Freight on Imports and Exports of Goods

294. Freight services provided to or acquired from abroad by the reporting economy will mostly, but not always, relate predominantly to that economy’s exports and imports of goods. Goods may be owned by the exporter at the time of shipment abroad, or the importer may have accepted delivery of the goods prior to implementation of international shipment. In the case of the reporting economy’s exports and imports of goods, the BOP compiler is usually not able to ascertain (from information it is feasible to collect on goods or freight services) who owned the goods when shipment took place. This information is required to determine whether transactions between residents and nonresidents have taken place as freight services are performed for, or on behalf of, the legal owners of goods. Any necessity for relating changes of ownership to freight services can be obviated by the use of a convention for limiting entries for freight services on imports and exports of goods to the carriage of the compiling country’s goods beyond the customs frontier of the exporting country. Under a convention of this kind, certain categories of transactions that take place—in a strictly legal sense—between residents are entered as mutually offsetting credits and debits, and certain offsetting transactions between residents and nonresidents may be excluded from the balance of payments. The use of such a convention is, of course, at variance with the general rule for including in the balance of payments only gross flows of services between residents and nonresidents. The problems of data collection are minimized, however, because entries made on the basis of this convention represent identifiable types of services performed (whether or not the relevant goods are, at the time, owned by a resident or a nonresident) by residents or nonresidents.

Freight Services Provided by the Compiling Economy

295. Freight services performed in connection with exports can be performed on behalf of the exporter or the importer. Strictly speaking, export-related freight services performed by resident operators on behalf of exporters are transactions between residents. For example, the cost of freight service on goods transported from the border of an exporting country to the point of sale in an importing country is estimated to be 100 units. The goods are sold for an all-inclusive price of 1,000 units. From the standpoint of flows between residents and nonresidents, the value of the transaction in goods amounts to 1,000 units. However, as the BPM convention is to record the value of goods at the customs border of the exporting country, the total value of 1,000 units is split between goods (valued at 900 units) and freight services (valued at 100 units). The flow of services proceeds from (1) the producer of the service to (2) the exporter to (3) the importer, rather than directly from resident enterprises furnishing the freight services to the importer. The service flows occur in this way because goods may be sold in one reporting period but freight services may have been rendered by the producer to the exporter in a preceding period.

296. When freight services are performed by resident transport operators on behalf of a nonresident importer, there is no ambiguity in interpreting a flow of services from resident to nonresident inasmuch as the importer is the owner of the goods. The direction of the service flow is from the producer (a resident enterprise) to the importer (a nonresident enterprise).

297. Freight services related to the compiling country’s imports may be performed, on behalf of the nonresident exporter, by resident enterprises. The nonresident exporter may sell the commodities only upon arrival of the commodities in the compiling country. Until that time, the exporter is the owner of the commodities. For example, if the cost of freight services is 200 units and the all-inclusive sales price of commodities is 1,200 units, the flow (from the standpoint of the compiling country) between resident and nonresident consists of an export of services (200–unit credit) and an import of goods (1,200–unit debit). However, as goods are—according to the BPM convention—valued at the customs border of the exporting country (that is, at 1,000 units), the additional value of 200 units becomes a service element provided by a resident producer to a resident consumer (the importer). Hence, in this instance, the service flow is:

producer (resident)

♦

exporter (nonresident)

♦

importer (resident)

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producer (resident)

♦

exporter (nonresident)

♦

importer (resident)

When freight services related to the compiling country’s imports are rendered—on behalf of the importer—by resident carriers, these services unambiguously represent a transaction between two residents and are therefore excluded from the scope of BOP statistics.

Freight Services Acquired by the Compiling Economy

298. What are the freight services that a reporting economy acquires from abroad in respect of exports and imports of goods? Services are performed in connection with exports when the exporter consigns goods abroad for subsequent sale. When goods are provided to a nonresident, the shipping service performed in connection with these goods is clearly an international transaction. Because valuation uniformly takes place at the customs border, value added through shipping of the goods is construed, ultimately, as a service flow from the exporter to the nonresident importer. The direction of the service flow is:

producer (nonresident)

♦

exporter (resident)

♦

importer (nonresident)

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producer (nonresident)

♦

exporter (resident)

♦

importer (nonresident)

299. Freight services that are purchased from abroad and relate to the compiling country’s imports consist of services performed (a) on behalf of the exporter and (b) on behalf of the importer. Services performed on behalf of the nonresident exporter are clearly transactions between nonresidents. However, because of the uniform valuation of goods, these services are shown in the balance of payments as service flows from nonresident exporters to importers rather than as integral parts of the value of goods. In these cases, the direction of the service flow is:

producer (nonresident)

♦

exporter (nonresident)

♦

importer (resident)

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producer (nonresident)

♦

exporter (nonresident)

♦

importer (resident)

When freight services are acquired from abroad and performed on behalf of a resident importer, it is clear that such services are international transactions. The direction of the service flow is from the producer (nonresident enterprise) to the resident importer.

