example, general government units are non-market producers, because they normally produce goods
and services, and then distribute those goods and services without charge. The production of the
output and its distribution are both non-monetary transactions that must be recorded in the 1993 SNA
to have a complete accounting of production.
The GFS system, however, focuses on the financial activities of government. Because the value of the
output produced and the value of the distribution are equal by definition, there cannot be any change
in the financial position of the government unit involved in transactions. As a result, these transactions
do not need to be recorded in the GFS system. The transactions associated with the production
process, such as compensation of employees and the purchase of goods and services for use in
production, do affect the financial position of the general government unit and are recorded in the GFS
system. Despite different treatments of some activities, both systems include all flows that change
stocks so that all changes in the balance sheet can be explained by the flows recorded.
In general, the transactions of the 1993 SNA that are not recorded in the GFS system include the
following:
• The output and simultaneous distribution of non-market goods and services;

• The output of fixed assets constructed on own account and the costs of producing those assets;
• Certain transactions related to employer social insurance schemes providing retirement benefits
Managed by general government units; and
• Transactions reflecting the reinvestment of earnings on direct foreign investment.
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2. Other economic flows
Other economic flow is a change in the volume or value of an asset or liability that does not result
from a transaction. Volume changes are described as (1) other changes in the volume of assets or,
simply, other volume changes, and value changes are described as (2) holding gains and losses. In all
cases, a reference to a change in the volume or value of an asset refers also to changes in liabilities as
appropriate.
(1) Other changes in the volume of assets cover a wide variety of events, which are divided into three
groups viz.
(a) Events that involve the addition to or deletion from the balance sheet of an existing asset or
liability with no changes in its quantity or quality. A few examples are given below;
• A mineral deposit becomes economically exploitable due to technological progress or
rise in market prices.
• Improved access may make commercial harvesting of timber feasible in a particular
forest.
• A construction project might lose its economic rationale before it is completed and is
abandoned.
• A government might grant patent protection to an invention.
• A creditor may decide not to collect a financial claim because of the debtor’s
bankruptcy.
(b) Events that change the quantity or quality of assets. A few example are:
• The discovery of a new deposit of minerals.
• An increase in the quantity of forests and fish stocks from natural growth.
• The partial or complete catastrophic destruction of an asset resulting from a large-scale
unforeseen event, such as a major earthquake or hurricane.
• The exhaustion of a patent over time.
• A unilateral change by an employer in the benefit structure of a retirement scheme.
• A decrease in the quality of an asset resulting from environmental damage, erosion,
deforestation, or unforeseen obsolescence.
• The creation of land by reclaiming it from the sea with the use of sea barriers.
• The seizure of assets by a government unit without full compensation in public interest.
• A change in land-use allowing use of agricultural land for commercial purpose.
(c) Events that lead to changes in the classification of assets. A few examples are:
• Corporation of government telecom department or posts.
• Privatisation and outright sale of a departmental enterprise.
• A conversion of non-monetary gold to monetary gold.
(2) Holding gains and losses on assets and liabilities, together with the corresponding changes in net
worth, arise as a result of changes in the prices of those assets and liabilities, including changes
resulting from exchange rate movements.
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3. GFS 1986
GFS 1986 distinguishes between:
Government financial assets.
(1) Receipts and payments- This is the first line of distinction for all transactions.
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4. Accounting rules
With the exception of consolidation, the accounting rules of the GFS system are the same as those of
the 1993 SNA. There are also many similarities between the rules used in the GFS system and those
applied by businesses in their financial statements.
4.1 Type of accounting system
Double-entry accounting is used for recording flows. In a double-entry system each flow gives rise to
two equal-value entries, traditionally referred to as a credit entry and a debit entry. A debit is an
increase in an asset, a decrease in a liability, or a decrease in net worth. Conversely, a credit is a
decrease in an asset, an increase in a liability, or an increase in net worth. Revenue entries, which
represent an increase in net worth, are recorded as credits. Conversely, an expense refers to a decrease
in net worth and is recorded as a debit.
A balance sheet is a compilation of a unit’s assets, liabilities, and net worth. The fundamental
identity of the balance sheet and of accounting in general is that the total value of the assets
always equals the total value of the liabilities plus net worth. Use of the double-entry system
ensures that this identity is correctly maintained.
4.2 Time of recording flows
Once a flow has been identified, the time at which it occurred must be determined so that the results of
all flows within a given accounting period can be compiled.
a. Alternative recording bases
With the accrual basis, flows are recorded at the time economic value is created, transformed,
exchanged, transferred, or extinguished. In other words, the effects of economic events are recorded in
the period in which they occur, irrespective of whether cash was received or paid or was due to be
received or paid. In general, the time attributed to events is the time at which ownership of goods
changes, services are provided, the obligation to pay taxes is created, the claim to a social benefit
payment is established, or other unconditional claims are established.
If an economic event requires a subsequent cash flow, such as purchases of goods and services on
credit, then the length of time between the time attributed to an event with the accrual basis and the
time of the cash flow is bridged by recording a receivable or a payable. For example, when a general
government unit purchases goods on credit, it records a debit to an inventory account and a
credit to accounts payable when ownership of the goods shifts. When the cash payment is made,
the general government unit records a debit to accounts payable and a credit to cash.
All events that result in the creation, transformation, exchange, transfer, or extinguishment of
economic value are recorded with the accrual basis in the GFS system. Thus, all non-monetary
transactions are included in statistics compiled on the accrual basis.
With the due-for-payment basis, flows that give rise to cash payments are recorded at the latest times
they can be paid without incurring additional charges or penalties or, if sooner, when the cash
payment is made. If a payment is made after it is due to be paid, then the gap is bridged by recording a
receivable, just as with the accrual basis. If a payment is made before it is due, then no receivable is
necessary.
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With the commitments basis, flows are recorded when a general government unit has committed itself
to a transaction. Normally, this basis applies only to purchases of assets, goods, and services,
including compensation of employees. The time of recording generally is when a purchase order is
issued by the general government unit. Flows for which the commitments basis is not applicable must
be recorded on one of the other three bases. In-kind transactions may or may not be recorded.
With the cash basis, flows are recorded when cash is received or disbursed. Although non-monetary
flows can be recorded, most accounting systems using the cash basis do not record non-monetary
flows because the focus is on cash management rather than resource flows.
b. The reasons for using the accrual basis in the GFS system
The GFS system uses the accrual basis, because the time of recording matches the time of the actual
resource flows. Consequently the accrual basis provides the best estimate of the macroeconomic
impact of government fiscal policy. With the cash basis, the time of recording may diverge
significantly from the time of the economic activities. For example, the interest paid on a zero-coupon
bond would not be recorded until the bond matures, which could be many years.
The accrual basis provides the most comprehensive information because all resource flows are
recorded, including internal transactions, in-kind transactions, and other economic flows, which have
impacts on the balance sheet. In general, accounts using the due-for-payment, commitments, or cash
basis are restricted to monetary transactions.
Payment arrears arise when an obligatory payment is not made by its due-for-payment date. As this
date is always the same or later than the date attributed to a flow under the accrual basis, all arrears
will be included in statistics compiled with the accrual basis. With the commitments basis, the validity
of information on arrears will be the same as with the accrual basis.
Information on cash flows is not lost with the accrual basis. Normally a separate statement of cash
flows is prepared along with accrual basis.
Accounts using the due-for-payment, commitments, or cash basis normally do not differentiate
between expenses and acquisitions of non-financial assets. With the accrual basis, acquisitions of non-
financial assets are recorded separately and the expense of using those assets in operating activities is
Matched with the period of their use rather than the period of their acquisition.
Additionally, the other major macroeconomic statistical systems (national accounts, balance of
payments, and monetary and financial statistics) use the accrual basis. Thus, the joint use of statistics
from two different systems is facilitated greatly by the use of the accrual basis in the GFS system.
Despite the advantages of the accrual basis, its implementation is more difficult than the other bases
and will require more estimates.
c. Implementation of the accrual basis
Taxes and other compulsory transfers are recorded when the activities, transactions, or other events
occur that create the government’s claim to the taxes or other payments. This time is not necessarily
the time at which the event being taxed occurred. For example, the obligation to pay tax on capital
gains normally occurs when an asset is sold, not when the asset’s value appreciated.
Estimating the revenue from taxes and compulsory social insurance contributions must take many
uncertainties into account. The primary uncertainty is that the government unit receiving the revenue
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is usually not a party to the transaction or other event that creates the obligation to pay the taxes or
compulsory social security contributions. Only those taxes and social security contributions that are
evidenced by tax assessments and declarations, customs declarations, and similar documents, and are
realistically expected to be collected, are considered to create revenue for government units.
If taxes are imposed on specific transactions, they are recorded at the times the underlying
transaction occurs, even though the time may not coincide with the actual payment of the tax.
Examples include sales taxes, value-added taxes, import duties, and estate and gift taxes.
In principle, income taxes and social contributions based on income should be attributed to the
period in which the income is earned. In practice, some flexibility is permitted. As a practical
deviation from the general principle, income taxes deducted at source, such as pay-as-you-earn taxes,
and regular prepayments of income taxes may be recorded in the periods in which they are paid, and
any final tax liability on income may be recorded in the period in which it is determined.
Income taxes are normally imposed on the income earned during an entire year. If monthly or
quarterly statistics are compiled, indicators of seasonal activity or other appropriate indicators may be
utilized to allocate the annual totals.
Taxes on the ownership of specific types of property are based on the value of the property at a
particular time but are deemed to accrue continuously over the entire year. Similarly, taxes on the use
of goods usually relate to a specific time period as per a license to operate a business.
Some compulsory transfers, such as fines, penalties, and property forfeitures, are determined at a
specific time. These transfers are recorded when the government has a legal claim to the funds, which
may be when a court renders judgment or an administrative ruling is published.
Determining the time of recording for grants and other voluntary transfers is complex because
there may be a wide variety of eligibility conditions. In some cases, a potential grant recipient has a
legal claim only when it satisfies certain conditions. These transfers are recorded when all
requirements and conditions are satisfied.
Dividends and withdrawals from income of quasi-corporations are recorded as of the date on which
they are declared payable or actually take place if no prior declaration occurs.
Transactions in goods and non-financial assets are recorded when legal ownership changes, which
may depend on the provisions in the sales contract. If that time cannot be determined precisely,
recording may take place when there is a change in physical ownership or control. For example, a
change of ownership is imputed to have taken place under a financial lease when the lessee takes
control of the asset.
Transactions in services normally should be recorded when the services are provided. If a service,
such as transportation, is delivered at a specific time, then the transaction is recorded at that time.
Other services are supplied or take place on a continuous basis. For example, operating leasing,
insurance, and housing services are continuous flows and, in concept, are recorded continuously as
long as they are being provided. More practically, the value of the services attributed to a period is
based on the quantity supplied during the period rather than the payments required.
Several other transactions also relate to flows that take place continuously or over extended periods.
For example, consumption of fixed capital accrues continuously over the whole period a fixed asset
is available for productive purposes and interest accrues continuously over the period that the financial
claim exists. Often an interest-bearing financial claim calls for periodic interest payments. These
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payments, however, reduce the liability that has already accrued over the previous period and are not
expense transactions.
Additions to inventories are recorded when products are purchased, produced, or otherwise acquired.
Withdrawals from inventories are recorded when products are sold, used up in production, or
otherwise relinquished. Additions to work-in-progress inventory are recorded continuously as work
proceeds. When production is completed, the production costs accumulated to that point are
transferred to finished-goods inventory.
Transactions in many types of financial assets, such as securities, loans, currency, and deposits, are
recorded when legal ownership changes. In some cases, the parties to a transaction may perceive
ownership to change on different dates because they acquire the documents evidencing the transaction
at different times.
5. Data Coverage and Sub-Sectors
In the GFSM 2001 framework, the main emphasis is on measuring the

fiscal performance of the general government sector. Countries are
strongly encouraged to compile, on a best effort basis, data for
the general government sector and all of sub sectors (as
relevant for each country). In the GFSY Questionnaire, provision is
made for the following general government sub-sectors and their
consolidation:
Sub sector 1: Budgetary central government

1.1 Ministries, parliament, presidency.
Sub sector 2: Extra budgetary units/entities such as:

2.1 Autonomous government agencies
2.2 Education Fund
2.3 Environment Protection Fund
2.4 Road Fund
2.5 Universities
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Units of General Government
The general government sector consists of all government units and all
non-market nonprofit institutions that are controlled and mainly
financed by government units. In the GFS system, provision is made for
three main sub-sectors (or levels) of government: Central; state
(provincial or regional); and local. While some countries have all three
sub-sectors; many have only a central government, or central
government and local government sub-sectors.
The central government sub-sector is a large and complex sub-sector

in most countries. It generally comprises a central group of
departments or ministries. Any central government
Entity that is fully covered by the central government budget is part of
the “budgetary central government” in the GFS Yearbook. Other
entities or units that are part of the central government are either
social security or extra budgetary central government. These entities
or units are operating under the authority of the central government
but are not (fully) covered by the central government budget.
Central Government Units Covered by the Budget (Sub-sector

