II. The Macroeconomic Accounts and Their Interrelations
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund


Macroeconomic statistics provide the basic information used to determine a country’s level of economic activity, assess the economy’s performance, and forecast future developments. A reliable set of statistics is thus indispensable to policymakers. Typically, four distinct but closely related statistical systems provide the core of the needed information: the national income and product accounts, the balance of payments, the government finance statistics, and consolidated banking system accounts.1 For countries where the state owns a considerable number of business operations, it is useful to supplement these data with the accounts of the state enterprises in order to determine the influence these enterprises have on the economy, but comprehensive data are not always available.

1. Introduction

Macroeconomic statistics provide the basic information used to determine a country’s level of economic activity, assess the economy’s performance, and forecast future developments. A reliable set of statistics is thus indispensable to policymakers. Typically, four distinct but closely related statistical systems provide the core of the needed information: the national income and product accounts, the balance of payments, the government finance statistics, and consolidated banking system accounts.1 For countries where the state owns a considerable number of business operations, it is useful to supplement these data with the accounts of the state enterprises in order to determine the influence these enterprises have on the economy, but comprehensive data are not always available.

The four different systems of macroeconomic accounts are based on the same general concepts and are thus interconnected and internally consistent. The fiscal, monetary, and balance of payments accounts provide details of aggregate economic activity measured by the national income and product accounts. This workshop focuses first on the most important concepts underlying the different sets of accounts and then on the interconnections among the accounts.

2. Common Features of Macroeconomic Accounts

The macroeconomic accounts represent a summary record of economic transactions. An economic transaction takes place when ownership of a real or financial asset is transferred between two economic units or when one economic unit provides a service for another. In most cases, economic transactions involve a quid pro quo: goods and services may be exchanged for financial assets (for example, they may be sold for money) or financial assets may be exchanged for other financial assets (for example, a security may be sold for money). However, in some cases, goods, services, and financial assets may be transferred without an exchange taking place. Such transfers occur when emergency food or medical supplies are provided free to the population of an area hit by a natural disaster. To ensure that such transactions are treated uniformly, they are also treated as having two sides: the value of the goods, services, or financial assets, and an offsetting bookkeeping entry (in the form of an unrequited transfer) on the payment side to indicate that the transaction involves a gift and not a sale.

Changes in the 1993 SNA

The data in this workshop were compiled on the basis of the standard accounting systems then being used, principally A System of National Accounts (SNA) (United Nations, 1968). This accounting framework has been extensively revised in the System of National Accounts, 1993, to include the following:

  • The accounting structure now provides for a more integrated presentation. The 1968 SNA used a dual presentation that measured the production account on the basis of producing units (and industries) and the rest of the system by institutional sectors (such as the private sector and government). The 1993 system measures the production account on the basis of both producing units and institutional sectors. It provides an integrated sequence of accounts, based on institutional sectors, in the form of current accounts, accumulation accounts, and (new in 1993) balance sheets. The 1993 system also records, as far as possible, gross flows rather than net flows, with a view to providing more details of sectoral transactions.

  • Although GDP is still an important measure in the 1993 system, more emphasis has been given to the identification of other key economic aggregates and balancing items. For example, more attention has been given to providing details of income flows. Whereas the 1968 system presented a single account focusing on the difference between sources and uses of income, the 1993 system presents a series of income accounts that provide greater insight into the generation, distribution, and use of incomes.

  • In keeping with the development of more sophisticated financial instruments and derivatives, the 1993 accounts provide more information on the types of assets and liabilities employed by each institutional sector.

  • There has been a concerted effort to ensure that, as far as possible, the SNA and related international statistical standards—for example the IMF’s Balance of Payments Manual (see Box 2.4)—are consistent. Future revisions of the manuals related to monetary statistics and government finance statistics can be expected to aim for maximum consistency with the 1993 SNA.

  • The 1993 system specifically recognizes the development of satellite accounts that augment the SNA accounts, such as those that record environmental statistics. For a more complete description of the changes made since the 1968 SNA, reference should be made to Annex I in the 1993 SNA.

  • In the future, national authorities are expected to convert their national accounts to conform to the new system of presentation.

The four sets of macroeconomic accounts record the economic activity of all residents of a geographic territory, usually a country. Residents are those economic units (including individuals) that have a closer tie with the country for which the accounts are being prepared than with any other. The distinction between residents and nonresidents is not based on nationality: a resident of one country may be a national of another.2

In the national income accounts, the concept of economic transactions is broadened to include certain transactions within the same economic unit: farmers may produce food for their own consumption, and homeowners occupying their own houses may be the recipients of housing services, for instance. Although no money changes hands and consumer and producer are identical, such transactions must be recorded if the national income aggregates for production and consumption are to be comprehensive and comparable across countries. In their capacity as producers, farmers are thus assumed to have sold their production to themselves in their capacity as consumers, and the implicit rent of owner-occupied dwellings is included in both production and consumption.

If the transactions of an economic agent or a group of agents for a particular period are added together, the resulting quantity measures a flow, i.e., an amount per unit of time. In contrast to a flow, a stock measures an amount existing at a single point in time. The monthly expenditures of a household constitute a flow, while the checking account balance at a particular moment is a stock. Flows are normally classified as either financial or nonfinancial (real). Financial flows involve changes in holdings of financial assets and liabilities, while nonfinancial flows refer to transactions that occur in the process of producing or acquiring goods and services. Taken together, real and financial flows record all the receipts and expenditures of an economic sector (household, enterprise, or government). For any given sector, the balance of nonfinancial transactions is, apart from statistical errors, equal to the change in its financial claims on and liabilities to the other domestic sectors and the rest of the world. For example, if a household spends more than its income in a particular period, the difference must be matched by dissaving or borrowing, drawing resources from other sectors.