Conventions for Recording

300. How do freight service flows between residents and nonresidents compare with BOP entries made according to the method recommended in the BPM for recording the transactions? The BPM method, in effect, is to treat freight services that are performed (a) in connection with the compiling country’s goods and (b) beyond the customs frontier of the exporting country as though such services were performed for residents of the importing country. The treatment is the same whether the freight services are provided by residents of that country or by residents of any other country. The procedure is for the compiling country to (a) enter as credits all export-related services performed by resident carriers after the exports have been loaded on board the carriers at the customs border and (b) enter as debits all import-related services performed by nonresidents after the imports have been loaded on board the carriers at the customs borders of the countries from which the commodities are being exported.

301. For example, an exporter in Longa sells two commodities to an importer in Pokolbin. According to the terms of the sale contract, the exporter is to deliver the goods to the importer at a port of entry in Pokolbin. The exporter hires, for 200 units, the services of a resident carrier to ship one of the commodities. To ship the second commodity, the exporter hires, for 300 units, the services of a carrier belonging to Central Paradiso. In accordance with the method recommended in the BPM, transportation services performed beyond the customs border of the exporting country are construed as transactions between the carrier and the importing country. Therefore, 200 units of the freight cost incurred by the exporter represent the provision of a service by a resident (the transportation enterprise) of Longa to a resident of Pokolbin (the importer). The other 300 units of freight cost represent the value of shipping services supplied by a resident carrier of Central Paradiso to the importer in Pokolbin. BOP entries for the freight item for Longa, Pokolbin, and Central Paradiso would be:

	Longa		Pokolbin		Central Paradiso
	Credit	Debit	Credit	Debit	Credit	Debit
Freight	200			500	300

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	Longa		Pokolbin		Central Paradiso
	Credit	Debit	Credit	Debit	Credit	Debit
Freight	200			500	300

302. The disadvantage with the approach recommended in the BPM is that such an approach may bring about the exclusion of offsetting flows between residents and nonresidents. If the recommendation for recording freight is followed, entries are not recorded in the balance of payments as offsetting credit and debit entries. When the transactions occur in different periods, the entry recorded in the second period should reverse the entry recorded in the first period rather than recording an additional service flow. However, exclusions of offsetting entries accord with the economic reality that, in the final analysis, the cost of freight is borne by the importing economy—whatever arrangements may have been made for shipping the goods.

303. The primary purpose of the BPM convention is to establish a method of recording freight (and other distributive services) performed in relation to goods on a basis that is (1) consistent with uniform f.o.b. valuation for the goods component and (2) easier to follow in practice than the regular procedure for recording, in the current account, gross resident-to-nonresident transactions. Use of this convention admittedly does not obviate all the statistical problems that may arise in compiling the items for goods and freight. When these two items are derived from trade returns based on c.i.f. valuations of imports at the frontier of the importing country, a separate estimate must be made of the amount spent on distributive services performed beyond the customs frontier of the country from which the goods were exported. This disaggregation simply reallocates, between goods and services, the distributive services element in the c.i.f. valuation of imports; therefore, any error in estimation will not affect the two items in combination. Furthermore, if the compiling country performs any of the distributive services in connection with its own imports, the amount of such services must be estimated separately from a total that includes similar services performed by the compiling country in connection with exports or other goods owned by nonresidents. While disaggregated data may be considerably more difficult to obtain than data on total earnings, any error in estimating disaggregated data will produce equal over- or understatement of the credit and debit sides of components for freight and other distributive services and will not affect the net amount of the item.

304. For example, the total value of imports assessed on a c.i.f. basis is 15,000 units. A sample shows that the ratio of imports valued f.o.b. to imports valued c.i.f. is 0.9—that is, 10 percent of the value of imports assessed on a c.i.f. basis constitutes the cost of freight. The difference between the c.i.f. and f.o.b. valuations is attributable to freight services that were provided by nonresident enterprises. In this case, the value of freight services acquired from nonresidents would be estimated at 1,500 units, and the value of goods assessed on an f.o.b. basis would be 13,500 units. BOP entries for the current account would be:

	Credit	Debit
Goods		13,500
Freight		1,500

View Table

	Credit	Debit
Goods		13,500
Freight		1,500

Alternatively, if the transportation component represents 11 percent of the total value of imports assessed on a c.i.f. basis, the value of freight services and imports of goods valued f.o.b. would be 1,650 units and 13,350 units, respectively. From the standpoint of the reporting country, the total value of debits (in respect of the sum of goods and freight) in the current account remains the same in both cases, although the allocation between the two items is different.