1)
This sub-sector lists all central government entities covered by the

central government budget, i.e., the budgetary central government.
The following are typical examples of budgetary central government
entities: courts of law, ministries, departments, and parliament. The
budgetary central government may also include central government
boards, commissions or central government agencies.
Central Government Units with Individual Budgets (Sub-sectors

2 and 3)
These sub-sectors list units or entities (extra budgetary entities or

units and social security units, respectively) that operate under
the authority of the central government but are not (fully) covered by
the central government budget (“budgetary central government”).
Typically, these units or entities have individual budgets, and their
own-revenue sources may be supplemented by grants (transfers) from
the budgetary central government or from other sources.
State Governments (Sub-sector 4)
This sub sector lists all state, regional or provincial governments in a

country. A state, province, or region is the largest geographical area
into which the country as a whole is divided for political or
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administrative purposes. The legislative, judicial, and executive

authority of a state government extends over the entire area of the
state, but does not extend over other states. To be recognized as a
government unit the entity must be able to own assets, raise funds,
and incur liabilities on its own account, and it must also be entitled to
spend or allocate at least some of the taxes or other income that it
receives according to its own policies. The entity may, however,
receive transfers from the central government that are tied to certain
specified purposes. A state government should also be able to appoint
its own officers independently of external administrative control.
If a government entity operating in a state is entirely dependent on

funds from the central government, and if the central government also
dictates the ways in which those funds are to be spent, then the entity
should be treated as an agency of the central government.
Local Governments (Sub-sector 5)
This sub-sector lists all local governments such as municipalities,

corporations, city councils, village councils etc. in a country. The
legislative, judicial, and executive authority of local government units
is restricted to the smallest geographic areas distinguished for
administrative and political purposes. The scope of a local
government’s authority is generally much less than that of the central
or state governments, and such governments may or may not be
entitled to levy taxes on institutional units or economic activities taking
place in their areas. They are heavily dependent on grants from higher
levels of government, and they may also act as agents of central or
state governments to some extent. To be treated as institutional units,
however, they must be entitled to own assets, raise funds, and incur
liabilities by borrowing on their own account. They must also have
some discretion over how such funds are spent, and they should be
able to appoint their own officers independently of external
administrative control.
6 Analytic Frameworks for GFSM 2001
The GFSM 2001 emphasizes the presentation of fiscal data in an

integrated framework of stocks and flows, the use of accrual
accounting, and the introduction of several new summary measures of
government performance. Nonetheless, the GFSM 2001 analytic
framework can be used to present data generated by a variety
of accounting practices, including data on a cash basis.
Basis of Recording (Accounting Method)
22
In summary, desired GFS tables comprise two Statements, nine

detailed classification tables, and two annexes:
Statement I: Statement of Government Operations
Statement II: Statement of Sources and Uses of Cash
Table 1: Revenue
Table 2: Expense
Table 3: Transactions in Assets and Liabilities
Table 4: Holding Gains and Losses in Assets and Liabilities
Table 5: Other Changes in the Volume of Assets and Liabilities
Table 6: Balance Sheet
Table 7: Functional Classification of Outlays
Table 8: Transactions in Financial Assets and Liabilities by Sector
Table 9: Total Other Economic Flows in Assets and Liabilities (new for
2006 GFS)
Annex 1: Consolidation Table
Annex 2: Integrated Statement of Stocks and Flows in Assets and
Liabilities
GFSM 2001
The GFSM 2001 framework consists of four statements: three based on accrual data
for transactions, other economic flows, and balance sheets; and a fourth based on
cash data.
The Statement of Government Operations presents summary information on all

transactions and derives important analytic balances from this information. Revenue
minus expense equals the net operating balance, which is a summary measure of the
effect of the government’s transactions on net worth. The subsequent deduction of
the net acquisition of non-financial assets from the net operating balance produces a
balance called net lending/borrowing, which measures
the extent to which government either provides financial resources to the other
sectors of the economy and the rest of the world (net lending) or uses financial
resources generated by the other sectors (net borrowing). Net lending/borrowing,
also, is equal to the government financing requirement derived as the net of
transactions in financial assets and liabilities. It is a measure of
the financial impact of government activity on the rest of the economy.
The Statement of Other Economic Flows presents information on changes in net

worth that arise from flows other than transactions. These flows are classified as
either changes in the value (revaluations) or the volume of assets and liabilities. The
balancing item of this statement is the change in net worth resulting from other
economic flows.
The Balance Sheet presents the stocks of assets, liabilities, and net worth at the
end of the accounting period. The government’s net worth is defined as the
difference between total assets and total liabilities. Another balancing item that can
be derived from the Balance Sheet is net financial worth, which is defined as total
financial assets minus total liabilities.
STATEMENT OF GOVERNMENT OPERATIONS
23
1 Revenue
2 Expense
Net operating balance (1-2=31+32-33)
31 Net acquisition of nonfinancial assets
Net lending/borrowing (1-2-31=32-33)
32 Net acquisition of financial assets
33 Net incurrence of liabilities
STATEMENT OF OTHER ECONOMIC FLOWS
Change in net worth resulting from other economic flows (41+42-43+51+52-53)
41, 51 Change in nonfinancial assets
42, 52 Change in financial assets
43, 53 Change in liabilities
BALANCE SHEET
6 Net worth (61+62-63)
61 Nonfinancial assets
62 Financial assets
63Liabilities
STATEMENT OF SOURCES AND USES OF CASH
1 Cash receipts from operating activities
2 Cash payments for operating activities
Net cash inflow from operating activities (1-2)
31 Net cash outflow from investments in nonfinancial assets
Cash surplus/deficit (1-2-31)
32* Net acquisition of financial assets other than cash
33 Net incurrence of liabilities
Net cash inflow from financing activities (-32*+33)
Net change in the stock of cash (3212+3222) 32*=32-3212-3222
Statement of Sources and Uses of Cash shows the amounts of cash generated and used
in operations, transactions in nonfinancial assets, and transactions involving financial
assets and liabilities, excluding cash itself. The balancing item, net change in the stock of
cash, is the sum of the net cash received from these three sources of cash flows.
Different Compilation Approaches for Member Countries
The GFSM 2001 recommends recording economic stocks and flows on

an accrual basis. However, it is recognized that, in most countries, the
development of accrual information will take time. Therefore, for each
sub-sector of general government, a country may complete GFS tables
according to the accounting rules underlying the fiscal data currently
being compiled by the reporting country. The accounting method
(cash, accrual or others) for each sub-sector of general government
should be indicated clearly.
Countries will use different approaches for compiling statistics in accordance with the
GFSM 2001 framework. The approaches will vary according to the country’s accounting
and budgeting practice, and the amount of resources devoted to the process. Most
governments currently use a cash basis of recording in their accounting and budgeting
systems. Some have started to use an accrual basis of recording and others use various
stages along a wide spectrum between cash and accrual. The GFSM 2001 analytic
24
framework, though conceived from an accrual perspective, can be used to present data
generated by a variety of accounting practices.
Cash Reporting
The majority of the 133 countries that report cash data for publication in the Government
Finance Statistics Yearbook (GFSY) will, most likely, continue to do so for the
foreseeable future. Beginning with the 2003 GFSY, the historical cash data that were
reported in accordance with the 1986 methodology are published in the GFSM 2001
framework. The conversion of the historical cash data to the framework of the GFSM
2001 results in a number of coverage and classification gaps.
7. GFSM 2001 Implementation
It is required to provide a brief description (about 160 words or less) of

the GFSM 2001 implementation status and plans of a country. If a
country plans to migrate to the GFSM 2001(or has already started
doing so), it is required to indicate the main steps of the plan and
their target dates. If a country has not yet developed plans to
migrate to the GFSM 2001, they may indicate so. Implementation of
the GFSM 2001 can take numerous forms and will depend on each
country’s circumstances. For countries that have data only on a cash
basis, a first step could be to reclassify these data in the GFSM 2001
framework. Introduction of accrual reporting can take the form of
either (i) the implementation of ad hoc adjustments to the cash data
(for example, the recognition of in-kind transactions and the accrual of
interest) or (ii) the implementation of accrual accounting for the source
data.
8. Valuation
All flows and stocks should be valued at the amounts for which goods, assets other than cash,
services, labor, or the provision of capital are in fact exchanged or could be exchanged for cash. These
values are referred to as current market prices or values.
Current market values of stocks are available for assets and liabilities that are traded in active
markets, most commonly certain financial assets and their corresponding liabilities. Current market
values of other assets and liabilities need to be estimated in a manner similar to non-monetary flows.
Some financial assets and liabilities, such as bonds, have a nominal value as well as a current market
value. Transactions in these assets and liabilities, however, should be valued at the prices actually paid
and not at their nominal value. Similarly, the stocks of such assets and liabilities should be valued at
their current market value when recorded on the balance sheet.
Another type of actual transaction that may require a valuation adjustment occurs when a unit sells an
item and does not receive the corresponding payment for an unusually long time. If the amount of
trade credit extended in this way is large, then value of the sale should be reduced by means of an
appropriate discount rate and interest should be accrued until the actual payment is made.
25
Flows expressed in a foreign currency are converted to their value in the national currency at the
rate prevailing when they take place, and stocks are converted at the rate prevailing on the balance
sheet date. The midpoint between the buying and selling rates should be used.
The values of flows that are not already expressed at their current market value, such as barter
transactions, must be estimated. In addition, current market values for many stocks will not be
readily available and must be estimated. There are various estimation methods, as described below,
and the choice of particular method depends on the circumstances and available information.
• Values of transactions can be estimated on the basis of values taken from markets with
similar transactions. The values of financial assets can be estimated using market transactions
of similar assets.
• Flows and stocks involving fixed assets can be valued using the market price for similar new
goods, properly adjusted for consumption of fixed capital.
• If there is no similar market, values of goods or services may be derived from market prices
of similar goods or services by making adjustments for quality differences.
• The values of flows and stocks of assets can be estimated on the basis of their historical or
acquisition cost, adjusted for all changes occurred since their purchase or production, such as
consumption of fixed capital, holding gains or losses, depletion, exhaustion, degradation,
unforeseen obsolescence, and exceptional losses.
• Goods and services can be valued by the amount that it would cost to produce them currently.
• Assets can be valued at the discounted present value of their expected future returns. This
method is used for many financial assets, natural assets, and intangible assets.
Contingencies
Contingencies are conditions or situations that may affect the financial position of the general
government depending on the occurrence or nonoccurrence of some future events. For example, a
government guarantee of a loan may result in an expense if the debtor defaults, but it will not be
known whether the expense will incur, when it will occur and by how much until a default occurs.
GFS 2002 follows the 1993 SNA by not treating any contingencies as financial assets or liabilities
because they are not unconditional claims or obligations. However, contingencies are presented
as memo items.
26
9. Derived measures
Derived measures consist of aggregates and balancing items. They are important analytic tools that
summarize the values of flows or stocks that have been individually recorded in the GFS system.
Aggregates are summations of elements in a class of flows or stocks. For example, tax revenue is the
sum of all flows classified as taxes. Balancing items are economic parameters obtained by subtracting
one aggregate from another aggregate. For example, the net operating balance is obtained by
subtracting the total expense aggregate from the total revenue aggregate. Net worth is equal to total
assets less total liabilities.
27
28
Taxes
Comprise: Total tax revenue [A.IV] minus social security contributions [A2.].
Note(s): The GFSM 1986 tax revenue category social security contributions [A2.] is classified to
the GFSM 2001 category social contributions [12]. Apart from the exclusion of social
contributions and a few changes to the descriptors of certain types of taxes, the GFSM 2001
classification of taxes is virtually identical to the GFSM 1986 classification of taxes.
Social Contributions
Comprise: Social security contributions [A2.] plus contributions to government employee

pension and welfare funds within government [A11.].
Note(s): Unlike in the GFSM 1986, social contributions by government as employer are not
eliminated in the GFSM 2001 when data are consolidated with the social security funds.
Grants
Comprise: Grants [A.VII].

Note(s): The breakdown of grants in the GFSM 1986 does not allow for a complete classification
to the GFSM 2001 subcategories, because no distinction is made between grants from foreign
governments and grants from international organizations. Additional country-specific information
is needed to classify the GFSM 1986 category grants from abroad [A17.] to either grants from
foreign governments [131], or grants from international organizations [132].
Other Revenue
Comprise: Total nontax revenue [A.V] minus contributions to government employee pension and
welfare funds within government [A11.] plus capital transfers from nongovernmental sources
[A16.].
Note(s): These GFSM 1986 categories serve as a proxy for other revenue [14], because they
include cash surpluses from departmental enterprise sales to the public. In the GFSM 1986, these
receipts are classified as entrepreneurial and property income (“dividends”), i.e., on a net basis.
According to the GFSM 2001 methodology, the gross revenues of market establishments are
classified to the various subcategories of other revenue.
2 Expense
Comprise: Current expenditure [C.III] plus capital transfers [C7.].