With respect to the timing of transactions, in the national income accounts and balance of payments they are recorded when an obligation is incurred (typically, when the legal ownership of an asset changes) rather than when it is settled; transactions defined in this way are said to be on an accrual basis. Government finance statistics, on the other hand, are generally recorded on a cash basis—that is, when money changes hands. Since monetary statistics are derived from balance sheets constructed in accordance with the rules of business accounting, they are also, in principle, on an accrual basis. However, as most bank transactions are carried out immediately in cash, this distinction is generally of little practical importance.

3. National Income and Product Accounts

The national income and product accounts attempt to measure the overall level of economic activity undertaken by domestic residents during a given period; thus, these accounts record flows. The economic activity generally takes the form of selling goods and producing services and can be measured in terms of any of the three aspects of the transactions relationship—that is, using data on (i) the production of the sector (such as agriculture or construction); (ii) the income (such as compensation and profits) each factor of production receives; or (iii) the expenditures on that output (see Figure 2.1). Thus, the natural starting point for an analysis of national income and product accounts is the identity between production and the disposition of production. The supply of goods and services available in a given year in the domestic economy may be viewed as the sum of domestically produced output and imports. The demand for those goods and services is equal to aggregate expenditure by domestic residents on consumption and investment, plus foreign purchases (exports).

Figure 2.1.
Figure 2.1.

National Income Account Approaches


VA = Value added

GDP = Gross domestic product

C = Consumption

I = Investment

X = Exports of goods and nonfactor services

M = Imports of goods and nonfactor services

W = Wages

OS = Operating surplus

ITS = Indirect taxes less subsidies

RIP = Rent, interest, and profits

D = Depreciation

Output may be interpreted in several ways (see Box 2.2). Gross domestic product (GDP) is a measure of the total value added of all resident producing units; it is similar (but not identical) to the output produced in the territory of a given country. The term gross implies that no deduction has been made for the depreciation of building and equipment that occurs as production takes place. Net domestic product (NDP) is GDP less depreciation.3

Another measure of output is gross national product (GNP). GNP measures income earned, both domestically and abroad, by resident-owned factors of production. Thus, GNP is equal to GDP plus payments from abroad to residents for the services their factors of production provide outside the reporting country, less payments to foreigners for the services of their factors of production in the home country. The difference between GDP and GNP is called net factor income from abroad and may be positive or negative.

Payments and receipts of factor income from abroad include investment income (such as returns on direct investment and interest earnings or payments); labor income (including income from migrant workers who have lived abroad for less than one year); and economic rents (income from land and buildings, and royalties for books, films, and computer software).

GNP provides a broader measure of the income available to a country than GDP, particularly if international factor income payments are large and fluctuate widely, and is therefore a more comprehensive measure of national wealth. As with NDP, net national product (NNP) can be derived by deducting depreciation from GNP. GDP at factor cost can also be distinguished from GDP at market prices (Box 2.3).

How the Concept of “Net Material Product” (NMP) Relates to Gross Domestic Product (GDP)

In the statistical system used in most former centrally planned economies, the concept used to measure output was Net Material Product (NMP), which has its origins in the input-output tables underlying the central plan. The primary difference between the NMP and GDP is that the NMP deducts depreciation and omits much of the value added of the nonmaterial service sector. Only those services considered to be a “continuation” of the actual production of material products, such as nonmaterial services used as inputs in production and the shipping, storage, and marketing of physical output, are in principle included in NMP, although practices vary among countries. GDP can thus be constructed from NMP by adding depreciation and the total value added of nonmaterial services (excluding nonmaterial services already included in the definition of NMP).

In general, the nonmaterial service sector is dominated by the private sector and tends to be the fastest-growing component of an economy, with the result that NMP growth figures tend to understate overall growth relative to the broader concept of GDP.

Factor Cost or Market Prices for Measurement of Output

The activities of the government in the economy cause a discrepancy between the sum of all factor payments, or incomes (output valued at “factor cost”), and aggregate expenditure (valued at “market prices”). The final price paid in a transaction differs from the sum of the receipts of the factors of production because of indirect taxes and government subsidies. As a result, in order to move from the concept of GDP measured from the income side at factor cost to the concept of GDP measured from the expenditure side at market prices, analysts must add the amount of indirect taxes (net of any subsidies to business).

A third important measure of aggregate output is gross national disposable income (GDI). GDI—GNP plus the value of net transfer payments from abroad—provides the most comprehensive measure of total income available to residents.4 Net foreign transfers typically include official foreign assistance grants, support from private charities, and the gifts or income transfers of private citizens. Again, net national disposable income (NDI) can be derived by deducting depreciation from GDI.

These three measures of aggregate output (GDP, GNP, and GDI) can be represented by the same equation form, according to the interpretation of external sector coverage in the relationship. If the measure of external sector flows includes only exports and imports of goods and nonfactor services, then the measure of output defined is GDP. If the measure of external flows includes net factor income as well as goods and nonfactor services, the measure of output is GNP. Finally, if the external sector also encompasses net transfers, a concept commonly identified as the current account of the balance of payments, the measure of output is GDI. If these external sector flows are separately identified, the equations can be written as:



C = consumption expenditure of the private sector and government;

I = investment expenditure of the private sector and government (including inventory changes);

X = exports of goods and nonfactor services;

M = imports of goods and nonfactor services;

YF = net factor income; and

TR = net transfers.

This simple relationship can be rearranged to show more clearly the basic interrelationship between economic sectors already discussed. Since national saving (S) is defined as gross national disposable income less consumption, then:


Equation 2.3 can be rewritten as:


This expression says that any external imbalance must be reflected in a domestic imbalance, with residents’ expenditures on domestic and foreign goods and services—the sum of consumption and investment—either exceeding or falling short of domestic output. If the imbalance between saving and investment is divided into two components representing the private (p) and government (g) sectors, equation 2.4 can be written as:


This expression underscores the relationship between a private or government sector saving-investment imbalance and current account deficits (surpluses). It should be emphasized that equation 2.5 is an identity. Without additional information, it cannot be inferred from this equation whether the source of the imbalance is external (for example, a terms of trade deterioration) or domestic (expansionary financial policies). The equation does, however, highlight the resource linkages that exist between the private, public, and external sectors.

a. Exercises

(1) GDP in nominal terms is equal to GDP at constant prices (GDPR) multiplied by the GDP deflator. Therefore, the GDP deflator can be calculated as follows:


Using data for 1990 (in Tables 2.3 and 2.4), calculate the implicit deflators for private and government consumption, investment, exports, imports, GDP, and domestic demand.