305. Some freight services performed in respect of the reporting country’s imports may be provided by resident enterprises. To determine the value of freight services provided by nonresidents, the cost of distributive services supplied by resident enterprises must be deducted from the total cost of transporting imports of goods beyond the customs border of the exporting country. Resident transport enterprises are normally able to provide data for total earnings on the international movement of goods and may be able to provide a disaggregation of these earnings into earnings on imports, earnings on exports, and other earnings from abroad. For example, such data could indicate that total earnings of domestic enterprises engaged in international transportation services amounted to 400 units, 150 units of which were attributable to earnings on imports. On the basis of this information and the assumption that the value of goods assessed on a c.i.f. basis was 15,000 units, 10 percent of which represented international freight, the following BOP entries can be constructed:

	Credit	Debit
Goods		13,500
Freight	250	1,350
Reserve assets (or other appropriate financial account item)	14,600

View Table

	Credit	Debit
Goods		13,500
Freight	250	1,350
Reserve assets (or other appropriate financial account item)	14,600

306. If the accounting systems of resident transport enterprises do not contain information on earnings from the shipment of imports, the BOP compiler may have to resort to indirect methods of estimation, such as sample inquiries. The compiler may err in disaggregating total freight services between resident and nonresident suppliers of these services. However, any over- or understatement of credit entries is balanced by the probability that debit entries are equally over- or understated. For example, if the estimated 150-unit value of freight services performed by domestic enterprises in connection with imports was actually 200 units, then the value of freight services performed in connection with the country’s exports (credit) would be overstated by 50 units. However, the value of freight services attributable to nonresidents, which is a derived figure, would also be overstated by the same amount. That is, instead of being 1,300 units, the nonresident freight services would be calculated as 1,350 units. The net amount of the freight component would not be affected.

307. According to the BPM rule for uniform valuation, the performance of distributive services in connection with goods always begins at the customs frontier of the exporting economy. To achieve symmetry between partner country recording of separate credit and debit entries for freight, another rule stipulates the place at which the performance of goods-related freight and other distributive services ceases—whether at the frontier of the importing country or at an interior point in that country. A rule is necessary because the recommended method for recording distributive services performed in connection with the compiling country’s goods can yield entries that are partly net, while the method used for recording other distributive services always shows gross transactions between residents and nonresidents. The rule states that distributive services are regarded as being part of those performed in connection with goods if such services are (a) performed within the territory of the importing country and (b) covered in a single contract (for example, a “through bill of lading”) that also pertains to the freight charged on goods up to the frontier of the importing country. Stated conversely, the rule stipulates that services performed within the territory of the importing country (for example, freight forwarding from the frontier to an interior point) and arranged under a separate contract are considered to be part of freight on goods other than imports or exports and are recorded on a full gross basis. This rule is intended to simplify the compilation of the figures by conforming to underlying data most likely to be available.

Other Freight Services

308. Only those services performed in connection with distribution of goods beyond the customs frontier of the country from which the goods were exported are recorded under the convention designed to ensure uniform valuation. For other distributive services, the usual recording practice for items in the current account must be followed. That is, the gross service flows between residents and nonresidents must be recorded. For example, ownership of a commodity may change from the economy of Namdarb to the economy of Hughesavia. Distributive services performed in shipping the commodity beyond the customs border of Namdarb to the point of destination in Hughesavia are provided by a resident of Clintonstan. From the standpoint of Hughesavia, the transaction represents the purchase of freight services relating to the import of goods; from the perspective of Clintonstan, the transaction represents the provision of distributive services for moving non-domestic goods. Freight may also include shipment of goods that are not exports or imports of any country (such as goods transported within a country by coastal shipping or some other means); shipment of goods to or from entities located outside the territories of which the entities are residents (such as goods sent from a country to its agencies and agency personnel located abroad); and shipment of goods lost or destroyed after crossing the frontier but before being delivered to the importer.

309. As the physical point for uniform valuation of goods is defined in the BPM as the border of the exporting country, any distributive services performed up to that point constitute an integral part of the value of goods assessed on an f.o.b. basis. Consequently, offsets are made in freight to certain resident-nonresident flows that may be included in the goods component when goods are valued uniformly at the customs frontier of the exporting country. Specifically, freight service debits are recorded by the exporting country and freight service credits are included by the importing country for freight services that the importing economy provides within the exporting country’s customs frontiers.

310. For example, the economies of Algornia and Coonawarra are contiguous. An importer in Coonawarra takes delivery of a commodity at the seller’s establishment, which is located at an inland point in Algornia. At the establishment of the Algornian exporter, the value of the goods is 100 units. The importer hires a trucking firm from Coonawarra to transport the goods to his place of business, and the cost of transporting the goods from the establishment of the seller to the border of Algornia is 20 units. In the BOP statements of both economies, the value of the goods would be shown as 120 units. To offset the overstatement, which is caused by the uniform point of valuation, of the goods export figure (credit) for Algornia, a contra entry (debit) is made under freight. Conversely, to offset the overstatement of the goods import figure for Coonawarra, a contra entry (credit) is also made in the freight component. The entries reflect the distributive services rendered by residents of Coonawarra in moving the goods from an inland point to the border of Algornia. BOP entries in respect of the goods and freight components are:

	Algornia		Coonawarra
	Credit	Debit	Credit	Debit
Goods	120			120
Freight		20	20

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	Algornia		Coonawarra
	Credit	Debit	Credit	Debit
Goods	120			120
Freight		20	20