Note(s): Other capital expenditure in the GFSM 1986—the acquisition of fixed capital assets
[C4.], purchases of stocks [C5.], and purchases of land and intangible assets [C6.]—are not
classified here because they do not represent current operating activities of government. These
items are classified in a separate table (see Net Acquisition of Nonfinancial Assets below).
Compensation of Employees
Comprise: Wages and salaries [C1.1] plus employer contributions [C1.2].

Note(s): Unlike in the GFSM 1986, government social contributions as employer [C1.2] are not
eliminated in the GFSM 2001 when data are consolidated with the social security funds.
29
Use of Goods and Services
Comprise: Other purchases of goods and services [C1.3].

Note(s): Because of the inclusion of payments for property expenses other than interest, the
GFSM 1986 category other purchases of goods and services is a proxy for the GFSM 2001
category of use of goods and services [22]. In the GFSM 2001, property expenses other than
interest are classified to a separate category other expense [28], subcategory property expenses
other than interest [281]. There is no equivalent of the GFSM 1986 aggregate total expenditure
on goods and services [C1.] in the GFSM 2001.
Consumption of Fixed Capital
Note(s): The accrual concept consumption of fixed capital [23] does not exist in the GFSM 1986
cash system and will show as being “not available” when GFSM 1986 cash data are classified to
the detailed GFSM 2001 tables.
Subsidies
Comprise: Subsidies [C3.1].

Note(s): Because of the inclusion of cash operating deficits of departmental enterprise sales to
the public [C3.1.3], the GFSM 1986 category subsidies is a proxy for the GFSM 2001 category
subsidies. In the GFSM 2001, the gross expenses of market establishments are classified to the
various expense categories.
Grants
Comprise: Current and capital transfers to other levels of national government [C3.2 and C7.1.1]
Plus current and capital transfers abroad to governments, international organizations, and to
supranational authorities [C3.5.1-2 and C7.2.1-2].
Note(s): The breakdown of these GFSM 1986 categories do not allow for a complete
classification to the GFSM 2001 subcategories of grants, because no distinction is made between
grants to foreign governments and grants to international organizations. Additional country-
specific information is needed to distinguish between grants to foreign governments [261] and
those to international organizations [262].
Social Benefits
Comprise: Current transfers to households [C3.4]

Note(s): Current transfers to households [C3.4] is a proxy for social benefits [27] because it
includes transfers that are not regarded as social benefits in the GFSM 2001 (e.g., scholarships
and other educational benefits). Data on expenses classified as social benefits are not available
from the GFSM 1986 expenditure categories and additional country-specific information is
needed to make a proper classification to the GFSM 2001 categories.
Other Expense
Comprise: Current transfers to nonprofit institutions [C3.3] plus other current transfers abroad
[C3.5.4]10 plus domestic capital transfers to nonfinancial public enterprises [C7.1.2], to financial
institutions [C7.1.3], to other enterprises [C7.1.4], and other domestic capital transfers [C7.1.5]
plus other capital transfers abroad [C7.2.4].
30
Note(s): These GFSM 1986 categories serve as a proxy for the GFSM 2001 category other
expense [28], because data on property expense other than interest are not separately available in
the GFSM 1986. Additional country-specific information is needed to classify property expense
other than interest—which is included in other purchases of goods and services [C1.3]—as other
expense [28]. 1
D. Classification of Transactions in Nonfinancial Assets12
In the GFSM 2001, the results of transactions in a particular category of assets can be presented
as either total acquisitions and total disposals, or the “net acquisition” of a particular asset. The
net acquisition of inventories is referred to as “changes in inventories”. Transactions in fixed
assets, valuables, and nonproduced assets are summarized as acquisitions, disposals, and
consumption of fixed capital. The accrual concept consumption of fixed capital does not exist in
the GFSM 1986 cash system.
Acquisition of Nonfinancial Assets
Comprise: Acquisition of fixed capital assets [C4.], purchases of stocks [C5.], and purchases of
land and intangible assets [C6.].
Note(s): Because the GFSM 1986 expenditure categories do not provide for the separate
classification of purchases of valuables, no data can be reclassified to the GFSM 2001 category
acquisition of nonfinancial assets: valuables [313.1]. Additional country specific information is
needed to do so.
Classification of Transactions in Financial Assets and Liabilities
Transactions in financial assets and liabilities—called financing in the GFSM 2001—are

presented as the net acquisition of each category of financial asset and the net incurrence of
each category of liability. That is, only the net change in the holding of a type of asset is
presented, not gross acquisitions and gross disposals as with most nonfinancial assets. When the
same type of financial instrument is held both as a financial asset and a liability, transactions in
financial assets are presented separately from transactions in liabilities, rather than netting
transactions in liabilities against transactions in financial assets.
10. Classification of Outlays by Function of Government (COFOG)
The Classification of Functions of Government (COFOG) is a detailed classification of the

functions, or socioeconomic objectives, that general government units aim to achieve through
various kinds of outlays. Although there are many similarities between the classifications of the
GFSM 2001/COFOG and those published in the GFSM 1986, there are also significant
differences. The main differences can be summarized as follows:
The GFSM 2001 does not have a category expenditure not classified by major group [B14.].
The items classified in the GFSM 1986 as expenditure not classified by major group are classified
as general public services [701] in the GFSM 2001.
The GFSM 2001 includes a new category environmental protection [705]. The GFSM 1986
does not classify these types of expenditures separately, but some environmental type
expenditures are included in housing and community amenity affairs and services [B7.].
The GFSM 2001 classifies outlays on research and development (R&D) as a separate group
(subcategory) within each division (main category). In most GFSM 1986/
31
32
33
34
11. Case Study- Indian Budgetary Statistics

1. Budget is the account of govt revenues and govt expenditure, and govt receipts and
govt payments.
1. Receipts and Revenues- All revenues are receipts, but all receipts are not revenues.
Receipts are classified as revenue receipts and capital receipts.
•Revenue receipts consist of those receipts which do not have obligations for repayments
such as taxes and duties, interest earnings, rents, dividends, profits, grants etc.
•Capital receipts consist of loans from domestic and foreign sources and have attendant
obligations of amortization and interest payments.
3. Expenditures and payments- Similarly, all expenditures are payments, but all payments
are not expenditure. Repayments of loans are not expenditure.
4. Requited and unrequited transactions- Requited transactions are those in which money
is paid or received in exchange of goods or services. But, transfers and grants are
unrequited expenditure as nothing is received in return of money.
Budget Accounts
1. Budget is account of government receipts and government expenditure

2. Both Receipts and Expenditure have two accounts- Revenue and Capital.
3. Revenue Account is the current account and is closed within a year. But capital
account is not normally closed within a year and continues for a number of years until all
obligations are met by the govt.
4. Govt has no obligations to anybody for revenue receipts. But, govt has obligations for
capital receipts.
Like receipts, expenditure has also two accounts- revenue and capital.
Revenue expenditures relate to current expenditure such as wages and salaries,
maintenance, subsidies, grants, interest payments. These expenditures do not lead to asset
creation or value addition, while capital expenditures (such as expenditures on plant,
machinery, land, property etc.) lead to asset creation.
Plan and non-plan expenditure- If any project or program is approved by the Planning
Commission as a part of the National Five Year Plan or Annual Plan, expenditure for that
project or program is called Plan Expenditure and all other expenditures are classified as
Non-Plan Expenditures.
7. Developmental and non-developmental- Internationally, expenditures are classified as
Developmental and Non-Developmental Expenditures. Any expenditure which leads to
higher production and economic development is called developmental expenditure; all
others are classified as Non-Developmental expenditures.
There is no one-to-one correspondence among these classifications.
Cross-Classification of expenditure in Budget 2006-07 (Rupees billion)
Type Plan Non-plan Total
Revenue 26% 61% 87%
Capital 5% 8% 13%
Total 31% 69% 100%
35
Classification of expenditure
(a)Interest payments- Revenue, non-plan, non-developmental exp

(b)Food subsidy- Revenue, non-plan, non-developmental expenditure
(c)Fertilizer subsidy- Revenue, non-plan, developmental expenditure
(d)Construction of national highways- Capital, plan, developmental expenditure
(e) Construction of border roads- Capital, plan, non-developmental expenditure
Salaries of staff of a National University- Revenue, plan, developmental expenditure
(g) Salaries of staff of a National University under construction- Capital, plan,
developmental Expenditure
(h) Construction of government hospitals/ government schools- Capital, Plan,
developmental expenditure
(i) Grants for private hospitals/ private schools – Revenue, non-plan, developmental
expenditure
Classification of receipts
1. Revenue and capital receipts

2. Revenue receipts- Taxes and Non-taxes
Taxes- Direct (personal income, corporate income, dividends tax) and indirect
(customs, excise, services tax)
Non-taxes- Interest receipts, profits, dividends, fees, service charges, grants
3. Capital receipts include recovery of loans, disinvestment of government equity, market
and other borrowings, public funds
4. Non-debt creating receipts include revenue receipts, recovery of loans and
disinvestment of govt equity.
Different concept of deficit

Revenue deficit= Revenue expenditure less revenue receipts
Capital deficit= Capital expenditure less capital receipts
Budget deficit= Total expenditure less total receipts= Revenue deficit +Capital deficit
Gross Fiscal Deficit= Total expenditure less Non-Debt receipts= Total Expenditure
less (Revenue receipts + recovery of loans + disinvestment of govt equity)
Gross Primary deficit= Gross Fiscal Deficit less interest payments
Net Fiscal Deficit= Gross Fiscal Deficit less Net Lending
Net Primary Deficit= Net Fiscal Deficit less Net Interest Payments
Net Lending = Loans given by the central govt to the States and PSUs less recoveries
of past loans from them
Net Interest Payments = Interest payments less interest receipts
Net RBI Credit to the central govt = RBI’s holdings of Treasury Bills, govt of India
dated securities, rupee coins, and loans and advances taken from RBI.
36
37
Fiscal Responsibility & Budget Management (FRBM) Act 2003 of India
• FRBM Act 2003 and FRBM Rules 2004 came into force w.e.f. 5 July 2004.
• The Act mandates the Central govt to eliminate revenue deficit by March 2009
and to reduce fiscal deficit to 3% of GDP by March 2008.
• Under section 7 of the Act, the central govt is required to lay before both houses
of Parliament Medium Term Fiscal Policy Statement, Fiscal Policy Strategy
Statement and Macro Economic Framework Statement along with the Annual
Financial Statement and Demand for Grants.
FRBM Rules 2004
• Reduction of revenue deficit by 0.5% of GDP or more every year.