(2) What factors may account for the differences in movements of the implicit deflators for the major components of GDP? Is it reasonable for the overall deflator to increase more or less than any of the individual components? Use the relationship:


and the definition of the GDP deflator given in the previous exercise to derive:


where R denotes real values for each sector, and Pi the deflator for each sector. Then apply the data in Table 2.3 to verify the GDP deflator for 1990.

(3) Use the information in the tables at the end of this chapter to calculate domestic saving and national saving (in nominal terms) for 1989 and 1990. Then calculate S – I, where S represents national saving, and check whether S – I equals the external current account balance, CAB. What are the possible reasons for a discrepancy?

Table 2.3.

Sri Lanka: Gross Domestic Product by Expenditure, 1986–90

(At constant 1982 market prices)

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Source: IMF Institute database.


Includes autonomous public corporations and the Mahaweli Authority.

Central government capital expenditure less capital transfers to corporations, plus local government investment.

(4) Note the following:

  • Central government saving may be measured as total revenue plus grants minus the sum of current expenditure (Table 2.6) and capital transfers;

  • Central government investment constitutes “acquisition of capital assets” (Table 2.7);

  • “Private” saving may then be derived as national saving minus central government saving; and

  • “Private” investment is total investment minus central government investment.6

Table 2.6.

Sri Lanka: Summary of Central Government Operations, 1986–91

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Source: IMF Institute database.
Table 2.7.

Sri Lanka: Economic Classification of Expenditure, 1986–91

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Source: IMF Institute database.

Some revisions have been made from data presented in earlier reports because of the reclassification of taxes paid on behalf of Mahaweli contractors as capital expenditures (transfers). These had previously been classified as current expenditure (transfers).

Using this procedure, complete the following table.

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b. Issues for discussion

(1) What are the key differences between the system of national accounts described in this section and the accounting framework used in your country?

(2) What are the advantages and disadvantages of the accounting framework described in this section and the system used in your country? Please discuss the rationales that underpin the two systems.

(3) What effects will the introduction of the Third Edition of the System of National Accounts have on Sri Lanka’s GDP?

(4) Review the definitions of the external current account that correspond to GDP, GNP, and GDI. Explore the rationales behind the different concepts.

4. Balance of Payments

The balance of payments reflects transactions only between residents of the reporting country and foreigners.7 All other transactions, such as those between domestic residents, are excluded. The balance of payments has three components. The external current account balance records transactions between residents and foreigners in goods and services, and unrequited transfers (as discussed in the previous section). The capital account balance provides summary statistics on changes in the net foreign asset position of domestic residents (excluding the banking system) arising from transactions such as external borrowing or repayments, foreign direct investment, and short-term capital movements. The monetary movements relate to changes in net international reserves of the banking system.8

The balance of payments is compiled according to the conventions of the double-entry accounting system. Each transaction is reflected in the accounts by both credit and debit entries. By convention, credit or positive entries are used for (i) real resource flows (exports); and (ii) financial flows (a reduction in the economy’s foreign assets or an increase in its foreign liabilities). Conversely, debit or negative entries are recorded for (i) real resource flows (imports); and (ii) financial items (an increase in assets or a decrease in liabilities). For example, an export transaction for which the foreign exchange receipts are deposited abroad is recorded as follows:

Credit: exports of goods (positive)

Debit: short-term capital (negative)

In principle, this method results in a zero balance, since each transaction involves credit and debit entries for the same amount. In practice, however, information on the debit and credit components of a transaction is usually obtained from different statistical sources, so that deficiencies in coverage, as well as variations in the time of recording and in the methods used to value transactions, result in a statistical discrepancy. To balance the accounts, an accounting entry usually referred to as net errors and omissions is introduced to reconcile the differences.

Changes in the Fifth Edition of the Balance of Payments Manual

The Fifth Edition of the IMF’s Balance of Payments Manual, issued in 1993, integrates external sector accounting with other macroeconomic accounts, particularly the System of National Accounts (SNA) (see Box 2.1), and incorporates important changes in methods of recording international transactions. Unlike the previous edition, the 1993 Manual establishes a system of international accounts encompassing a conceptual framework for measuring and presenting both the external transactions of an economy and its international financial position through a comprehensive measure of external assets and liabilities. Among other important changes, the new Manual:

  • redefines the current account to exclude capital transfers, which are included in an expanded and renamed capital and financial account (formerly the capital account) that has been revised to provide data on these flows in greater detail;

  • expands the classification scheme for service transactions, in recognition of their growing importance;

  • expands and restructures the coverage of portfolio investment to reflect the development of new financial instruments such as derivatives and financial futures;

  • extends coverage of emerging forms of exceptional financing transactions such as debt forgiveness and debt/equity swaps; and

  • develops a consistent classification scheme for income and financial assets and liabilities that relates flows to the overall investment position (stock).

Throughout, the nomenclature has been revised to more accurately describe the increasingly sophisticated composition of international transactions.

Referring again to the three main components of the balance of payments, the accounts may be written in equation form as:



CA = the current account;

F = the change in foreign indebtedness of domestic residents plus other capital flows such as direct investment; and

R = the change in net official reserves.

Since the balance of payments by definition has a zero balance, the concept of a surplus or deficit becomes operational only if external transactions are divided into two subgroups that separate transactions falling within the group (“above the line”) from those falling outside (“below the line”). The decision on where to draw the line is based on a determination of which set of transactions is perceived as providing the most appropriate analytical framework for assessing balance of payments need.