Treatment of Loading (Stevedoring) Charges

311. Freight refers mainly to the carriage of goods. However, as used in the BPM, the term also includes any ancillary services provided by a carrier in conjunction with the service of transport. In particular, freight includes the services of loading goods on board a carrier and unloading goods from a carrier if the contract between the owner of the goods and the enterprise operating the carrier requires the latter to provide that service. If such a service is performed at the customs frontier of the country from which goods are exported and if the service is provided by or on behalf of the carrier, the loading charge is included as part of freight. Otherwise, the loading charge is included in the value of goods. For example, an importer in Cromania takes delivery of goods at the border of the exporting country. The goods are worth 1,000 units. The importer contracts with a carrier belonging to Dromesia to transport the goods to his place of business, and the freight cost is 100 units. Furthermore, the carrier is to arrange for the stevedoring services, which cost 5 units and are provided by a resident of Dromesia. In this case, the freight charge would include the 5 units in respect of loading costs. BOP entries for Cromania would be:

	Credit	Debit
Goods		1,000
Freight		100
Reserve assets (or other appropriate financial account item)	1,100

View Table

	Credit	Debit
Goods		1,000
Freight		100
Reserve assets (or other appropriate financial account item)	1,100

312. If the freighter were instead operated by a Cromanian enterprise, the balance of payments of Cromania would contain the following entries:

	Credit	Debit
Goods		1,000
Transportation-other		5
Reserve assets (or other appropriate financial account item)	1,005

View Table

	Credit	Debit
Goods		1,000
Transportation-other		5
Reserve assets (or other appropriate financial account item)	1,005

313. Alternatively, if the importer arranges for stevedoring services, these should be included in the value of the goods. In this case (if the operator of the carrier is a not a resident of Cromania), the BOP entries would be:

	Credit	Debit
Goods		1,005
Freight		95
Reserve assets (or other appropriate financial account item)	1,100

View Table

	Credit	Debit
Goods		1,005
Freight		95
Reserve assets (or other appropriate financial account item)	1,100

314. This treatment is used because the statistics collected on freight usually cover indistinguishably all services performed by or on behalf of carriers, whereas statistics collected on goods are unlikely to include loading charges if loading is provided by or on behalf of the carrier. (Refer to paragraphs 321–324 for further discussion on the recording of stevedoring transactions in the balance of payments.)

Business Travel

333. Business travelers are commercial travelers who visit an economy for sales campaigns, market exploration, or commercial negotiations on behalf of the nonresident enterprise that employs them. Government employees who are traveling on official business and are not stationed in the economies they visit and employees of international organizations on official missions are business travelers. Employees installing machinery or equipment (if the enterprise that employs them is not a resident of the economy where the installation takes place) and crew members of carriers stopping off or lying over are classified as business travelers. Excursionists traveling for the purpose of business, such as attendance at meetings, should also be regarded as business travelers. Personal expenditures on goods and services by seasonal, border, and other nonresident workers in the economies in which they are employed are also recorded under travel-business.

Personal Travel

334. This category covers travelers going abroad for purposes other than business (for example, holidays for pleasure; participation in sports; visits to relatives and friends; and religious, educational, and health purposes). Also included in this category are government employees on leave in economies other than those in which they are resident or those in which they are stationed. For example, U.S. military personnel who are stationed in Germany and holiday in Switzerland should be treated as travelers while they are in Switzerland.

Goods and Services Covered

335. Included as part of the travel item are all goods and services acquired by travelers. It does not matter—as long as the goods and services are acquired by the traveler for personal, rather than commercial, use—whether the goods and services are consumed immediately or later, or whether the goods and services are finally consumed by the traveler himself or by a third person. For example, an automobile purchased by a traveler during her stay in a host country and shipped to her home country for personal use should be included as part of the travel item. Goods that are obtained and later given away by the traveler should also be included in the travel item.

336. The travel item should also cover goods and services acquired by travelers whether the goods and services are paid for by the traveler or provided to him without a quid pro quo. In practice, information on goods received free of charge (such as free room and board received by official visitors or free instruction received by students) will be difficult to obtain. If information is available, offsetting entries should be made in travel and current transfers.

337. The most common goods and services that nonresident travelers acquire when staying in a host country are meals, lodging, entertainment, sightseeing excursions, gifts, and souvenirs. It is also recommended that fees such as airport taxes or tickets for traffic violations be recorded under travel—although such fees are, strictly speaking, transfers. This recommendation is predicated on grounds of practicality, and these transactions are unlikely to be internationally significant.

338. For example, a resident of Coonawarra travels in Daniherland for six months to attend a training course. During this time, the traveler spends 850 units on goods and services, 500 units of which are spent on an automobile that the traveler subsequently takes back with him to Coonawarra and 30 units of which are spent on gifts for relatives in Daniherland. The traveler stays in accommodations provided by the Daniherland government. The accommodations are provided free of charge but valued at 125 units. The following entries should be recorded in Daniherland’s balance of payments:

		Credit	Debit
Goods			30
Travel		975
Current transfers
	General government		125
	Other	30
Reserve assets (or other appropriate financial account item)			850
		1,005	1,005

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		Credit	Debit
Goods			30
Travel		975
Current transfers
	General government		125
	Other	30
Reserve assets (or other appropriate financial account item)			850
		1,005	1,005

The travel item includes the accommodation services received by the traveler without a quid pro quo, as well as the purchase of the automobile. The gifts provided to the traveler’s relatives are shown as imports of goods and are offset by a transfer.