• Reduction of gross fiscal deficit by 0.3% of GDP or more every year.
• No assumption of additional debt exceeding 9% of GDP for 2004-05 and
progressive reduction of this limit by at least one percentage point of GDP in each
subsequent year.
• No guarantee in excess of 0.5% of GDP in any financial year.
• Four fiscal indicators to be projected for the medium term. These include revenue
deficit, fiscal deficit, tax revenue and total debt as % of GDP.
• Greater transparency in the budgetary process, rules, accounting standards and
policies having bearing on fiscal indicators.
• Quarterly review of the fiscal situation.
• The rules mandate the Central Government to take appropriate collective action in
the case of revenue and fiscal deficits exceeding 45% of the budget estimates, or
total non-debt receipts falling short of 40% of the budget estimates at the end of
half year of the financial year.
• The rules also prescribe the formats for the mandatory statements.
Table-2 Current Fiscal Background (as % of GDP)
Item 2005-06 2006-07 2006-07 2007-08

Actual BE RE BE
1.Revenue Deficit 2.6 2.1 2.0 1.5
2.Fiscal Deficit 4.1 3.8 3.7 3.3
3.Primary Deficit 0.4 0.2 0.1 (-) 0.2
38
Table-2 Medium Term Fiscal Indicators
Items 2006-07 RE 2007-08 BE 2008-09 2009-10

Target Target
1.Revenue Def as % of GDP 2.0 1.5 0.0 0.0
2.Fiscal Deficit 3.7 3.3 3.0 3.0
as % of GDP
3. Gross tax rev. 11.4 11.8 12.3 12.7
as % of GDP
4.Year-end debt stock (% of GDP) 64.4 61.4 58.6 56.0
GFS WORKSHOP SESSION-1
Indian Budget 2007-08
Given data on Indian Budget 2007-08, estimate the following in Rs.billion and express
these as percentage to GDP:
(a) Revenue deficit
(b) Capital deficit
(c) Budget deficit
(d) Gross Fiscal Deficit
(e) Gross Primary deficit
(f) Net lending
(g) Net interest payments
(h) Net Fiscal Deficit
(i) Net Primary deficit
Items Rs. Billion

1.Tax revenues 4039
2.Non-tax revenues 825
2a.Interest receipts 193
3. Capital receipts 1941
3a. Recovery of loans 15
3b. Disinvestment of govt. equity 417
4.Revenue expenditure 5579
4a. Interest payments 1590
5.Capital expenditure 1226
5a. Loans to States and PSUs 45
6.Memo item: GDP at current mp 45730
39
GFS WORKSHOP SESSION-2
1. The following table provides the Fiscal Statements for Mongolian General
Government sector for the year 2003 (Jan-Dec) as per GFS Accounting standards.
However, it has the following two limitations: (a) It does not estimate the
Consumption for Fixed Capital, and (b) It does not provide the Statement for Cash
Balance for 2003 (in the table cash balance is given for 2002).
2. Estimate depreciation expenses (i.e. consumption of fixed capital) by taking broad
categories of assets and assuming expected life of assets. Then rework
GFS Accounts for Mongolia General Government (GG) 2003 in Billion MNT
Billion B. Statement of sources and Billion
A. Statement of govt operations MNT uses of cash (2002) MNT
1 Cash receipts from
1. Revenue 599.94 operating activities 489.77
2. Expense 465.85 11 Taxes 287.27
GOB Gross operating balance (1-2) 134.09 12 Social securities 54.93
Less Consumption of fixed capital 0 13 Grants 19.31
NOB Net operating balance 134.09 14 Other receipts 128.26
2 Cash payments for
31 Net acquisition of nonfinancial assets 139.02 operating expenses 402.92
NLB Net lending/ borrowing (NOB-31) -4.93 21 Compen. of employees 112.1
32 Net acquisition of financial assets 54.86 22 Purchase of goods/services 163.93
33 Net incurrence of liabilities 63.22 24 Interest 20.04
NLB Statistical discrepancy 3.43 25 Subsidies 8.79
Statement of other economic flows 26 Grants 0.62
Balance sheet 27 Social Benefits 90.62
6 Net worth -449.42 28 Other payments 6.82
CIO Net cash inflow from
61 Nonfinancial assets 1306.79 oper.activities 86.85
31.1 Purchases of
62 Financial assets 0 nonfinancial assets 99.65
63 Liabilities 1756.21 31.2 Sales of nonfinan. assets 0
31 Net cash outflow from
investments in nonfinancial 99.65
assets
CSD Cash surplus/ deficit -12.8
32x Net acquisition of
fin.assets,excl.cash 37.04
321x Domestic 36.74
322x Foreign 0.3
323 Monetary gold and SDR 0
33 Net incurrence of liability 65.36
331 Domestic -16.86
332 Foreign 82.22
NFB Net cash inflow from
financial activities 28.32
NCB Net change in the stock
of cash 15.52
CSD Statistical discrepancy 0
40
Billion Table-2 Expense by economic Billion

Table-1 Revenue MNT type MNT
1 Revenue 599.94 2 Expense 465.85
21 Compensation of
11 Taxes 353.69 employees 142.92
111 taxes on income, profits, capital gains 97.58 211 Wages and salaries 117.34
1111 Individuals 28.8 212 Social contributions 25.58
1112 Corporations and other enterprises 68.78 22 Use of goods and services 178.23
23 Consumption of fixed
112 Taxes on payroll and workforce 0 capital 0
113 Taxes on property 12.66 24 Interest 17.65
114 Taxes on goods and services 209.96 25 Subsidies 9.38
1141 General taxes on goods and services 121.87 26 Grants 0.73
1142 Excises 58.58 261 To foreign governments 0
262 To international
115 Taxes on Intnl. trade & transactions 32.65 organisations 0.72
263 To other general govt
116 Other taxes 0.84 units 0.01
12 Social contributions 90.84 2631 Current 0.01
121 Social security contributions 90.84 2632 Capital 0
122 Other social contributions 0 27 Social Benefits 116.81
13 Grants 8.73 28 Other expense 0.13
281 Property expense other
131 From foreign governments 8.66 than interest 0
282 Miscellaneous other
132 From international organisations 0.06 expense 0.13
133 For other general govt units 0.01 2821 Current 0.13
14 other revenue 146.68 2822 Capital 0
41
Table-3 Transactions in assets &

liabilities Table-6 Balance Sheet
3 Change in net worth from transacts. 6 Net worth -449.42
31 Net acquisition of nonfinl. assets 139.02 61 Nonfinancial assets 1306.79
311 Fixed assets 100.14 611 Fixed assets 1140.59
3111 Buildings and structures 96.77 6111 Building and structures 788.79
3112 Machinery and equipment 1.38 6112 Machinery & equipment 309.16
3113 Other fixed assets 1.99 6113 Other fixed assets 42.64
312 Inventories 38.01 612 Inventories 165.97
313 Valuables 0 613 Valuables 0
314 Nonproduced assets 0.87 614 Nonproduced assets 0.23
3141 Land 0 6141 Land 0
3142 Subsoil assets 0 6142 Subsoil assets 0
3143 Other naturally occurring assets 0.64 6143 Other natural assets 0
3144 Intangible nonproduced assets 0.23 6144 Intangible nonprd. asset 0.23
32 Net acquisition of financial assets 54.86 62 Financial assets
by instruments by instruments 1477.94
3202 Currency and deposits 160.4 6202 Currency and deposits 162.96
3203 Securities other than shares 0 6203 Securities except shares 0
3204 Loans 19.17 6204 Loans 931.38
3205 Shares and other equity -19.37 6205 Shares and other equity 357.7
3206 Insurance technical services 0 6206 Ins. technical reserves 0
3207 Financial derivatives 0 6207 Financial derivatives 0
3208 other accounts receivables 0 6208 Other accounts payable 25.9
By debtor By creditor 1477.94
321 Domestic 62.67 621 Domestic 1477.94
322 Foreign -7.81 622 Foreign 0
323 Monetary gold and SDR 0 623 Monetary god and SDR 0
33 Net incurrence of liabilities 63.22 63 Liabilities 1756.21
by instruments by instruments
3302 Currency and deposits 0 6302 Currency and deposits 0
3303 Securities other than shares 78 6303 Securities except shares 108.84
3304 Loans -22.66 6304 Loans 1626.92
3305 Shares and other equity 0 6305 Shares and other equity 0
3306 Insurance technical reserves 0 6306 Insurance tech. services 0
3307 Financial derivatives 0 6307 Financial derivatives 0
3308 Other accounts payable 0 6308 other accounts payable 20.45
By creditor By debtor
331 Domestic 162.98 631 Domestic 320.72
332 Foreign -99.76 632 Foreign 1435.49
Table 4 Holding gains in assets & liabl. Memo. items
Table-5 Other changes in the volume of 6M2 Net financial worth -278.28
assets and liabilities 6M3 Debt at market value n.a.
6M35 Debt at face value n.a.
6M4 Debt at nominal value n.a.
6M5 Arrears n.a.
6M6 Obligation for social
security n.a.
6M7 Contingent liabilities n.a.
42
(for Table-8 Transactions in

Table-7 Outlays by functions of govt. 2002) financial assets
7 Total outlays 502.58 and liabilities by sector
82 Net acquisition of
701 General public services 88.94 financial assets 54.87
7017 Public debt transactions 20.04 821 Domestic 62.68
7018 General transfers between levels of
govt 0 8211 General government -35.3
702 Defense 24.91 8212 Central bank 58.57
8213 Other depository
703 Public order and safety 29.76 corporations 20.37
8214 Financial corporations
704 Economic affairs 95.88 n.i.e. 0
8215 Nonfinancial
7042 Agriculture and allied 15.07 corporations 15.81
8216 Households & NPIs
7043 Fuel and energy 17.28 serving households 3.23
7044 Mining, manufacturing, construction 3.57 822 Foreign -7.81
7045 Transport 31.78 8221 General government 0
8227 International
7046 Communications 20.4 organisations 0
8228 Financial operations
705 Environmental protection 1.47 other than -7.81
international
706 Housing and community services 7.57 organisations
707 Health 52.54 8229 Other non-residents 0
7072 Outpatient services 48.7 823 Monetary gold and SDR 0
83 Net incurrence of
7073 Hospital services 0 liabilities 63.22
7074 Public health services 3.84 831 Domestic 162.98
708 Recreation, culture and religion 15.88 8311 General government -34.73
709 Education 88.23 8312 Central bank 169.28
8313 Other depository
7091 Pre-primary and primary education 67.25 corporations 19.55
8314 Financial corporations
7092 Secondary education 15.12 n.i.e. 0
8315 Nonfinancial
7094 Tertiary education 5.86 corporations 8.88
8316 Households & NPIs
710 Social protection 97.4 serving households 0
7 Statistical discrepancy, total outlay 0 832 Foreign -99.76
8321 General government 0
8327 International
organisations 0
8328 Financial operations
other than 0
international
organisations
8329 Other non-residents -99.76
43
GFS Workout Session-3
Differences between Australian Accounting Standards (AAS)

And GFS Accounting Standards
Issue AAS Treatment GFS Treatment

1. Asset write-downs Treated as part of operating expenses. Treated as revaluations (other
than economic flows) except for
mutually agreed write-downs, and
therefore removed from expenses.
2. Gains/ losses of assets Treated as part of operating income/ Treated as revaluations (other
expenses. than economic flows) and
therefore removed from revenues/
expenses.
3. Provisions for bad and Treated as part of operating expenses Act of creating provisions is not
doubtful debts. and included in the balance sheet as considered an economic event
an offset to assets (as per and is therefore not considered an
requirements by the Australian expense or included in the
government). balance sheet.
4. Interest flows related to Treated as operating income and Treated as other economic flows
swaps and other financial expenses. and not so included in revenues
derivatives. and expenses.
5. Acquisitions of defense Treated as capital expenditure. Treated as an expense at the time
weapon platforms. Defense weapon platforms appear as of acquisition. Defense weapon
an asset on the balance sheet. platforms do not appear as an
Depreciation expenses on the assets asset on the balance sheet, and so
are recorded in the operating no depreciation is recorded in the
statement. operating statement.
6. Valuation of assets and Classes of assets and liabilities are Individual assets and liabilities
liabilities. measured using a range of methods. are measured at current market
The predominant methods for valuing value based on current market
different asset classes include historic prices or a suitable proxy where
cost and market value. market prices are not available.
7. Finance leases Treats fiancé leases as if an asset As per the accounting standard,
were purchased from borrowings. except that the GFS flow
That is, the lease payment is split into statement includes the acquisition
an interest component (which is of the asset as a supplementary
shown as an operating expense) and a item for the calculation of the
principal component. surplus/ deficit and underlying
The asset and liability are recorded on cash balance.
the balance sheet.
The convention does not apply to the
cash flow statement, which does not
record the acquisition of the asset or
the liability.
8. Compensation to labor Takes only wages and salaries. Compensation to employees
Govt contributions to employees includes both wages and
insurance and pension funds are salaries and Govt’s
treated as personal transfers. contributions to employees'
insurance and pension funds.
44
Table-1 Australian General Government Sector Operating Balance in 2005-06

As per Australian Accounting Standards (in Australia $ million)
Sl.no. Item AAS
1 Total tax revenue 206600

1.1 Income tax 172114
1.2 Indirect tax 28116
1.3 Fringe benefits tax 4084
1.4 Other taxes 2286
2 Total non-tax revenue 17565
2.1 Sales of goods and services 4604
2.2 Interests and dividends 8805
2.2.1 of which, swap interest revenue 1981
2.2.2 Other interest revenue 6824
2.3 Other non-tax revenue 4156
Total Revenue 224165
3 Total gains 1348
3.1 Foreign exchange gains 139
3.2 Proceeds from sale of assets 1
3.3 Other economic revaluations 1208
4 Total income (1+2+3) 225513
Expenses
5 Total goods and services 56684
5.1 Compensation to employees 23555
5.2 Suppliers 17701
Of which, defense weapons 3873
5.2.1 platforms
5.2.2 Other supplies 13828
5.3 Depreciation and amortization 4617
Of which, defense weapons 2427
5.3.1 platforms depreciations
5.3.2 Other depreciations 2190
5.4 Net write-down of assets 3465
of which, mutually agreed write- 923
5.4.1 downs
5.4.2 Unilateral write-downs 2542
5.5 Losses from sale of assets 2
5.6 Foreign exchange losses 0
5.7 Other goods and services 7344
6 Total subsidies and grants 147202
6.1 Personal benefits 92981
6.2 Subsidies 11099
45
6.3 Grants 43122