Because there are limits to the changes in reserve positions that countries are willing or able to accept, an overall imbalance in reserves is an important indicator of the need for a balance of payments adjustment.9 The standard practice is to place below the line only changes in the short-term assets and liabilities of the monetary authorities, or changes in net official international reserves.10

Equation 2.6 can then be rewritten to emphasize the most important factors relating to changes in external reserves:


Equation 2.7 highlights the way in which the balance of payments acts as a constraint to resource use in the economy. Specifically, a current account deficit—identified as equal to an excess of domestic spending over income in the previous section—is sustainable only as long as capital inflows persist and/or net official international reserves can be decreased. Thus, while imbalances in the current account do not necessarily imply a need for policy adjustment, they may raise questions about the sustainability of the current account deficit (see Chapter III).

In a typical balance of payments summary, the current account is divided into separate balances for trade, services, and unrequited transfers. From an economic point of view, the distinction between goods and services is not significant; a unit of foreign exchange earned by exporting services strengthens the external balance in exactly the same way as a unit earned by exporting goods. Two pragmatic considerations favor the use of the trade balance concept: first, merchandise trade data from customs reports are available on a timely basis; and second, the compilation of trade statistics normally results in relatively complete and accurate coverage.

Trade in merchandise is defined on an f.o.b. (free-on-board) basis. According to this definition, the costs of transporting goods (and related services) up to the customs frontier of the exporting country are included in the value of merchandise, but expenditures incurred beyond that point are treated as services. The other major categories of services include travel (goods and services acquired by travelers outside their country of residence) and investment income (earnings from financial assets, with interest earnings and payments representing major items under this heading). As noted above, unrequited transfers include remittances from workers residing abroad and government grants of goods, financial resources, and technical assistance. However, remittances by migrant workers who have been abroad for less than a year are recorded as labor income under services. Investment and labor income together comprise factor services; all other services are not directly related to factors of production and are classified as nonfactor services.

The capital account classifies flows as short, medium, or long term. Long-term flows include direct investment, portfolio investment (purchases and sales of bonds and equities), and other long-term capital. The sums of the current and capital accounts are traditionally identified as the overall balance, or net external position, which is identical to the economy’s financing requirement.

Official international reserves are regarded as below-the-line items. Also, loans extended to support the authorities’ gross reserve position are, by convention, considered to be a part of the monetary authorities’ net international reserve position. A drawing from the IMF does not affect the authorities’ net reserve position, since both reserve assets and liabilities increase by the same amount. Similarly, repayments of such loans (or repurchases of IMF drawings) are shown as outflows below the line.

a. Exercises

Following are some hypothetical transactions between Sri Lankan residents with foreigners during a given year. Make up a balance of payments accounting table and enter the transactions appropriately, with corresponding credit and debit entries. Then tabulate the current account balance, the capital account balance, and the overall balance.

  • An export of tea from Sri Lanka is worth SDR 3 million. The export company receives the SDR equivalent in foreign exchange, which it converts at a commercial bank into Sri Lankan rupees in order to pay wages. The commercial bank, having no need for additional foreign exchange, converts the currency at the Central Bank.

  • An import of wheat into Sri Lanka is worth SDR 5 million. The importer purchases the required foreign exchange from a commercial bank, which in turn draws down its deposit balance in a correspondent bank abroad.

  • A migrant worker who has been working in the Middle East for three months sends a portion of his earnings, amounting to the equivalent of SDR 350, to his wife at their home in Colombo. The Sri Lankan rupees are purchased from an exchange dealer who offers transfers by wire and who periodically resupplies himself with foreign exchange purchased from the Central Bank.

  • Indians living in New Delhi buy tickets from Air Lanka in Colombo in the amount of SDR 25,000 in order to vacation in Sri Lanka. They pay with Indian rupees, which Air Lanka deposits in its account in New Delhi.

  • Garment manufacturers in Colombo pay the equivalent of SDR 3,000 in Sri Lankan rupees to a local ocean shipping company for freight and insurance in order to ship a consignment to London. The shipping firm deposits the rupees in its local account.

  • The Sri Lankan Government floats an SDR 50 million bond issue in Tokyo.

  • The World Health Organization donates medical supplies and vaccines worth SDR 2 million to the Sri Lankan Government.

  • Foreign investors purchase land and a factory building in Sri Lanka that are worth SDR 3.5 million. To make the payments, they purchase Sri Lankan rupees from commercial banks.

  • A group of Sri Lankan construction workers who have been in Kuwait for the last two years send the equivalent of SDR 5,000 in foreign exchange to their families, all located in the same village. The equivalent of SDR 4,000 is exchanged for rupees at banks; the remainder is hidden under mattresses or buried.

  • The public electric utility, a recipient of concessional foreign lending in the past, makes an amortization payment equivalent to SDR 1.5 million. It also makes a periodic interest payment amounting to the equivalent SDR 3,000. It purchases the required foreign exchange from commercial banks.

b. Issues for discussion

(1) In addition to the data in Table 2.5, what information would be useful in assessing the sustainability of Sri Lanka’s balance of payments?

Table 2.5.

Sri Lanka: Balance of Payments, 1986–90

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ource: IMF Institute database.

Excludes petroleum exports.

Public corporations and private companies.

Trade credits, short-term borrowings of public corporations and private corporations, and liabilities to foreign currency banking units (FCBUs).

Total debt, including use of IMF credit, private sector debt, and short-term debt, as a percent of exports of goods and nonfactor services.

(2) Comment on the analytical uses of the trade balance, the current account balance, and the overall balance.

(3) What is the likely effect of the Fifth Edition of the Balance of Payments Manual on Sri Lanka’s external accounts?

5. Fiscal Accounts

The operations of the government—through purchases of goods and services, resource transfers, revenue-raising measures, and financing decisions—influence the level and growth of economic activity, the allocation of resources among different uses, and the distribution of income. An important aspect of fiscal analysis is the assessment of the macroeconomic impact of budgetary operations on output growth, inflation, and the balance of payments. A review of the major budgetary aggregates and an analysis of the various concepts of the budget balance provide a preliminary indication of the fiscal policy stance.