Nonlife Insurance

344. Conceptually, the “normal” service charge that an insurer takes into account in setting premiums during a specific period may not be the same as the net premiums (premiums minus claims) payable during that period. Losses may be greater or lesser than those expected in the longer run; claims may not yet be payable on losses that have already occurred; and premiums may have been paid in advance on risks to which the insurer has not yet been exposed. Therefore, in principle, net premiums may reflect not only a service charge but also capital gains/losses and pre- or postpayments. Furthermore, insurers will invest their unearned premiums (premiums paid in advance of periods in which any claims that may result from these premiums are incurred), and the income earned from these investments will also be taken into account by the insurer in determining the “normal” service charge. Because of the practical difficulties in sorting out these various elements, net premiums are customarily considered—for BOP purposes—the measure of insurance services from the point of view of the insurer. This method is therefore recommended in the BPM for determining exports of all types of insurance services and imports of reinsurance services.

345. However, if each individual insurance transaction (or a subset of an insurance enterprise’s transactions) is considered, net premiums become a very poor proxy of the measure of insurance services. When a premium of 10,000 units is paid on a policy, the service charge represents only a fraction of this amount. The remainder represents money transferred to the insurance enterprise to pay future claims in respect of this or other policies. Likewise, a claim of 50,000 units does not represent a “negative service” provided by the insurance enterprise. The claim simply reflects a transfer of funds from the insurance enterprise to the claimant. For these reasons, the BPM recommendation is that, for imports of insurance services, the service provided should be calculated—in the case of insurance on goods—by applying to gross premiums paid to nonresident insurers the ratio of insurance services to gross premiums for exports of insurance services or—in the case of other direct insurance—by applying to gross premiums paid to nonresident insurers the ratio of estimated service charges to total premiums for resident insurers. Other flows of money between the resident insured and the nonresident insurer—that is, premiums payable minus the estimated service charge and claims receivable—are regarded as transfers.

346. The following example illustrates the recording of insurance services in the balance of payments. An insurance company resident in Algornia insures residents of Coonawarra, Cromania, Dromesia, and Essendonia against the risk of damage from hurricanes. Premiums of 4,000 units are received from each country. During the accounting period, a claim of 10,000 units is made as a result of storm damage suffered in Coonawarra. In accordance with recommendations in the BPM, the insurance services provided by the insurer are equal to the premiums received minus any claims paid. Thus, the following BOP entries would be made for Algornia:

	Credit	Debit
Insurance services	6,000
Current transfers	10,000	10,000
Reserve assets (or other appropriate financial account item)		6,000

View Table

	Credit	Debit
Insurance services	6,000
Current transfers	10,000	10,000
Reserve assets (or other appropriate financial account item)		6,000

The transfer items represent, for debits, claims payable and, for credits, premiums receivable minus the insurance service charge. While these entries are net across all transactions, such will not be the case at the regional level.

347. On the basis of information contained in paragraph 346, the insurance service charge per unit of premium for this type of insurance may be calculated as 6,000 units (net premiums) divided by 16,000 units (gross premiums), or 0.375. Therefore, the insurance service received by Coonawarra, Cromania, Dromesia, and Essendonia is 0.375 times the premium paid (4,000 units), or 1,500 units each. This result makes sense, as each country received exactly the same insurance coverage from Algornia.

348. BOP entries for Coonawarra, Cromania, Dromesia, and Essendonia may now be constructed. Entries for Cromania, Dromesia, and Essendonia are identical.

^*The transfer debit entries represent premiums paid minus the service charge.

	Credit	Debit
Insurance services		1,500
Current transfers*		2,500*
Reserve assets (or other appropriate financial account item)	4,000

^*The transfer debit entries represent premiums paid minus the service charge.

View Table

	Credit	Debit
Insurance services		1,500
Current transfers*		2,500*
Reserve assets (or other appropriate financial account item)	4,000

^*The transfer debit entries represent premiums paid minus the service charge.

For Coonawarra, the following BOP entries are required:

^*The transfer debit entry is equal to premiums paid minus the service charge. The transfer credit entry is equal to Coonawarra’s claims receivable.

	Credit	Debit
Insurance services		1,500
Current transfers*	10,000	2,500*
Reserve assets (or other appropriate financial account item)		6,000

^*The transfer debit entry is equal to premiums paid minus the service charge. The transfer credit entry is equal to Coonawarra’s claims receivable.

View Table

	Credit	Debit
Insurance services		1,500
Current transfers*	10,000	2,500*
Reserve assets (or other appropriate financial account item)		6,000

^*The transfer debit entry is equal to premiums paid minus the service charge. The transfer credit entry is equal to Coonawarra’s claims receivable.