7 Borrowings cost 5911
7.1 Interests 5843
of which, swap interest expenses 1845
7.1.1
7.1.2 Other interest expenses 3998
7.2 Other borrowing costs 68
8 Total expenses (5+6+7) 209797
9 Operating balance (4-8) 15716
Assignment
Given above information on Australian Accounting Standards, estimate the

operating balance as per GFS accounting standards for Australian General
Government Sector for 2005-06.
46
Balance of Payments-
Basic Concepts and Analytical Framework
Prof. Tarun Das
Analytical framework
The linkage between key aggregates of accounts of the total economy and balance of
payments flows can, by the use of symbols, be summarized algebraically within a
savings/investment framework.
C = private consumption expenditure

G = government consumption expenditure
I = gross domestic investment
S = gross saving
X = exports of goods and services
M = imports of goods and services
NY = net income from abroad
GDP = gross domestic product
GNDY = gross national disposable income
CAB = current account balance in the balance of payments
NCT = net current transfers
NKT = net capital transfers
NPNNA = net purchases of nonproduced, nonfinancial assets
NFI = net foreign investment or net lending/net borrowing vis-à-vis the rest of the world
Balance of payments flows are italicized in the following equations.
GDP = C + G + I + X–M (1)

(X–M = balance on goods and services in the balance of payments)
CAB = X – M + NY+NCT (2)
GNDY = C + G + I + CAB (3)
GNDY = C + G + S (4)
Equating (3) and (4) we get:
S = I + CAB
S – I = CAB
S – I + (NKT – NPNNA) = CAB + NKT–NPNNA = NFI
(NKT – NPNNA = balance on the capital account of the balance of payments)
Balance sheet accounts for the total economy and domestic institutional sectors depict the
level and composition of the stock of assets and liabilities at the beginnings and ends of
47
appropriate reference periods. The difference between the sum of assets and the sum of
liabilities equals the net worth of the economy and the sectors.
The interrelationship between the internal and external sectors of an economy can be seen
in greater detail by distinguishing between the private and government sectors. Private
saving and investment (Sp and Ip) and government saving and investment (Sg and Ig)
are identified:
S–I = Sp+Sg–Ip–Ig (5)
Use of the definition of the current account from equation (1) then gives:
CAB = (Sp–Ip)+(Sg–Ig) = S–I (6)
This equation shows that, if government sector dissaving is not offset by net saving on
the part of the private sector, the current account will be in deficit. More specifically,
the equation shows that the budgetary position of the government (Sg-Ig) may be an
important factor influencing the current account balance. In particular, a sustained current
account deficit may reflect persistent government spending in excess of receipts, and
such excess spending suggests that fiscal tightening is the appropriate policy action.
We also know that
CAB = NKA+RT = S–I (7)
Where
NKA = net capital and financial account (i.e., all capital and financial transactions
excluding reserve assets)
RT = reserve asset transactions
This equation shows that the current account balance is necessarily equal (with sign
reversed) to the net capital and financial account balance plus reserve asset transactions.
This relationship shows that the net provision, as measured by the current account
balance, of resources to or from the rest of the world must—by definition—be matched
by a change in net claims on the rest of the world.
In this analysis, it is useful to rewrite equation (7) as:
S–I = CAB = TB+SIB+TRANB = NKA+RT (8)
Where
TB = trade balance
SIB = service and income balance
TRANB = current transfer balance
48
BOP Accounting Principals
Entries in the international accounts are either flows or stocks. In the

context of international accounts, stocks are called positions.
Flows and Positions
Flows refer to economic actions and effects of events within an

accounting period, and positions refer to a level of assets or liabilities
at a point in time. Flows reflect the creation, transformation, exchange,
transfer, or extinction of economic value; they involve changes in the
volume, composition, or value of an institutional unit’s assets and
Liabilities. Flows are classified into (i) transactions and (ii) other flows.
Transactions
A transaction is an economic flow that is an interaction between two

institutional units by mutual agreement or an action within an
institutional unit that it is analytically useful to treat like a transaction,
often because the unit is operating in two different capacities. Illegal
transactions are treated the same way as legal actions. Illegal
transactions are those that are forbidden by law.
Transactions recorded in the international accounts are always

interactions between a resident and a nonresident institutional unit. By
the nature of international accounts, internal or intra-unit transactions
are not recorded.
To establish whether a transaction involving a transferable external

asset is a transaction between a resident and a nonresident, the
compiler must know the identities of both parties. Recorded
international transactions may include not only those that involve
assets
and liabilities and take place between residents and nonresidents but
also those that involve transferable assets of economies and take
place between two residents and, to a lesser extent, transactions that
take place between nonresidents.
Some mutual agreements involve three parties. For example,

guarantees involve the guarantor, the debtor, and the creditor.
Transactions occurring between each two parties (for example,
between the guarantor and debtor, or between the guarantor and
creditor, or between the debtor and creditor) should always be
identified and recorded as such.
49
When a unit carries out transactions as an agent on behalf of another

unit, those transactions are recorded exclusively in the accounts of the
principal.
Each transaction involves two entries, a debit entry and a

credit entry, for each party to the transaction. In contrast,
“other flows” involve only one entry for each party.
Transactions can be classified as exchanges or transfers, monetary or
non-monetary, and can be reported through rerouting and partitioning.
50
ACCOUNTING PRINCIPLES
Every transaction is either an exchange or a transfer. An

exchange (sometimes called a transaction with “something for
something” or a transaction with a quid pro quo) involves a provision
of something of economic value in return for a counterpart item of
economic value. Purchases of goods and services, acquisition of
assets, compensation of employees, dividends, etc. are all exchanges.
A transfer (also called a transaction with “something for nothing” or a

transaction without a quid pro quo) involves a provision (or receipt) of
an economic value by one party without receiving (or providing) a
counterpart item of economic value. Taxes, debt forgiveness, grants,
personal remittances are examples of transfers.
Every transaction is either a monetary or non-monetary

transaction. A monetary transaction is one in which one institutional
unit makes a payment (receives a payment) or incurs a liability
(acquires an asset) stated in units of currency. Non monetary
transactions are not initially stated in units of currency by the
transacting parties. Barter transactions, remuneration or payments in
kind, and provision of goods and services without charge, including
foreign aid in goods, are all non monetary transactions. Since all flows
are to be expressed in monetary terms, the monetary values of non
monetary transactions need to be estimated.
Rerouting and Partitioning
Some transactions do not directly reflect the underlying economic

relationships, and need to be rearranged. Rerouting and partitioning
are the two types of rearrangements employed in the international
accounts. Rerouting records a transaction as taking place in channels
different from that observed. Social contributions paid by employers
directly to the retirement scheme provide an example. The economic
substance of such a transaction is revealed by rerouting: First, by
showing the social contributions as payments made by employers to
employees, and then showing these as social contributions by
employees to the retirement scheme.
Partitioning unbundles two or more different transactions that appear

as a single transaction from the perspective of the parties involved. For
example, bank interest payable and receivable by financial
intermediaries is partitioned into two components. One component
represents the pure interest while the remainder represents the
purchase of financial intermediation services for which the
intermediaries do not explicitly charge for determining financial
51
intermediation services. Likewise, when a financial derivative is settled

with the delivery of the underlying asset, a transaction in the financial
derivative should be separated from the transaction in the underlying
asset even though only a single payment is made for the delivery of
the underlying asset.
Imputation of transactions refers to constructing entries in the

accounts when no actual transactions occur. Imputation of transactions
in the international accounts is made in the following specific cases:
• Retained earnings of direct investment enterprises are treated as

reinvestments made by the enterprise.
• Property income earned on technical reserves held by insurance

corporations and pension funds are deemed to be payable to policy
holders who are then deemed to pay back to insurance corporations as
premium supplements even though in terms of actual cash flows the
property income is retained by the insurance enterprises.
• When government has a nonresident entity to undertake fiscal

functions related to government borrowing and/or incurring
government outlays abroad with no or incomplete economic flows
between the government and the nonresident entity related to these
fiscal activities, transactions are imputed in the accounts of both the
government and the nonresident entity to reflect the fiscal activities of
the government.
• Retained earnings of investment funds are treated as if they were

distributed to shareholders who are then deemed to reinvest in the
investment fund.
Other flows
Other flows are changes in the volume or value of an asset or liability

that does not result from a transaction. In the context of international
accounts, other flows are only recorded for financial assets and
liabilities because the international investment position relates only to
external financial assets and liabilities. Two broad types of other flows
are distinguished:
(i) Changes between opening and closing positions that are not
due to transactions or revaluations. Examples are unilateral
write offs of claims by creditors, reclassification of assets,
monetization and demonetization of gold, and other events.
Changes in financial claims and liabilities arising from the
52
change in residence of individuals are treated as other

changes in the volume of assets.
(ii) Revaluations of an asset or liability that arise from changes

in their prices and/or the exchange rates that affect the
domestic currency values of assets and liabilities
denominated in foreign currency.
Positions
Positions refer to the level of financial assets or liabilities at a point in

time. They are recorded in the international investment position, which
is a balance sheet of external financial assets and liabilities. Generally,
positions are shown at the beginning and end of an accounting period.
Positions between two periods are connected with flows during that
period because changes in positions are caused by transactions and
other flows. The following relationship is valid for each position:
P¹ = Pº+ F or F = P¹ - Pº
Where Pº = values of a specific position at the beginning of an accounting period
P¹= values of a specific position at the end of an accounting period
F = Net value of all flows during the period that affected that particular position.
Financial assets include financial claims and, by convention, monetary

gold. A financial claim is a financial instrument that has a counterpart
liability. However, financial derivatives in the form of forward contracts
may change between assets and liabilities during their life. Gold bullion
is not a claim and does not have corresponding liability. It is treated as
a financial asset because of its special role as a means of financial
exchange in international payments by monetary authorities.
C. Accounting System
The accounting system underlying the international accounts derives

from broad bookkeeping principles. Three bookkeeping principles can
be distinguished:
(a) Vertical double-entry bookkeeps, also known as simply

double-entry bookkeeping used in business accounting: The
main characteristic of vertical double-entry bookkeeping is that
each transaction leads to two entries, a credit entry and a debit
entry, in the books of the transactor. This principle ensures that
the total of all credit entries equal that of all debit entries for all
transactions. The method permits a check on consistency of
53
accounts and also ensures the fundamental identity of a unit’s

balance sheet i.e., the total value of assets equals the total
value of liabilities plus net worth.
(b) Horizontal double-entry booking: It implies that if unit A

provides something to unit B, the accounts of both A and B
show the transaction for the same amount: as a payment in A’s
account and as a receipt in B’s account. Horizontal double entry
bookkeeping ensures the consistency of recording for each
transaction category by counterparties. For example, at the
global worldwide level, dividends payable by all economies
should be equal to dividends receivable by all economies.
(c) Quadruple-entry bookkeeping: It implies the simultaneous

application of both the vertical and horizontal double entry
bookkeeping results. A single transaction between two
counterparties thus gives rise to four entries. In contrast to
business bookkeeping, international accounts deal with
interactions among a multitude of units in parallel, and thus
requires special care for consistency. For instance, as a liability
of one unit is mirrored in a financial asset of another unit, they
should be identically valued, allocated in time, and classified; to
avoid inconsistencies in aggregating balance sheets of units
into regional or global totals. Thus, definitions, classifications,
and accounting principles in the international accounts are
derived to ensure symmetry and uniformity in concepts and
reporting. The quadruple property is used for bilateral
comparisons and global integrated data.
Current and Capital Account
In the current and capital accounts, a credit denotes receivables from

exports, incomes, transfers, and disposals of nonproduced nonfinancial
assets. A debit implies payables for imports, incomes, transfers, and
acquisitions of nonproduced nonfinancial assets.
In the case of the flows in financial assets and liabilities, the terms “net
changes in assets” and “net changes in liabilities” are used to reflect
the nature of the financial flows, which are recorded on a net basis
separately for each financial asset and liability. For both assets and
liabilities, a positive change indicates an increase in positions and a
negative change indicates a decrease in positions.
D. Time of Recording of Flows
Once a flow is identified, the time at which it occurred must be

determined so that the results of all flows within a given accounting
54
period can be compiled. Determination of timing is very important for

maintaining consistency of international accounts but is complicated
due to existence of leads and lags in international payments.
Broadly, the time of recording could be determined on four bases:

accrual basis, the due-for-payment basis, the commitment
basis, and the cash basis.
(a) Accrual accounting records flows at the time economic value is

