A Note on the Treatment of Multiple Exchange Rates in National Accounts

Abstract

accounting is based upon evaluation of the real intersectoral flows of goods and services, far as possible, at market prices, market prices meaning either the prices received by the local seller or the prices paid by the local purchaser.' Apart from other exceptions which are not of immediate interest here, this principle seems to have been abandoned in the case of imports and exports. Apparently in order to preserve consistency with the balance of payments, imports are generally evaluated c.i.f entrance port, and exports f.o.b. leaving port. Any indirect taxes and subsidies incident on imports and exports are recorded, together with indirect taxes and subsidies on domestic flows, as flows between gross domestic product and the governmental accounts.2 This treatment seems to make the national accounts less useful for purposes of dynamic analysis, in the sense of examining the buyers' choice between imports and domestic products, and local producers' choice between domestic and export markets: the purchaser of imports compares their local market prices with the prices of domestic products, and the potential exporter takes into account any taxes and subsidies on exports when deciding what part of his output to export.3 If this treatment seems unsatisfactory for the accounts of any country, this is a fortiori the case for countries with multiple exchange rates. Multiple rates are frequently not explicit but are actually effected by differential taxation or subsidization. But even in those cases where they are made explicit the deviations from the basic rate can be conceived as indirect taxes or subsidies. The treatment of multiple exchange rates in national accounts seems to have been dealt with only from the point of view of how to arrive at constant price estimates.4 But when the accounts are reduced to base-year prices they disappear to the degree that their rates deviate from those of the base year. It follows that for countries with multiple exchange rates, national accounts at current prices are more revealing than at constant prices. Differential exchange rates are established for particular commodities, or groups of commodities, whereas national accounts are built up from sectoral transactions. It is, therefore, necessary to distinguish purchases of imported goods and services within the purchases of each sector, and to compute the weighted average effective exchange rate for the import component of each sector. In the simplified examples shown below the sectors are identical with the three final-product categories of the gross product account: consumption, gross domestic investment, and exports. Thus if intermediate sectors are not represented in the system, the import components must comprise, besides the direct purchases of each sector from abroad, also indirect imports * This article was completed in March 959, so that it does not contain references to papers by William I. Abraham of the United Nations and Graeme S. Dorrance of the International Monetary Fund, which were issued as drafts subsequently and apparently have not been published so far. I would like to acknowledge gratefully valuable comments by Dr. S. J. Prais, now with the International Monetary Fund, and my colleague, Susanne Freund. 1 United Nations, System of Accounts and Supporting Tables (New York, 953), 8. 2Ibid., i8ff. As far as we know the only exception is the United Kingdom Blue Book on Income and Expenditure, issued annually by the Central Statistical Office. See, for example, in the I956 issue, page 9, Table I2. In this document imports include taxes levied on them; and gross product, national and domestic, excludes these taxes. 'A strong case for the inclusion of import duties in import values was made by J. L. Nicholson, National Income at Factor Cost or Market Prices? Economic Journal, LXV (June 1955), 2I6 f. The discussion between Nicholson and Burton (which concerned the consistency of the British official series of GDP at I948 market prices and factor cost with the series at current prices), as well as Nicholson's later discussion with R. L. Sammons, seems to have left unshaken Nicholson's basic argument in regard to the evaluation of imports and exports as affecting the analytical value of national accounts. The statistical side of these disputes is of no interest in our context. Cf. H. Burton, Expenditure Taxes, Imports and Gross Domestic Product at Market Prices, Economlic Journal, LXVII (December 1957), 644-54; J. L. Nicholson, Duties and the Gross Domestic Product at Market Prices, ibid., LXVIII (June I958), 39396; H. Burton, Duties and the Gross Domestic Product at Market Prices: Rejoinder, ibid., LXVIII (September 1958), 585-88; R. L. Sammons, A Note on the Treatment of Import Duties and the Gross Product, ibid., LXVIX (June I959), 384-87, and Nicholson's reply, ibid., 388-go. 'See United Nations, Economic Survey of Latin America, I95I-I952 (New York, I954), 33-35.