349. As the statistician has the necessary information, it is possible to allocate, for domestic transactions and exports of insurance services, insurance service charges to classes of policyholders in proportion to premiums paid. However, it is difficult to do the same for imports of insurance services as the importers are generally not in a position to determine the proportion of service charges attributable to them. (Therefore, the BPM recommendation is to use ratios derived from the domestic insurance industry.) For imports of insurance services, other proxies must be used to estimate insurance service charges. If this procedure is not feasible (for example, if the type of insurance services under consideration are not exported or if there is no domestic insurance industry for a particular type of insurance), the long-term relationship between premiums paid to nonresidents and claims received from nonresidents could be used to determine approximate service charges. Alternatively, BOP compilers in the exporting country could be contacted for information regarding service charges.

350. Before the discussion of nonlife insurance services is concluded, it may be useful to consider measures to be taken if claims exceed premiums for exported insurance services or for imports of reinsurance services. Use of the difference between premiums and claims would result in a “negative” service charge, which is a concept that makes no economic sense. Therefore, it is recommended that the compiler use the “normal” service charge per unit of premium, which is calculated by using the long-term relationship between premiums and claims, to determine the service charge for the period under consideration. This recalculated insurance service charge would then be used in the calculation of items for insurance services and related transfers.

Life Insurance

351. Two main features distinguish life insurance from nonlife insurance. There is often a substantial lag between the payment of life insurance premiums and the payment of claims arising from these premiums. For example, a 20-year-old person takes out a life insurance policy that matures when she turns 60. The payout value is based upon total payments made during the life of the policy. Forty years will elapse between initial payments and actual payout of the policy. The income earned on these premiums, which conceptually should be considered in the calculation of the insurance service charge, is often significant. The second distinguishing feature of life insurance is the certainty that a claim will occur. (Insurance policies that pay claims only in the event of death before a particular age are not considered life insurance for BOP purposes.) Because of this certainty, payment of premiums may be viewed by the insured as savings, and claims may be viewed as withdrawal of these savings. Furthermore, with many life insurance policies, the policyholder has a “surrender option”; that is, he or she can cash in his or her policy before maturity. On the basis of these attributes, the life insurance policyholder is considered to have a claim on the life insurance enterprise.

352. It is recommended in the BPM that the service element in life insurance be calculated on the same basis as the service element associated with nonlife insurance. However, this practice could produce misleading results in the balance of payments—particularly if international transactions in life insurance are significant.¹⁰ If this is the case, an alternative and more meaningful way of calculating the service charge associated with life insurance would be to divide the sum of the operating costs and profits of life insurance enterprises into total premiums payable. As with nonlife insurance, the service charge is more easily calculated for exports of insurance services than for imports. Similar ratios, which could be obtained from the domestic life insurance industry or from BOP compilers in other countries, could be used for imports. As life insurance transactions between residents and nonresidents tend to be relatively insignificant and service charges tend to be a relatively small percentage of premiums, an alternative is to ignore entirely the service element of life insurance transactions.

353. Because of the investment nature of life insurance premiums and claims, life insurance premiums (minus any service charge calculated) are recorded as increases in the policyholder’s claim on the life insurance enterprise (or mutual pool, in the case of mutual funds); claims (and surrenders of policies) are recorded as decreases in this investment. Investment in life insurance is recorded, in the financial account and the international investment position, under the other investment-other assets/liabilities items. The subject is not addressed in the BPM, but the compiler may wish to record “bonuses” on life insurance policies. (Bonuses arise from the investment, by insurance enterprises, of policyholder funds.) Such bonuses could be recorded as income payable from insurance enterprises to policyholders and offset by an increase in policyholder claims on insurance enterprises.

354. An example may clarify the treatment of life insurance in the balance of payments. Residents of Pokolbin pay 12,000 units in premiums to a nonresident life insurance enterprise and receive 22,000 units in claims. Furthermore, analysis of Pokolbin’s domestic life insurance industry shows that the ratio of operating costs and profits to premiums receivable is 0.05. The following entries would be recorded:

Pokolbin’s Balance of Payments:

^*In BOP presentations, these entries would be shown on a net basis (10,600-unit credit). Gross entries are shown for illustrative purposes only.

Pokolbin’s Balance of Payments:

	Credit	Debit
Insurance services		600
Financial account
Other investment-other assets*	22,000	11,400
Reserve assets (or other appropriate financial account item)		10,000

^*In BOP presentations, these entries would be shown on a net basis (10,600-unit credit). Gross entries are shown for illustrative purposes only.

View Table

Pokolbin’s Balance of Payments:

	Credit	Debit
Insurance services		600
Financial account
Other investment-other assets*	22,000	11,400
Reserve assets (or other appropriate financial account item)		10,000

^*In BOP presentations, these entries would be shown on a net basis (10,600-unit credit). Gross entries are shown for illustrative purposes only.

The insurance services item was calculated by multiplying the 12,000 units of premiums by 0.05. The increase in investment (debit entry) was calculated as the difference between premiums and the estimated service charge.

Commissions and Similar Fees on Exports and Imports of Goods

359. According to the BPM, agent fees on exports and imports are regarded as part of the value of goods if such fees are paid by the exporter (regardless of whether the agent is a resident of the exporting country or some other country) or if such fees are paid by the importer to an agent resident in the exporter’s country. When agent fees are paid by the exporter to a nonresident agent or paid by an importer to an agent in countries other than the importing or exporting economy, entries should be made in the balance of payments in the merchanting and other trade-related services item. No entries are required in this item for agent fees paid by the importer to agents in the exporting country. While such transactions involve residents in different economies, the fees constitute part of the value of transactions in goods to which the agent fees are related.