created, transformed, exchanged, transferred, or extinguished.
In other words, the effects of economic events are recorded in
the period in which they occur, irrespective of whether cash was
received or paid or was due to be received or paid.
(b) A due-for-payment basis records flows that give rise to cash
payments at the time the payments fall due. If a payment is
made before it is due, then the flows are recorded when the
cash payment is made.
(c) A commitment basis records flows when a unit has committed
itself to a transaction. Normally, this basis applies only to
acquisition of financial assets or incurrence of liabilities, and
purchases of goods, services, and labor inputs. The time of
recording generally is when a commitment is made or a
purchase order is issued. Flows for which the commitment basis
is not applicable must be recorded on one of the other three
bases.
(d) A cash basis records flows when cash is received or disbursed.
In its strict form, only those flows that involve cash as the
medium of exchange are included.
Advantages of accrual basis in the international accounts
The international accounts use the accrual basis for determining the
time of recording of flows, as it matches the time of recording with the
timing of the events giving rise to the actual resource flows. With the
cash basis, the time of recording may diverge significantly from the
time of events and transactions to which the cash flows relate. The
due-for payment basis will usually record transactions after the
resource flows have taken place, although the long delays caused by
cash basis would, in most cases, be reduced. The timing of the
commitment basis will precede the actual resource flows.
The accrual basis provides the most comprehensive information

because all resource flows are recorded, including non monetary
transactions, imputed transactions, and other flows. Such a
comprehensive recording ensures the integration of flows and changes
in balance sheets.
55
The accrual basis is consistent with the way transactions, other flows,
and main economic aggregates (balance on goods and services, net
lending/net borrowing) are defined. It is also close to the business
accounting.
a. Time of recording of transactions
The change of economic ownership is central in determining the time

of recording on an accrual basis for transactions in goods,
nonproduced nonfinancial assets, and financial assets. Entries for
transactions in assets owned by institutional units (goods,
nonproduced nonfinancial assets, and financial assets) are made at the
time economic ownership of the underlying asset is transferred.
Application to Goods
Transactions in goods should be recorded as of the time that the

change of economic ownership takes place. The timing used in
international merchandise trade statistics follows customs procedures,
which are set up to record the movement of goods across borders. The
time at which goods cross the border can be taken only as an
approximation to the time when the change of economic ownership
occurs. A customs-based collection system usually provides a choice of
dates at which transactions may be recorded (for example, lodgment
of customs declaration, customs clearance of goods, etc.). The time of
recording in the international standards for merchandise trade
statistics is when the customs declaration is lodged.
Goods on consignment (that is, goods intended for sale but not
actually sold when the goods cross the frontier) should be recorded
only at the time economic ownership changes. Goods under financial
lease arrangements are considered to change economic ownership at
the inception of the lease.
Application to services
Transactions in services are recorded when the services are provided.
Application to incomes and transfers
Distributive transactions are recorded at the moment the related

claims arise. As a result, for example, compensation of employees,
interest, social contributions and benefits are all recorded in the period
during which the amounts payable accrue. With respect to some
distributive transactions, the time of accrual depends on the unit’s
56
decision as to when to distribute income or make a transfer. Dividends

are recorded at the moment they are declared payable. Distributed
branch profits are recorded when they actually take place. Reinvested
earnings are derived from retained earnings, and therefore are
recorded in the period in which retained earnings accrue.
Interest is recorded as accruing on a continuous basis as the financial

resources are provided for use on a continuous basis. For some
financial instruments, the debtor does not make any payments to the
creditor until the financial instrument matures, at which time a single
payment discharges the debtor’s liability; the payment covers the
amount of funds originally provided by the creditor and the interest
accumulated over the entire life of the financial instrument.
Taxes and other compulsory transfers should be recorded when the

activities, transactions, or other events occur that create the
government’s claim to the taxes or other payments. In principle,
income taxes and social contributions based on income should be
attributed to the period in which the income is earned.
Some compulsory transfers, such as fines, penalties, and property

forfeitures, are determined at a specific time. These transfers are
recorded when a legal claim is established, which may be when a court
renders judgment or an administrative ruling is published.
Determining the time of recording for grants and other voluntary

transfers can be complex because there is a wide variety of eligibility
conditions that have varying legal powers. In some cases, a potential
grant recipient has a legal claim when it has satisfied certain
conditions, such as the prior incurrence of expenses for a specific
purpose or the passage of legislation. These transfers are recorded
when all requirements and conditions are satisfied.
Application to transactions in nonproduced nonfinancial assets
Transactions in nonproduced nonfinancial assets are recorded at the

time economic ownership of these assets changes.
Application to financial transactions
Transactions in financial assets (including payments of cash) are

recorded when economic ownership changes. Some financial
claims/liabilities, such as trade credit and advances, are the implicit
result of a nonfinancial transaction. In these cases, the financial claim
is deemed to arise at the time the counterpart nonfinancial transaction
occurs.
57
According to the accrual basis, repayments of debts are recorded when

they are extinguished (such as when they are paid, or rescheduled, or
forgiven by the creditor). When arrears occur, no transactions should
be imputed, but the arrears should continue to be shown in the same
instrument until the liability is extinguished. Data on arrears are
important in their own right, and thus should be presented as
supplementary items.
The time of recording of flows arising from activation of one-off

guarantees (including capital transfers and other changes in the
volume of assets if applicable) is determined by the occurrence of the
events activating the guarantee.
Employee stock options are recognized at the time of grant.

Compensation of employees associated with employee stock options
should be recorded as accruing over the period to which the option
relates, generally the period between the granting and vesting dates.
b. Time of recording of other flows
Other changes in the volume of assets, including reclassifications, are

recorded as these
Changes occur. Revaluations occur continuously as prices and
exchange rates change. In practice, revaluations are computed
between two points in time during which the relevant assets/liabilities
are held on the balance sheet.
E. Valuation
Market prices refer to current exchange value, i.e., the values at

which goods and other assets, services, and labors are exchanged or
else could be exchanged for cash. Market prices are the basis for
valuation in the international accounts.
1. Valuation of transactions
Transactions that involve dumping and discounting represent market

prices. Transaction prices for goods and services are inclusive of
appropriate taxes and subsidies. Market price is the price payable by
the buyer after taking into account any rebates, refunds, adjustments,
etc. from the seller. Exports of goods are recorded at FOB values,
which take into account any export taxes payable or any tax rebates
receivable, while imports are valued at c.i.f. prices (including customs,
insurance and freight charges).
58
Transactions in financial assets and liabilities are recorded at the prices

at which they are acquired or disposed of. Transactions in loans should
always be valued at market prices. Transactions in financial assets and
liabilities should be recorded exclusive of any commissions, fees, and
taxes whether charged explicitly, included in the purchaser’s price, or
deducted from the seller’s proceeds. This is because both debtors and
creditors should record the same amount for the same financial
instrument. The commissions, fees, and taxes should be recorded
separately from the transaction in the financial asset and liability,
under appropriate categories.
When market prices for transactions are not observable, valuation

according to market-price-equivalents provides approximation to
market prices. In such cases, market prices of the same or similar
items when such prices exist will provide a good basis for applying the
principle of market prices. Generally, market prices should be taken
from the markets where same or similar items are traded currently in
sufficient numbers and in similar circumstances. If there is no
appropriate market in which a particular good or service is currently
traded, the valuation of a transaction involving that good or service
may be derived from the market prices of similar goods and services
by making adjustments for quality and other differences.
When nonfinancial resources are provided, without a quid pro quo, to

nonresidents by the government or private nonprofit institutions of an
economy, the same values must be reflected in the international
accounts of both recipient and donor. The suggested rule of thumb is
to use the value assigned by the donor as a basis for recording.
In some cases actual exchange values may not represent market

prices. Examples are transactions involving transfer prices between
affiliated enterprises, manipulative agreements with third parties, and
certain noncommercial transactions, including concessional interest.
Prices may be under- or over invoiced, in which case, an assessment of
a market-equivalent price needs to be made. Selection of the best
market-value equivalents to replace book values is an exercise calling
for cautious and informed judgment.
While some noncommercial transactions, such as a grant in kind have

no market price, other noncommercial transactions may take place at
implied prices that include some element of grant or concession so
that those prices also are not market prices. Examples of such
transactions could include negotiated exchanges of goods between
governments and government loans bearing lower interest rates than
those with similar grace and repayment periods or other terms for
purely commercial loans.
59
2. Valuation of other flows
Other flows in the international accounts capture changes in

international investment position of financial assets and liabilities that
are not due to transactions. Holding gains and losses arise from
changes in market values of positions of financial assets and liabilities.
Other changes in the volume of financial assets and liabilities are
recorded at the market-equivalent prices of similar instruments.
3. Valuation of positions of financial assets and liabilities
Positions of financial assets and liabilities should be valued as if they

were acquired in market transactions on the balance sheet reporting
date. Valuation according to market value equivalent is needed for
valuing financial assets and liabilities that are not traded in financial
markets or are traded only infrequently. For these assets and liabilities,
it will be necessary to estimate fair values that, in effect, approximate
market prices. The present value of future cash flows can also be used
as an approximation to market prices provided an appropriate discount
rate can be used.
Loan positions are recorded at nominal value. The use of nominal

values is partly influenced by pragmatic concerns about data
availability and the need to maintain symmetry between debtors and
creditors. In addition, because loans are not intended for negotiability,
without an active market, estimating a market price can be somewhat
subjective. such as the fair value of loans or the value of
nonperforming loans should be included as memorandum items. Loans
that have become negotiable de facto should be reclassified under
debt securities.
Positions on deposits and accounts receivable/payable are also

recorded at nominal value although they give rise to the same issues
of nominal and fair values as loans. Deposits at banks and other
depository corporations in liquidation should also be recorded at their
nominal value until they are written off.
Concepts on Values
Market values, fair values, and nominal values should be distinguished

from such notions as amortized values, face values, book values, and
historic cost.
60
• Fair value is a market-equivalent value. It is defined as the amount

for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s-length transaction.
•Nominal value refers to the amount the debtor owes to the creditor,
which comprises the outstanding principal amount including any
accrued interest.
• Amortized value reflects the amount at which the financial asset or

liability was measured at initial recognition minus the principal
repayments.
• Face value is the undiscounted amount of principal to be repaid.
• Book value in business accounts generally refers to the value

recorded in the enterprise’s records. Book values may have different
meanings because their values are influenced by timing of acquisition,
company takeovers, frequency of revaluations, and tax and other
regulations.
• Historic cost, in its strict sense, reflects the cost at the time of
acquisition, but sometimes it may also reflect occasional revaluations.
4. Unit of account and currency conversion

a. Unit of account
Values of nonfinancial and financial transactions and the values of

positions of financial assets and liabilities may be expressed initially in
a variety of currencies or in other standards of value, such as Special
Drawing Rights (SDRs). The conversion of these values into a reference
unit of account is a requisite for the construction of consistent and
analytically meaningful accounts.
International accounts can be compiled in the domestic currency as

well as in another currency in addition to the domestic currency. Data
in domestic currency are needed because several other
macroeconomic and micro data are compiled in domestic currency. In
addition, a standard or international unit of account is necessary to
allow for aggregation on a global or regional basis and to facilitate
international comparisons. It is preferable that the unit of account be a
stable one.
b. Currency conversion principles
A distinction should be made between the currency of account and the

currency of settlement. The currency of account is determined by the
61
currency in which the value of flows and positions is fixed, and thus
determines the currency denomination. The currency of settlement
may be different from the currency of account.
For an economy, a domestic currency is distinguished from foreign

currency. Domestic currency is that which is legal tender in the
economy and issued by the monetary authority for that economy; i.e.
either that of an individual country or, in a currency union, that of the
common currency area to which the country belongs. All other
currencies are foreign currencies.
Special Drawing Rights (SDRs) are considered to be foreign currency in

all cases, including for the economies that issue the currencies in the
SDR basket. Unallocated accounts for gold and other precious metals
are classified as being denominated in foreign currency.
A financial derivative contract to purchase foreign currency with

domestic currency is classified as a financial derivative to receive
foreign currency. If instead the contract is to purchase domestic
currency with foreign currency at a future date, this is a financial
derivative to pay foreign currency.
Flows expressed in a foreign currency are converted to their value in

the domestic currency at the rate prevailing when the flows take place,
and positions are converted at the rate prevailing on the balance sheet
date. The midpoint between the buying and selling rates should be
used at the time of transaction (for transactions) and at the close of
business on the reference date for positions.
Derived measures relating to a period are calculated by subtracting

one type of flow from
another. In principle, therefore, derived measures of flows in one
currency (for example, domestic currency) should not be directly
converted into another currency (for example, foreign currency). First,
the underlying flows themselves should be converted from the
domestic currency into the foreign currency. Then, the derived
measures in foreign currency can be calculated from the flows
denominated in foreign currency.
62
F. Aggregation and Netting
Aggregates are summations of elementary items in a class of flows or

positions. For example, compensation of employees is the sum of all
flows that are classified as compensation of employees. Aggregations
or combinations in which all elementary items are shown for their full
values are called gross recordings (e.g., all interest receivables are
aggregated separately from all interest payables). Aggregations or
combinations whereby the values of some elementary items are offset
against the same items that have an opposite sign are called net
recordings (e.g., acquisitions of foreign currency are netted against the
sales of the foreign currency).
The international accounts follow gross recording in the current and