The sum of all budgetary receipts, including financing, must by definition equal the sum of all expenditures. Consequently, as with the balance of payments, for analytical purposes the concept of a budget surplus or deficit involves separating out a subset of total budgetary transactions. Box 2.5 provides a summary of the main aggregates that enter a budget statement.

Summary of Government Finances

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An overall surplus or deficit is normally defined as the difference between total revenue and grants (A+B+C) and total expenditure and net lending (D+E+F).11

For a variety of reasons, many countries use a modified form of the basic budget balance identified here in their national budgetary presentation. Socialist countries in particular often classified elements of financing in the GFS accounts as revenue, a method that tends to reduce the budgetary deficit.

Because taxes and other government revenues absorb the purchasing power of the private (nongovernment) sector, and government expenditures increase aggregate demand, an overall deficit may indicate an expansionary fiscal stance vis-à-vis the rest of the economy. Similarly, an overall surplus may indicate a contractionary stance. Such an interpretation needs to be qualified by a detailed analysis of the type of financing involved, the structure of receipts and expenditures, and the exogenous factors (such as commodity prices for major exports) that may be causing the surplus or deficit. Nevertheless, sharp changes in the government’s overall balance, particularly when measured as a proportion of output, provide an important signal that the impact of government operations on the economy needs to be carefully reviewed.

A further concept that is often used in fiscal analysis is the current account balance, which can be in the form of a surplus or deficit. The current account balance is defined as current revenue plus grants minus the sum of current expenditure and capital transfers and is a measure of government sector saving. A high level of government saving is sometimes interpreted as a contribution to development, since it generates financing for a substantial amount of capital formation. Such an assessment should be tempered, however, by the recognition that it is difficult to distinguish between the developmental impact of current and capital outlays and that the very concepts of current and capital accounts can overlap. For instance, current expenditures on education and health maintain and improve human capital.

Several additional budgetary measures have been developed to emphasize other aspects of fiscal operations.

The operational deficit excludes the effects of inflation on interest payments from the budget. In a hyperinflationary environment, these payments are often seen as necessary to induce creditors to hold government debt and thus should be classified below the line as amortization of existing debt.

This approach is taken one step further in the concept of the primary deficit, which excludes all interest payments and thereby attempts to eliminate the effect of previous budgets in assessing the current fiscal position.

In countries that are major oil exporters, for example, where external transactions represent a significant contribution to domestic wealth and the relationship between domestic supply and demand is particularly important, it may be useful to employ the concept of the domestic deficit, which compares domestic revenues with outlays in order to assess the budget’s impact on the economy.

Finally, for analytical purposes, many countries attempt to remove the effects of fluctuations in economic activity on budgetary performance in order to eliminate temporal disturbances and better assess long-term fiscal performance. The full employment deficit adjusts revenues to reflect their likely performance if the economy achieves its full potential output and assesses the fiscal stance by comparing expenditures to adjusted revenues. The cyclically adjusted or trend deficit assesses both revenues and expenditures in the context of long-term average output.

Government transactions (as recorded in the different categories of the national accounts) can be linked directly to the fiscal accounts, although important conceptual differences exist between the two accounting systems. The fiscal accounts include as current expenditure all government outlays on goods and services, including wages and salaries, as well as subsidies, transfers, and interest on public debt. The national accounts definition of government consumption is much narrower than the fiscal accounts definition of current expenditure in that it includes only spending on goods and services, since subsidies and transfer payments are not classified as final consumption of the government. Other differences between the two accounting systems are presented in Box 2.6.

Government Consumption and Current Expenditure

A number of other factors account for the differences between the measurement of government current expenditure according to the Manual on Government Finance Statistics and public consumption according to the System of National Accounts.

  • First, in measuring government consumption, the national accounts normally impute a value to implicit government contributions to unfunded employee welfare benefits and depreciation of fixed capital. A value for depreciation is included to provide a measure of the economic cost of government-provided services, since government services are not usually offered for sale at competitive prices but are offered free of charge.

  • Second, the national accounts are recorded on an accrual basis, while fiscal accounts are usually recorded on a cash basis.

  • Third, the definition of government may differ among the accounts. In many countries, the national accounts use a broad definition of the government sector that includes the general government (central and local governments and extrabudgetary and revolving funds) plus public nonfinancial enterprises. The fiscal accounts generally use a narrower definition.

  • Fourth, in the fiscal accounts, government fees and charges and nonindustrial sales should, in principle, be deducted from current expenditure on goods and services (assuming that these fees approximate the costs incurred by the government in providing the relevant services), since these items would be classified in the national accounts as final or intermediate consumption of other sectors (for instance, fees for museums or recreational facilities listed as final consumption of households, and payments for government publications as intermediate consumption of business units).

Government capital formation in the national accounts definition is equal to the government’s acquisition of new and existing fixed capital assets less sales of assets plus purchases of stocks. The definition of real capital formation in the fiscal accounts differs from the same definition in the national accounts by the amount of any sale of assets—for example, the privatization of state enterprises. The IMF Manual on Government Finance Statistics recommends that any sales of assets be classified under net lending. In practice, however, these transactions are often recorded off the budget and the proceeds earmarked for specific uses or as capital revenue. It should be noted that the investment figures in the national income accounts include outlays by both local government and the central government.

The impact of a given overall surplus or deficit on aggregate demand depends on its financing as well as its magnitude. Financing can involve changes in the public sector’s holdings of currency, bank deposits, and government liabilities (including advances from the banking sector and government securities), as well as in any financial assets held by the government for the purpose of maintaining liquidity rather than pursuing public policy.12 The financing of government operations is usually divided into external and domestic borrowing; domestic borrowing is further divided into nonbank and bank financing.

External financing is defined on a net basis and comprises disbursements by nonresidents of new loans less amortization payments on outstanding debt. External interest payments are recorded above the line in current expenditure. In principle, each external financing transaction of the government has a corresponding entry in the capital account of the balance of payments, classified according to the maturity and type of instrument used.