360. The following example illustrates the material in paragraph 359. These transactions take place between Domestica and Nostaw in a particular year.

aValue (excluding agent fees) of goods exported from Domestica to Nostaw	200
bFees charged on Domestica’s exports (seea) by an agent in Nostaw and paid by the importer	10
cFees charged on Domestica’s exports (seea) by an agent in Domestica and paid by the importer in Nostaw	20
dValue of goods imported by Domestica from Nostaw	300
eFees charged on Domestica’s imports (seed) by an agent in Cromania and paid by the importer	40

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aValue (excluding agent fees) of goods exported from Domestica to Nostaw	200
bFees charged on Domestica’s exports (seea) by an agent in Nostaw and paid by the importer	10
cFees charged on Domestica’s exports (seea) by an agent in Domestica and paid by the importer in Nostaw	20
dValue of goods imported by Domestica from Nostaw	300
eFees charged on Domestica’s imports (seed) by an agent in Cromania and paid by the importer	40

In this case, the balance of payments of Domestica should show the following entries:

		Credit	Debit
Goods
	Exports f.o.b.	220
	Imports f.o.b.		300
Merchanting and other trade-related services			40
Reserve assets (or other appropriate financial account item)		120

View Table

		Credit	Debit
Goods
	Exports f.o.b.	220
	Imports f.o.b.		300
Merchanting and other trade-related services			40
Reserve assets (or other appropriate financial account item)		120

Thus, entries under exports include agent fees that were paid in connection with transactions in goods by the Nostawan importer to an agent resident in Domestica. Fees paid by the Nostawan importer to the agent in Nostaw are not reflected in the value of exports as the transaction is strictly between two nonresidents.¹² The debit entry recorded for merchanting and other trade-related services relates to agent fees paid by the importer in Domestica to a resident of a third economy, Cromania. Had these fees been paid to a resident of Nostaw, the fees would have been included in the value of goods recorded in the balance of payments rather than being shown as a separate transaction under merchanting and other trade-related services.

Merchanting

361. The acquisition and subsequent sale of goods that do not cross the frontier of the economy in which the temporary owner of these goods is a resident is called merchanting. These transactions are not recorded as imports and subsequent reexports of goods. The BPM recommendation is that any difference in the value of the goods be regarded as a fee for a service rendered to nonresidents and that this fee be included in merchanting and other-trade related services. Speculative gains or losses realized from transactions in commodity arbitrage are also recorded under this item. However, speculative gains or losses occurring in connection with financial items constitute part of the value of these items and, when realized, such gains or losses are reflected in the financial account. Paragraphs 189–194 of the Textbook provide additional details on the treatment of merchanting.

362. An enterprise in Bushland purchases coffee from a resident of Central Paradiso for 300 units and sells the coffee to a resident of Jaymaranda for 330 units. The goods are shipped directly from Central Paradiso to Jaymaranda, and the goods do not cross the border of Bushland. In another transaction, the enterprise in Bushland speculates in oil stocks held abroad and loses 10 units in the transaction.

The balance of payments of Bushland should show the following entries:

	Credit	Debit
Merchanting and other trade-related services	30
	–10
Reserve assets (or other appropriate financial account item)		20

View Table

	Credit	Debit
Merchanting and other trade-related services	30
	–10
Reserve assets (or other appropriate financial account item)		20

Thus, the credit entry for merchanting represents the merchanting gain of 30 units, which is calculated as the difference between acquisition and sale prices of the coffee, and the debit entry for that item reflects the loss from oil trading.

Embassies, Consulates, and Other Official Entities

364. Transactions of embassies, consulates and other official entities of foreign governments (such as military units, aid missions, tourist and information offices, libraries, and offices to encourage immigration) with residents of countries where the entities are located should be recorded in the balance of payments of both the host countries and the countries represented by the entities. According to the BPM, these entities are residents of the countries represented rather than the countries where the entities are located. Goods and services acquired from host economies by these entities should be regarded as transactions in the government services n.i.e. item in the balance of payments of both countries. On the other hand, cash remittances, shipments of goods, and any other transactions between these official entities and their home countries should be excluded from the balance of payments of host countries because these transactions represent transactions between nonresidents.

365. Transactions of the nonresident personnel of foreign official entities (such as embassies) with residents of the economies in which the entities are located should also be recorded in the balance of payments. The residence of personnel from embassies, consulates, and other government offices is not defined by the usual one-year rule of residence but by center of interest. On the basis of the center of interest concept, persons posted from their home countries to work in official entities located in other countries maintain centers of interest in their home countries—regardless of whether the employees reside in host countries for less or more than one year. Therefore, such personnel are always treated as nonresidents of host countries, and transactions of these personnel with residents of host countries should be included in the balance of payments.