capital accounts. For goods under merchanting, both purchases and
resales of goods are shown on a gross basis, although both entries are
shown under exports with a negative sign for purchases. Acquisitions
and disposals of nonfinancial nonproduced assets are recorded on a
gross basis. Capital transfers receivables and payables are also
recorded separately on a gross basis. Flows on transactions in
nonfinancial nonproduced assets and capital transfers are recorded on
a gross basis, as they are important in the context of cross-border
analysis. At the same time, the gross recording allows the derivation of
net flows, if needed.
In the case of flows in financial assets and liabilities, the term “net”
may have dual meanings (summing all debits and credits for a financial
asset type or a liability type and netting of an asset against a liability).
• “Net recording” always refers to aggregations whereby all debit

entries of a particular asset or liability are netted against all credit
entries in the same asset or liability type (e.g., acquisitions of foreign
currency are netted against the sales of the foreign currency; bond
issues are netted against redemption of bonds).
• When net is used together with a category of financial instrument

such as “net financial derivatives”, it is meant for netting of a financial
asset against the same type of liability.
• Title of some derived measures also uses the term “net”. They are
“net lending/borrowing” and “net international investment position”.
The international accounts follow net recording in the financial and

other changes in financial assets and liabilities accounts.
63
Positions of financial assets and liabilities are recorded on a gross

basis. Positions of the same type of a financial instrument held both as
a financial asset and a liability are to be presented gross, so that
assets are recorded under assets and liabilities are recorded under
liabilities.
G. Symmetry of Reporting
Symmetry of reporting by counterparties is important to ensure

consistency, comparability, and analytical usefulness of international
accounts, which group the flow and position data of individual units
into sectoral and national aggregates. International accounts can also
be prepared for a region and the world as a whole.
H. Derived Measures
Derived measures are not transactions or other flows. They are

economic constructs that are calculated by subtracting one or more
aggregates from one or more other aggregates. Some important
derived measures in the international accounts are as follows:
– Balance on goods
– Balance on services
– Balance on goods and services
– Balance on primary incomes
– Balance on secondary incomes
– Current account balance
– Net lending/borrowing
– Changes in net IIP arising from other flows
– Net international investment position.
Financial Account
The financial account of the SNA shows the net acquisition of financial assets and the net
incurrence of liabilities. Transactions in financial assets and liabilities for each
institutional sector and the total economy encompass those among domestic sectors and
those related to the rest of the world. Consolidated domestic flows cancel each other so
that transactions for the economy as a whole are (i) accounted for by transactions vis-à-
vis the rest of the world and (ii) equal to flows shown in columns for the rest of the
world. In the balance of payments, transactions (from the viewpoint of the compiling
economy) in the financial account of the capital and financial account correspond to
entries in columns for the financial account of the rest of the world, but changes in assets
64
of the rest of the world represent changes in liabilities for the compiling economy and
vice versa.
Some useful concepts
Residence is a particularly important attribute of an institutional unit in the balance of

payments because the identification of transactions between residents and nonresidents
underpins the system. Residence is also important in the SNA because the residency
status of producers determines the limits of domestic production and affects the
measurement of GDP and many important flows.
The concept of residence used in this Manual is identical to that used in the SNA. The
concept is not based on nationality or legal criteria, although it may be similar to concepts
of residence used for exchange control, tax, and other purposes in many countries. The
concept of residence is based on a sectoral transactors center of economic interest.
Moreover, country boundaries recognized for political purposes may not always be
appropriate for economic purposes.
Economic Territory of a Country
The economic territory of a country consists of the geographic territory administered by a

government; within this territory, persons, goods, and capital circulate freely. In a
maritime country, economic territory includes islands that belong to the country and are
subject to the same fiscal and monetary authorities as the mainland; goods and persons
move freely to and from the mainland and the islands without any customs or
immigration formalities. The economic territory of a country includes the airspace,
territorial waters, and continental shelf lying in international waters over which the
country enjoys exclusive rights and has, or claims to have, jurisdiction over fishing rights
and rights to fuels or minerals below the sea bed. The economic territory of a country
also includes territorial enclaves in the rest of the world. These are clearly demarcated
land areas (such as embassies, consulates, military bases, scientific stations, information
or immigration offices, aid agencies, etc.) located in other countries and used by
governments that own or rent them for diplomatic, military, scientific, or other purposes.
In addition, economic territory includes free zones and bonded warehouses or factories
operated by offshore enterprises under customs control. (These are considered part of the
Economic territory of the country in which the free zones, etc. are physically located.)
Resident Institutional Units
The sectors of an economy are composed of two main types of institutional units: (i)
households and individuals who make up a household and (ii) legal and social entities,
such as corporations and quasi-corporations (e.g., branches of foreign direct investors),
nonprofit institutions, and the government of that economy. These institutional units must
meet certain criteria to be considered resident units of the economy.
Residence of Enterprises
65
An enterprise is said to have a center of economic interest and to be a

resident unit of a country when the enterprise is engaged in a
significant amount of production of goods and/or services there or
when the enterprise owns land or buildings located there. The
enterprise must maintain at least one production establishment in the
country and must plan to operate the establishment indefinitely or
over a long period of time. Enterprises may be privately owned and/or controlled,
publicly owned and/or controlled, or controlled by residents and/or nonresidents.
Enterprises may be financial or nonfinancial institutions.
General Government
General government agencies that are residents of an economy include all departments,
establishments, and bodies located in the economic territory of an economy’s central,
state, and local governments and all embassies, consulates, military establishments, and
Other entities, which are located elsewhere, of an economy’s general government.
Concept of Market Price
A uniform system of valuation for the international accounts—for valuation of (i)

transactions in real resources and financial assets and liabilities and (ii) stocks of assets
and liabilities—is required for the compilation of aggregates of such statistics on a
consistent basis and for international comparability purposes. The recommendation in
this Manual is that market price should be used as the basis of valuation for both
transactions and stocks. Thus, transactions are generally valued at the actual prices agreed
upon by transactor; stocks of assets and liabilities are valued at market prices in effect at
the time to which the balance sheet relates. These principles are in accord with those
presented in the SNA.
Major Classifications of BOP
The standard components of BOP are comprised of two main groups of accounts: The
current account pertains to goods and services, income, and current transfers. The
capital and financial account pertains to (i) capital transfers and acquisition or disposal
of nonproduced, nonfinancial assets and (ii) financial assets and liabilities.
66
Balance of Payments: Standard Components
1. Current Account
A. Goods and services

B. Income
a. Goods 1. Compensation of employees
1. General merchandise 2. Investment income
2. Goods for processing 2.1 Direct investment
3. Repairs on goods 2.1.1 Income on equity
4. Goods procured in ports by carriers 2.1.1.1 Dividends and distributed branch
5. Nonmonetary gold profits***
5.1 Held as a store of value 2.1.1.2 Reinvested earnings and
5.2 Others undistributed branch profits***
2.1.2 Income on debt (interest)
b. Services 2.2 Portfolio investment
1. Transportation 2.2.1 Income on equity (dividends)
1.1 Sea transport 2.2.2 Income on debt (interest)
1.1.1 Passenger 2.2.2.1 Bonds and notes
1.1.2 Freight 2.2.2.2 Money market instruments and
1.1.3 Other financial derivatives
1.2 Air transport 2.3 Other investment
1.2.1 Passenger
1.2.2 Freight C. Current transfers
1.2.3 Other 1. General government
1.3 Other transport 2. Other sectors
1.3.1 Passenger 2.1 Workers’ remittances
1.3.2 Freight 2.2 Other transfers
1.3.3 Other
2. Travel
2.1 Business
2.2 Personal*
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
9.1 Merchant and other trade-related
services
9.2 Operational leasing services
9.3 Misc. business, professional, technical
services
10. Personal, cultural, and recreational
services
10.1 Audiovisual and related services
10.2 Other personal, cultural, and
recreational services
11. Government services n.i.e.
67
2. Capital and Financial Account
A. Capital account 2.1.2.3 Financial derivatives

1. Capital transfers 2.1.2.3.1 Monetary authorities
1.1 General government 2.1.2.3.2 General government
1.1.1 Debt forgiveness 2.1.2.3.3 Banks
1.1.2 Other 2.1.2.3.4 Other sectors
1.2 Other sectors 2.2 Liabilities
1.2.1 Migrants’ transfers 2.2.1 Equity securities
1.2.2 Debt forgiveness 2.2.1.1 Banks
1.2.3 Other 2.2.1.2 Other sectors
2. Acquisition/disposal of nonproduced, 2.2.2 Debt securities
nonfinancial assets 2.2.2.1 Bonds and notes
1. B. Financial account 2.2.2.1.1 Monetary authorities
1. Direct investment 2.2.2.1.2 General government
1.1 Abroad 2.2.2.1.3 Banks
1.1.1 Equity capital 2.2.2.1.4 Other sectors
1.1.1.1 Claims on affiliated enterprises 2.2.2.2 Money market instruments
1.1.1.2 Liabilities to affiliated enterprises 2.2.2.2.1 Monetary authorities
1.1.2 Reinvested earnings 2.2.2.2.2 General government
1.1.3 Other capital 2.2.2.2.3 Banks
1.1.3.1 Claims on affiliated enterprises 2.2.2.2.4 Other sectors
1.1.3.2 Liabilities to affiliated enterprises 2.2.2.3 Financial derivatives
1.2 In reporting economy 2.2.2.3.1 Banks
1.2.1 Equity capital 2.2.2.3.2 Other sectors
1.2.1.1 Claims on direct investors 3. Other investment
1.2.1.2 Liabilities to direct investors 3.1 Assets
1.2.2 Reinvested earnings 3.1.1 Trade credits
1.2.3 Other capital 3.1.1.1 General government
1.2.3.1 Claims on direct investors 3.1.1.1.1 Long-term
1.2.3.2 Liabilities to direct investors 3.1.1.1.2 Short-term
2. Portfolio investment 3.1.1.2 Other sectors
2.1 Assets 3.1.1.2.1 Long-term
2.1.1 Equity securities 3.1.1.2.2 Short-term
2.1.1.1 Monetary authorities 3.1.2 Loans
2.1.1.2 General government 3.1.2.1 Monetary authorities
2.1.1.3 Banks 3.1.2.1.1 Long-term
2.1.1.4 Other sectors 3.1.2.1.2 Short-term
2.1.2 Debt securities 3.1.2.2 General government
2.1.2.1 Bonds and notes 3.1.2.2.1 Long-term
2.1.2.1.1 Monetary authorities 3.1.2.2.2 Short-term
2.1.2.1.2 General government 3.1.2.3 Banks
2.1.2.1.3 Banks 3.1.2.3.1 Long-term
2.1.2.1.4 Other sectors 3.1.2.3.2 Short -term
2.1.2.2 Money market instruments 3.1.2.4 Other sectors
2.1.2.2.1 Monetary authorities 3.1.2.4.1 Long-term
2.1.2.2.2 General government 3.1.2.4.2 Short-term
2.1.2.2.3 Banks
2.1.2.2.4 Other sectors
1.
68

Capital and Financial Account
3.1.3 Currency and deposits 3.2.4.3 Banks
3.1.3.1 Monetary authorities 3.2.4.3.1 Long-term
3.1.3.2 General government 3.2.4.3.2 Short-term
3.1.3.3 Banks 3.2.4.4 Other sectors
3.1.3.4 Other sectors 3.2.4.4.1 Long-term
3.1.4 Other assets 3.2.4.4.2 Short-term
3.1.4.1 Monetary authorities 4. Reserve assets
3.1.4.1.1 Long-term 4.1 Monetary gold
3.1.4.1.2 Short-term 4.2 Special drawing rights
3.1.4.2 General government 4.3 Reserve position in the Fund
3.1.4.2.1 Long-term 4.4 Foreign exchange
3.1.4.2.2 Short-term 4.4.1 Currency and deposits
3.1.4.3 Banks credits 4.4.1.1 With monetary authorities
3.1.4.3.1 Long-term 4.4.1.2 With banks
3.1.4.3.2 Short-term 4.4.2 Securities
3.1.4.4 Other sectors 4.4.2.1 Equities
3.1.4.4.1 Long-term 4.4.2.2 Bonds and notes
3.1.4.4.2 Short-term 4.4.2.3 Money market instruments/
derivatives
3.2 Liabilities 4.5 Other claims
3.2.1 Trade credits Selected Supplementary
3.2.1.1 General government Information
3.2.1.1.1 Long-term 1. Liabilities for foreign authorities’
3.2.1.1.2 Short-term reserves
3.2.1.2 Other sectors 1.1 Bonds and other securities
3.2.1.2.1 Long-term 1.2 Deposits
3.2.1.2.2 Short-term 1.3 Other liabilities
3.2.2 Loans 2. Exceptional financing transactions
3.2.2.1 Monetary authorities 2.1 Transfers
3.2.2.1.1 Use of Fund credit and loans 2.1.1 Debt forgiveness
from the Fund 2.1.2 Other intergovernmental grants
3.2.2.1.2 Other long-term 2.1.3 Grants received from Fund subsidy
3.2.2.1.3 Short-term A/C
3.2.2.2 General government 2.2 Direct investment
3.2.2.2.1 Long-term 2.2.1 Investment associated with debt
3.2.2.2.2 Short-term 2.2.2 Other
3.2.2.3 Banks 2.3 Portfolio investment:
3.2.2.3.1 Long-term 2.4 Other investment—liabilities*
3.2.2.3.2 Short-term 2.4.1 Drawings on new loans by
3.2.2.4 Other sectors authorities
3.2.2.4.1 Long-term 2.4.2 Rescheduling of existing debt
3.2.2.4.2 Short-term 2.4.3 Accumulation of arrears
3.2.3 Currency and deposits 2.4.3.1 Principal on short-term debt
3.2.3.1 Monetary authorities 2.4.3.2 Principal on long-term debt
3.2.3.2 Banks 2.4.3.3 Original interest
3.2.4 Other liabilities 2.4.3.4 Penalty interest
3.2.4.1 Monetary authorities 2.4.4 Repayments of arrears
3.2.4.1.1 Long-term 2.4.4.1 Principal
3.2.4.1.2 Short-term 2.4.4.2 Interest
3.2.4.2 General government 2.4.5 Rescheduling of arrears
3.2.4.2.1 Long-term 2.4.5.1 Principal
3.2.4.2.2 Short-term 2.4.5.2 Interest
69
2.4.6 Cancellation of arrears