Domestic sources of financing are typically divided into two parts: bank and nonbank borrowing. Nonbank borrowing includes the sale of government debt instruments, such as bonds and treasury bills, to the nonbank sector of the economy. Information on such borrowing is obtained directly from government sources. In some countries, this type of borrowing, which includes loans from pension funds, is substantial and can exceed bank borrowing.

Bank borrowing, as recorded in the fiscal accounts, should correspond to lending identified by the monetary survey. However, in many countries differences in coverage and in the time when transactions between the relevant fiscal authorities and the central bank are recorded may prevent an exact reconciliation of the fiscal and monetary accounts. Bank borrowing is defined as equal to the change in banking system credit extended to the government less any change in government deposits. Borrowing from the banking system is frequently a major source of budgetary financing and thus influences monetary developments significantly. In these circumstances, monetary and fiscal policy are closely linked, and any attempt to control monetary expansion is unlikely to succeed unless it is supported by an appropriate fiscal policy.

a. Exercises

(1) Recast the following fictitious budget statement for Shangri-La into the GFS standard format (see Box 2.7).

(2) Calculate the central government’s nonfinancial transactions balance (SI)g and the current and overall budget balances for all three years.

Summary of Central Government Accounts for Shangri-La

(In millions of Shangri-La rupees)

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(3) Does the GFS presentation provide a different interpretation of the fiscal position in Shangri-La? (Hint: compare major budgetary aggregates as a share of GDP.)

(4) How should the following transactions be classified in the government accounts?

  • Personal emoluments

  • Equity participation in commerce

  • Central bank profit remittances

  • Purchase of locomotives for the railways

  • Loans from the IMF

  • Receipts of rent from government-owned buildings

  • Loan interest receipts

  • Pensions and gratuities

(5) For the Sri Lanka accounts, calculate the ratio of government bank borrowing to beginning period broad money stock for 1989 and 1990. Does this measure present a different picture of government fiscal policies than what is presented in Table 2.6? Under what circumstances might this measure be an important policy concern?

b. Issues for discussion

(1) What is the rationale behind the distinction between capital and current expenditures?

(2) How should the various kinds of government transactions involving financial claims on others be treated? What is the rationale behind your answer?

(3) What are the advantages of incorporating the operations of nonfinancial public enterprises into an analysis of fiscal policy? What are the problems?

6. Monetary Accounts

The institutions in the financial system can be divided into three subsectors: the monetary authorities; depository institutions, or commercial banks; and other financial institutions, such as development banks. Most analyses of the monetary accounts exclude other financial institutions, which generally play a minor role in monetary creation. The term monetary authorities usually denotes the central bank in its capacity as issuer of currency, holder of national external reserves, borrower for balance of payments purposes, and head of the banking system.13 Commercial banks are distinct from other financial institutions, because they create liabilities that can be used as a means of payment. Typically, commercial banks obtain their funds from deposits that can be transferred by checks or similar instruments and are used to settle the obligations of deposit holders. Funds may also be obtained from the central bank and from external credits.

Monetary statistics are consolidated at three different levels: the monetary authorities’ and commercial banks’ accounts; the monetary survey, which consolidates the accounts of the monetary authorities and the commercial banks; and the financial survey, which consolidates the monetary survey with the accounts of financial institutions outside the commercial banking system. The financial survey is particularly relevant in those countries where the operations of nonbank financial institutions account for a significant share of financial transactions. In each case, the consolidations—which are based on both the T-accounts of the relevant institutions and monetary sector accounts—are derived from the accounting identity between assets and liabilities. In most countries, the monetary survey is the broadest commonly available measure of the banking system. The survey is a summary presentation of the consolidated balance sheets of the monetary authorities and the commercial banks that “nets out” all interbank transactions.

A major purpose of the monetary survey is to facilitate analysis of the monetary aggregates that are most influenced by the monetary authorities and that play the most important role in determining output, prices, and the balance of payments. The monetary survey demonstrates that the liabilities of the banking system to the private sector (broad money, or M2) are the counterpart of banking sector assets, which are held as net foreign assets (valued in local currency) and as net domestic credit from the banking system.14 In equation form:



M2 = liabilities of the banking system (broad money);

NFA = net foreign assets of the banking system, including net official international reserves, R; and

NDC = net domestic credit extended by the banking system, including other items (net).

It is important to stress that equation 2.8 is an accounting identity, not a behavioral equation. It merely states that for the economy as a whole, an increase in money balances must be the result of an increase in the banking system’s net foreign assets, an increase in bank credit, or both. Clearly, the way in which changes in banking sector assets affect the supply of broad money (M2) and the purchasing power it represents is an important policy issue. A subordinate issue is the composition of broad money, which consists of narrow money, or M1 (currency in circulation outside the banks plus demand deposits); time and savings deposits (quasi-money); and other less liquid liabilities, such as paper issued by banks in the form of certificates of deposit.

In the monetary survey, domestic credit is usually divided into three components: loans to the government, loans to nonfinancial public enterprises, and loans to the private sector. Bank claims on the public sector can be held in the form of loans or securities. Banking system credit to the government nets out the deposits of the central and local governments.15

For each foreign asset transaction of the banking system, there should be a corresponding entry in the balance of payments that is reflected either in the overall balance or above the line in the capital account. Specifically, the change in net foreign assets of the banking system should be equal to the change in net official international reserves, as reflected in the overall balance, and the change in net foreign assets of the banking system not included in the definition of official reserves, as reflected in the capital account. It should be noted that the change in international reserves, as defined in the balance of payments, should also be reflected in the monetary survey. The flow of net international reserves is calculated as the difference in stocks (valued in a major foreign currency or in SDRs at end-of-year exchange rates). The difference between the average exchange rate at which the foreign exchange entered the accounts during the year and the rate at the end of the year is entered as a valuation adjustment in “other items (net).” The formulae for valuation adjustments are as follows:



Vt = valuation adjustment for period t;

NFAt = net foreign assets in local currency at the end of period t;

ERt and ERAVGt = the end period and period average exchange rates for period t; and

NFA*t = the change in net foreign assets during period t, expressed in terms of foreign currency.

a. Exercises

(1) Create a monetary survey for 1990 for Shangri-La based on the standard classification used in the IMF publication International Finance Statistics (IFS):

(In billions of Shangri-La rupees, end of 1990)

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(2) Use Table 2.8 to calculate the “contributions” to the growth in money and quasi-money (∆MOQ/MOQ) during 1989 and 1990 of changes in net foreign assets (∆NFA), net claims on government (∆NDCG), domestic credit to other sectors (∆DCP), and other items net (∆OIN). Since:


it necessarily follows that:


Then calculate the distribution of the growth of money and quasi-money among its components—that is, narrow money (distinguishing between currency and demand deposits) and quasi-money.