366. The following summary represents the principal types of transactions engaged in by embassies, consulates, other official entities, and related personnel and classified as government services n.i.e.:

expenditures in host countries by embassies, consulates, etc. for goods and services such as office supplies and furniture, fuel and utilities, rent or purchases and sales of embassy buildings, official cars and the operation and maintenance thereof, and official entertainment;

personal expenditures in host countries by diplomatic, military, and other personnel of foreign official entities.

367. Several examples show how transactions relating to embassies and other official entities located abroad should be recorded in the balance of payments. In the first example, the Cromanian embassy in Hughesavia buys, for embassy use, an office building located in Hughesavia. The embassy pays 500 units for the building. The balance of payments of Cromania should show the following entries:

	Credit	Debit
Government services n.i.e.		500
Reserve assets (or other appropriate financial account item)	500

View Table

	Credit	Debit
Government services n.i.e.		500
Reserve assets (or other appropriate financial account item)	500

However, purchases and sales of land by foreign embassies should not be recorded as government services n.i.e. Rather, these transactions should be recorded under the acquisition or disposal of non-produced, nonfinancial assets in the capital account.

368. In the second example, during a particular year, Cromania’s embassy in Hughesavia collects the following receipts and makes the following payments through commercial banks in Hughesavia:

Receipts
aCash received from government in Cromania	1,000
bInterest on bank deposits in Hughesavia	50
Payments
cWages paid to Hughesavian staff	200
dWages paid to Cromanian staff	500
eExpenditure for office supplies in Hughesavia	50
fRent for embassy building	150

View Table

Receipts
aCash received from government in Cromania	1,000
bInterest on bank deposits in Hughesavia	50
Payments
cWages paid to Hughesavian staff	200
dWages paid to Cromanian staff	500
eExpenditure for office supplies in Hughesavia	50
fRent for embassy building	150

These transactions should be recorded in the balance of payments of Hughesavia in the following manner:

^*In BOP presentations, this item would be shown on a net basis (650-unit credit). Gross entries are shown for illustrative purposes only.

	Credit	Debit
Government services n.i.e.	50e
	150f
Compensation of employees	200c
Investment income		50b
Other investment-assets-currency and deposits-banks		1000a
Other investment-liabilities-currency and deposits-banks*	1000a	200c
	50b	50e
		150f

^*In BOP presentations, this item would be shown on a net basis (650-unit credit). Gross entries are shown for illustrative purposes only.

View Table

	Credit	Debit
Government services n.i.e.	50e
	150f
Compensation of employees	200c
Investment income		50b
Other investment-assets-currency and deposits-banks		1000a
Other investment-liabilities-currency and deposits-banks*	1000a	200c
	50b	50e
		150f

^*In BOP presentations, this item would be shown on a net basis (650-unit credit). Gross entries are shown for illustrative purposes only.

369. In the third example, a resident of Cromania is stationed for three years with the embassy of his country in Hughesavia. The Cromanian resident collects the following receipts and makes the following payments through commercial banks in Hughesavia:

^*The funds were transferred from the diplomat’s bank account in Hughesavia to Cromania prior to the purchase.

Receipts
aSalary paid by embassy into local bank account	500
bInterest on bank account in Hughesavia	10
cDividends (on shares from an enterprise in Cromania) paid into local bank account	50
Payments
dExpenditures for food and clothing in Hughesavia	100
eRent for apartment in Hughesavia	150
fPurchase of a car in Cromania	1,000*

^*The funds were transferred from the diplomat’s bank account in Hughesavia to Cromania prior to the purchase.

View Table

Receipts
aSalary paid by embassy into local bank account	500
bInterest on bank account in Hughesavia	10
cDividends (on shares from an enterprise in Cromania) paid into local bank account	50
Payments
dExpenditures for food and clothing in Hughesavia	100
eRent for apartment in Hughesavia	150
fPurchase of a car in Cromania	1,000*

^*The funds were transferred from the diplomat’s bank account in Hughesavia to Cromania prior to the purchase.

The balance of payments statement of Hughesavia should reflect the following entries:

^*Entries are shown on a gross basis for illustrative purposes.

	Credit	Debit
Government services n.i.e.	100d
	150e
Investment income-interest		10b
Other investment-assets-currency and deposits-banks*	1000f	500a
		50c
Other investment-liabilities-currency and deposits-banks*	500a	100d
	10b	150e
		1000f

^*Entries are shown on a gross basis for illustrative purposes.

View Table

	Credit	Debit
Government services n.i.e.	100d
	150e
Investment income-interest		10b
Other investment-assets-currency and deposits-banks*	1000f	500a
		50c
Other investment-liabilities-currency and deposits-banks*	500a	100d
	10b	150e
		1000f

^*Entries are shown on a gross basis for illustrative purposes.

In practice, it often may be difficult to obtain data on the expenditure by nonresident staff of embassies, consulates, military units, etc. Therefore, an estimate of their expenditures may be based on information received from those entities on wages and salaries paid to nonresident personnel.

370. In addition to transactions between foreign government entities located in a country and the residents of that country, receipts and contributions made under joint military arrangements constitute another group of transactions recorded in the category of government services n.i.e. Also recorded under this item are general administrative expenditures associated with aid.