2.4.6.1 Principal
2.4.6.2 Interest

Capital and Financial Account
3. Other transactions 4. Services sub-items

3.1 Portfolio investment income 4.1 Travel (personal)
3.1.1 Monetary authorities 4.1.1 Health-related
3.1.2 General government 4.1.2 Education-related
3.1.3 Banks 4.1.3 Other
3.1.4 Other sectors 4.2 Miscellaneous business, professional,
3.2 Other (than direct investment) and technical services
income 4.2.1 Legal, accounting, management
3.2.1 Monetary authorities consulting, and public relations
3.2.2 General government 4.2.2 Advertising, market research, and
3.2.3 Banks public opinion polling
3.2.4 Other sectors 4.2.3 Research and development
3.3 Other investment (liabilities) 4.2.4 Architectural, engineering, and
3.3.1 Drawings on long-term trade credits other technical services
3.3.2 Repayments of long-term trade 4.2.5 Agricultural, mining, and on-site
credits processing
3.3.3 Drawings on long-term loans 4.2.6 Other
3.3.4 Repayments of long-term loans
BOP WORKOUT SESSIONS
1. Two-Gap Model
Y=C+I+X–M (1)
Y=C+S (2)
Y = Income, C = Consumption, I = Investment, S = Savings, X = Exports, M = Imports
Equating equations (1) and (2) we get
C+S=C+I+X–M OR (S – I) = (X – M ) (3)
Savings - Investment gap (or Resource Gap on the domestic account) equals current
account balance (CAB).
2. Macro-economic Balance Sheet with Government

Y = GNP = GDP + NFI (4)
GDP= PubExp + PubInv + PvtExp + PvtInv + X–M (5)
Where
GNP = Gross national product
GDP = Gross domestic product
PubExp = Public expenditure
PubInv = Public investment
PvtExp = Private expenditure
70
PvtInv = Private investment

X = Exports of goods and services
M = Imports of goods and services
NFI = Net factor income from abroad
Rearranging the terms of equations (4) and (5) we get

Y = (PubExp + PubInv + PvtExp + PvtInv + X – M) + NFI (6)
Or, Y – (PvtExp + PvtInv) = (PubExp + PubInv) + (X – M + NFI) (7)
Or, Y – (PvtExp + PvtInv + T) = (PubExp + PubInv - T) + (X – M + NFI) (8)
Or, (X – M + NFI) = [Y – (PvtExp + PvtInv + T)] + [T – (PubExp + PubInv)]
(X – M + NFI) = Current account balance = Exports of goods and services minus imports
of goods and services plus net factor incomes from abroad
Y – (PvtExp + PvtInv + T) = Private sector balance = Income minus private expenditure

minus private investment minus taxes paid to the government
T - (PubExp + PubInv) = Public sector balance = Taxes minus Public expenditure minus
public investment
Thus we get:
Current account balance = Private sector balance + Public sector balance
Exercise-1: The following data relate to Indian economy for the year
2003-04
Items (Rupees billion)
1.GNP 27459
2.Public Expend (PubExp) 3121
3.Private Expend (PvtExp) 17353
4.Public Invest (PubInv) 1802
5.Private Invest (PvtInv) 5680
6.Public savings (PubSav) 284
7.Private savings (PvtSav) 7695
8.Taxes less subsidies (T) 2402
9.Exports of goods & services (X) 4078
10.Imports of goods and services (M) 4434
Workout Session- 1:
Given above data, estimate the following:
1. GDP at current market prices
2. Net factor income from abroad
3. Current account balance
4. Private Investment-Savings gap
5. Public Investment-Savings gap
6. Overall Investment-Savings gap
7. Private account balance
8. Public account balance
71
9. Examine the following identities:

(a) Overall Investment-savings gap (or resource gap on the domestic account) equals
current account balance (CAB)
(b) Current account balance equals private sector balance plus public sector balance
72
2. Balance of Payments Accounting
A. Current Account – Account is closed by the end of the year. These are non-asset
transactions and have no future obligations.
B. Capital Account- Account is not closed within a year and has future obligations. It
consists of financial flows, which can be grouped into debt flows and non-debt creating
financial flows. Debt has attendant obligations for repayment of principal (amortization)
and payment of interest charges. Amortization appears on capital account while interest
charges appear on current account. Similarly non-debt financial flows appear on capital
account, while dividends, royalties etc. appear on current account.
Current Account
A.1 Trade Account –

Trade balance = Merchandise exports minus merchandise imports
A.2 Invisibles Account- A.2.1 to A.2.4
A.2.1 Non-factor services = Travel + Transportation + Insurance + Govt not included
elsewhere (n.i.e) + Miscellaneous business and professional services (including software,
BPO etc.)
A.2.2 Factor incomes (interest, rent, dividend, wage)
A.2.3 Private transfers (remittances)
A.2.4 Official transfer (foreign grants)
Capital Account
B.1 Non –debt creating financial flows

B.1.1 Foreign Investment = Foreign Direct Investment (FDI) + Portfolio Investment
B.2 Debt Flows- B.2.1 to B.2.5
B.2.1 External Assistance = Loans obtained from multilateral organizations and bilateral
countries
B.2.2 External Commercial Borrowing
B.2.3 Short-term credits (trade credits)
B.2.4 Banking capital (deposits and others)
B.2.5 Other capital
73
2. The following data relate to the Balance of Payments Situation of India during
2005-06
Items US$ Billion

1 Merchandise Exports f.o.b. 104.8
2 Merchandise Imports c.i.f. 156.3
3. Net travel services 1.4
4. Net transportation services -1.2
5.Net software and other non-factor services 22
6. Inward FDI flows 7.7
7. Outward FDI flows 2.0
8. Net Portfolio investment 12.5
9.Factor incomes, net -5.6
10.Private transfers, net 24.1
11.Official transfers, net 0.2
12.External assistance, net 1.4
13. Ext. comm. borrowing, net 1.6
14. Short-term credit, net 1.7
15. Banking capital, net 1.4
16. Other capital flows, net 1.4
17. Foreign exchange reserves at the beginning of the year 130.9
2. Workout Session-2
Given above data, estimate the following for Indian BOP in 2005-06:
1. Trade balance
2. Non-factor services balance
3. Net invisibles
4. Current account balance
5. Non-debt creating financial flows
6. Debt creating financial flows
7. Total capital flows
8. Overall balance of payments
9. Build up of foreign exchange reserves
10. Foreign exchange reserves at the year-end
74
Exercise-3
India's Balance of Payments (US$ Million)
Items 2006-
07
1 2
Merchandise Exports 127,090
Merchandise Imports 191,995
Software services receipts 31,300
Software services payments 2,502
Business services receipts 31,065
Business services payments 28,951
Transfers receipts 28,861
Transfers payments 1,446
Foreign Direct Investment, net 8,437
Portfolio Investment, net 7,062
Investment income receipts 8,574
Investment income payments 12,856
External Assistance, net 1,770
Ext.commercial borrowing, net 16,084
NRI Deposits, net 3,895
Short-term Credits, net 3,275
Other capital inflows 4,421
Travel receipts 9,423
Travel payments 7,235
Transportation receipts 8,069
Transportation payments 8,857
Insurance receipts 1,200
Insurance payments 641
Government n.i.e. receipts 273
Government n.i.e. payments 417
Employee's compensation, net -564
Memorandum items:
Foreign exchange reserves at 162650
the beginning of the year
GDP at current mp 892930
75
WORKOUT SESSION-2 ON BOP

Given the data on India's BOP in 2006-07
Estimate the following:
US$ As % of
Million GDP
1 Goods balance
2 Net invisibles
2.1 Invisibles receipts
2.1.1 Services
2.1.2 Income
2.1.3 Transfers
2.2 Invisibles payments
2.2.1 Services
2.2.2 Income
2.2.3 Transfers
3 Current account balance
4 Foreign investment
5 Non-debt capital flows
6 Other capital flows
7 Total capital flows
8 Net balance of payments
9 Build up of foreign exchange
10 End-year foreign.exch.reserves
76

Official Economic Statistics - Part-1 - GFS and BOP Statistics by Tarun Das

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Official Economic Statistics by Tarun Das

Professor Tarun Das1

UN Statistical Institute for Asia and Pacific

1. Brief profile of the resource person (page-5 and 75)

2. Course outline, scope, objectives and pedagogy (page-6 and 76)

3. Government Finance Statistics (GFS) (pages 7-44)

3.1 Flows and Stocks

4. Balance of Payments (BOP) Statistics (pages 45-70)

4.1 Analytical framework

5. Monetary and Financial Statistics (MFS) (pages 77-92)

5.1 Basic concepts

6. Productivity Analysis (pages 93-108)

6.1 Production Function

7. Answers to Workout Sessions (pages 109-127)

Profile of the Resource Person Prof. Tarun Das

• Professor Tarun Das teaches Public Policy and Research Methodology to

• Presently, he is working at Ulaanbaatar, Mongolia as Glocom Inc. (USA)

• Work Experience: 35 yrs as Development Economist in the government

• Country Co-coordinator for the IMF Govt Finance Statistics, Special

• Worked as Consultant to the World Bank (Washington), ADB (Manila),

• Worked on Fiscal Management for the governments of Cambodia,

• Member of Govt. Delegate to World Bank, ADB, IMF, UNCSD, WTO.

• Research/Teaching Interest: Macro Econometric Modeling and Policy

• Dr. Das is a widely traveled person and possesses diversity in skills in

• Qualifications: MA in Econ. (Gold Medalist), Calcutta University, 1969.

Course Outline, Scope, Objectives and Pedagogy

Government Finance Statistics – Basic Concepts

Professor Tarun Das

1. Flows and Stocks

Where Sº = values of a specific stock at the beginning of an accounting period

A transaction has the following characteristics:

(b) Every transaction is either an exchange or a transfer. A transaction is an exchange if one

(e) All transactions can also be classified as monetary or non-monetary. A non-monetary

Differences with SNA 1993

• The output and simultaneous distribution of non-market goods and services;

2. Other economic flows

Government financial assets.

4.1 Type of accounting system

4.2 Time of recording flows

a. Alternative recording bases

c. Implementation of the accrual basis

5. Data Coverage and Sub-Sectors

In the GFSM 2001 framework, the main emphasis is on measuring the

Sub sector 1: Budgetary central government

Sub sector 2: Extra budgetary units/entities such as:

Units of General Government

The central government sub-sector is a large and complex sub-sector

Central Government Units Covered by the Budget (Sub-sector

This sub-sector lists all central government entities covered by the

Central Government Units with Individual Budgets (Sub-sectors

These sub-sectors list units or entities (extra budgetary entities or

State Governments (Sub-sector 4)

This sub sector lists all state, regional or provincial governments in a

administrative purposes. The legislative, judicial, and executive

If a government entity operating in a state is entirely dependent on

Local Governments (Sub-sector 5)

This sub-sector lists all local governments such as municipalities,

6 Analytic Frameworks for GFSM 2001

The GFSM 2001 emphasizes the presentation of fiscal data in an

Basis of Recording (Accounting Method)

In summary, desired GFS tables comprise two Statements, nine

The Statement of Government Operations presents summary information on all