Table 2.8.

Sri Lanka: Monetary Survey, 1986–90

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Source: IMF Institute database.

Imputed stock from January 1, 1987.

(3) Using a similar approach to that used in (2) above, calculate the contributions to the growth of reserve money from the data in Table 2.9.

Table 2.9.

Balance Sheet of the Central Bank of Sri Lanka, 1986–90

(in millions of Sri Lanka rupees)

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Source: IMF Institute database.

Capital accounts, which are a liability, are included in other items, net.

(4) Based on the formula given at the end of the preceding section, and using relevant data from Tables 2.5 and 2.8, estimate the valuation adjustment for net foreign assets in the monetary survey in 1990. The end-of-period exchange rate per SDR was SL Rs 52.566 in 1989 and SL Rs 57.248 in 1990; the average exchange rate during 1990 was SL Rs 54.355 per SDR.

b. Issues for discussion

(1) Why are government deposits not treated as money or quasi-money? Why does the monetary survey present credit to the government net of government deposits? Is there a situation in which this presentation would not be the best one from the point of view of economic analysis? Why are the deposits of local governments and public enterprises treated differently from central government deposits?

(2) Do increases in domestic credit by the monetary authorities and by deposit money banks have similar effects on the stock of money?

(3) What are some of the problems you encountered in applying the criteria for distinguishing between deposit money banks and nonbank financial institutions? How does such a distinction affect the figures for domestic credit and money?

(4) Why are resident and nonresident deposits denominated in foreign exchange treated differently? Why are such deposits, when held by residents, included in quasi-money? Why are counterpart funds not treated as foreign liabilities or as quasi-money?

(5) Discuss the relationship between the financing of the overall deficit or surplus in the balance of payments (Table 2.5) and the change in net foreign assets in the monetary survey (Table 2.8).

7. Interrelations Among the Accounts

Figure 2.2 at the end of this chapter provides an overview of the macroeconomic interrelationships between the accounts already discussed. The figure shows the three supporting accounts (balance of payments, fiscal, and monetary) and their relationship with both the national income and product accounts and intersectoral linkages. Transactions appearing in more than one sector are highlighted. Bank financing of the government, for example, while a source of financing for budgetary expenditures, is also a banking sector asset, and external financing for the budget enters the balance of payments as a capital account transaction.

Figure 2.2.
Figure 2.2.

Interrelationships Among Macroeconomic Accounts

While conceptually identical, in practice, the entries in the different accounts differ for several reasons. First, the transactions are recorded at different times. Government accounts record payments when they are made, but payments made by checks do not enter the banking sector statistics until the checks are cashed, which may be weeks or even months later. The national income and product accounts record transactions on an accrual basis, so that resource flows that are not financial transactions, such as consumption of fixed capital, are included in these accounts but not in the government accounts. Some other conceptual or definitional differences among the accounts follow.

  • The standard definition of government in all sectoral accounts comprises the central, state, and local levels, including pension funds. Nonfinancial public enterprises are excluded, since they are presumed to be organized on commercial principles, and their financial operations are not considered subject to direct public control.

  • There is a clear distinction between recording practices (cash and accrual) and the treatment of net lending (in the GFS and the SNA).

  • Central government consumption in the national income and product accounts can be derived from budgetary data as follows: fees, charges, and nonindustrial sales are deducted from current expenditures on goods and services, including wages and salaries but excluding subsidies.16

  • The term “indirect taxes” that is used to distinguish GDP at factor cost from GDP at market prices in the national income accounts is not identical to the concept that can be derived from the GFS. Payments by households to government should be excluded from the former.17

  • The government calculates its liabilities at face value (the amount it must eventually repay), while the banks’ valuation is usually at acquisition cost or market value, whichever is lower.

  • The net foreign assets of commercial banks may be excluded from official reserves in the balance of payments accounts if bank holdings are not subject to the effective control of the monetary authorities. In this case, changes in net foreign assets of commercial banks are included as short-term capital movements in the balance of payments. The overall balance of payments position (change in reserves) then differs from the change in net foreign assets reported in the monetary survey.

  • Government saving, defined as current revenue less current expenditures in the fiscal accounts, excludes consumption of fixed capital. In the national income accounts, it is included in the derivation of saving. However, this distinction is minor, since depreciation and saving are both included in the capital finance table of the national accounts. The sum of these two components represents gross saving.

8. Financial Transactions: The Flow of Funds Table

The interrelations depicted in the previous section can also be analyzed in a “flow of funds” table. When the national income accounts are disaggregated by sector, and a record of the financial transactions of each sector is added, then each sector’s statement is presented in a format similar to that for the sectoral accounts introduced earlier. Notably, each sector’s balance of nonfinancial transactions—the difference between its saving and investment—should, in principle, equal the change in its financial assets and liabilities with the other domestic sectors and the rest of the world. Since nonfinancial transactions among domestic sectors occur twice and offset each other (buyer and seller), the sum of these sectoral balances, in principle, equals the balance of payments current account (equation 2.5). If changes in the financial assets and liabilities of a sector are defined in the same manner as capital and reserve movements in the balance of payments, then the sum of the financial transactions of all the domestic sectors should again, in principle, equal the international capital and reserve movements within each category. The phrase “in principle” is intended to indicate that the identities can be obscured by errors and omissions and other statistical problems.

A schematic flow of funds is shown in Table 2.10. Transactions are identified for three domestic sectors (private, public, and banking) and the external sector, or the rest of the world. The banking sector is defined to include those institutions whose positions are recorded in the monetary survey. The public sector comprises the general government (central plus local governments and extrabudgetary funds) and nonfinancial public enterprises. In practice, information on the operations of nonfinancial public enterprises is often inadequate because full data are not available; in these circumstances, nonfinancial public enterprises are included in the private sector and only the narrower concept of government is used.18

Table 2.10.

Schematic Flow of Funds

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Represents foreign countries; that is, the current account surplus (deficit) of the reporting country represents the deficit (surplus) of the external sector.

SP-IP=Private sector net saving;SG-IG=Government net saving;CAB=Current account deficit;GNL=Government net lending;OIG=Government nonbank borrowing;FIG=Government foreign borrowing;FIP=Private sector foreign borrowing;NFA=Net foreign assets;DCP=Private sector domestic credit;NDCG=Government bank borrowing;DC=Domestic credit;MOQ=Broad money (money and quasi-money); andOIN=Other items, net.

By convention, saving and investment by the banking sector are included with the private sector, so that only financial transactions by banks appear in column 3. According to the convention for recording entries, from the point of view of the sector in question, an increase in an asset takes a negative sign and an increase in a liability a positive sign, and vice versa.19 The sum of each row and column should thus equal zero. For example, an increase in the money stock held by the private sector is a liability of the banking sector and an asset of the private sector. It is recorded twice in row 7: as a negative entry in column 1 and as a positive entry in column 3. Blanks in column 4 indicate that transactions among domestic sectors in the relevant rows do not directly affect the balance of payments.

The first step in constructing a flow of funds table is to calculate each sector’s nonfinancial transactions balance. These are calculated directly from the sectoral accounts, as follows:

  • the current account balance is derived from the balance of payments (XM+YF+TR);

  • the budget deficit (excluding net lending) is derived from the government accounts (SI)g; and

  • private sector net saving (SI)p is derived from the national income accounts and the budget deficit, excluding net lending.20

The nonfinancial sector balance for the economy as a whole, denoted as (SI)g + (SI)p, is equal to the external current account of the balance of payments.

a. Exercises

Table 2.11 constructs the flow of funds for Sri Lanka for 1989. Row 1 summarizes the nonfinancial transactions balances of each sector as derived above. The data for the external current account balance have been converted into Sri Lankan rupees at the average exchange rate for the period. Total gross investment is obtained from the national accounts (Table 2.4), and total gross saving is derived as a residual. Government net lending, which is directed to the private sector, is shown in row 2. Government domestic nonbank borrowing (row 3) is obtained from the fiscal tables.

Table 2.4.

Sri Lanka: Gross Domestic Product by Expenditure, 1986–90

(At current market prices)

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Source: IMF Institute database.


Includes autonomous public corporations and the Mahaweli Authority.

Central government capital expenditure less capital transfers to corporations, plus local government investment.

Table 2.11.

Sri Lanka: Flow of Funds, 1989

(In billions of Sri Lanka rupees)

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Represents foreign countries; that is, the current account surplus (deficit) of the reporting country represents the deficit (surplus) of the external sector.

Total external borrowing is equal to the capital account of the balance of payments (Table 2.5).21 The net external borrowing of the public and banking sectors is obtained from the fiscal accounts and monetary accounts, respectively, and private sector external flows are derived residually.

Data for the change in net international reserves (row 6), a form of external financing of the banking system, and for changes in bank credit (row 7) are obtained from the monetary survey. The definition of broad money used here (row 8) includes the total liabilities of the banking system to the private sector.

“Other items (net)” is derived as a residual. The discrepancy in the banking sector column (row 9, column 3) corresponds to the change in “other items (net)” of the monetary survey. The discrepancy in the external sector column represents the “errors and omissions” item in the balance of payments, after account is taken of the valuation adjustment resulting from exchange rate changes. These two discrepancies have their counterparts in the discrepancy that remains in the accounts of the private sector.

The figures in column 2 can be checked for consistency against the table on public sector operations. Row 1 should equal the above-the-line overall balance (excluding net lending), and rows 2–7 the below-the-line financing of the overall balance (including net lending). Row 3 should coincide with items corresponding to changes in stock levels from the monetary survey, and row 4 with the consolidated balance of payments expressed in local currency units. However, in light of the various factors identified in the previous chapter, in practice, some of these items may not correspond exactly.

(1) Using the data tables and accounting framework presented in this workshop, derive the nonfinancial transaction balances for each sector for 1990, using the format of Table 2.11.

(2) In Table 2.12, prepare a flow of funds for 1990 in the same format as Table 2.11.

Table 2.12.

Sri Lanka: Flow of Funds, 1990

(In billions of Sri Lanka rupees)

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Represents foreign countries; that is, the current account surplus (deficit) of the reporting country represents the deficit (surplus) of the external sector.

b. Issues for discussion

Based on the above exercises:

(1) Discuss the major changes taking place in the sectoral nonfinancial transactions balances between 1989 and 1990.

(2) Compare the financing of the sectoral balances in 1990 with the financing of these balances in 1989.

(3) Suppose the Sri Lankan Government had decided to raise its expenditures above the level actually recorded in 1990. Indicate how:

  • the nonfinancial transaction balances might have changed; and

  • the flow of funds might have been affected.

In discussing these points, consider the impact of three alternative methods of financing the increase in expenditure:

  • an increase in taxes;

  • an increase in Central Bank credit; and

  • borrowing from abroad.

Table 2.1.

Sri Lanka: Gross Domestic Product by Industrial Origin at Constant Prices, 1986–90

(In millions of Sri Lanka rupees at 1982 factor cost)

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Source: IMF Institute database.


Including forestry and fishing.

Tea, rubber, and coconuts.