Principles of Macroeconomics

Unit 6 - The System of National Accounts (SNA)

As the world economy becomes increasingly globalized, international trade statistics have failed to keep up. The nature of business conducted by multinational firms is largely ignored in GDP accounting. For example, U.S. trade statistics ignore the foreign sales of American-owned firms located abroad.

The U.S. Department of Commerce and National Academy of Science have estimated America's trade statistics based on ownership. Exports are defined as the sum of

cross-border sales of goods and services produced by American firms to foreigners;
net sales to foreigners by American subsidiaries located abroad; and
sales by American firms to American subsidiaries of foreign firms.

After doing the same for imports and foreign firms, the results are dramatic. In 1991 official measures of the cross-border trade of goods and services resulted in a trade deficit of $28 billion. Using the revised estimates that account for the direct activity of American firms abroad resulted in a $164 billion surplus. Even a narrowed-down measure that includes only items #1 and #2 above results in a $24 billion U.S. trade surplus.

To better capture the increasing globalization of the world economy, several prominent international organizations are using the System of National Accounts (SNA) as an improved measure of national economic output across the globe. Some characteristics include:

The use of the IMF's (International Monetary Foundation) balance-of-payments statistics. This system values imports based on the price from the exporting nation ("free-on-board"). In contrast, GDP statistics count the value of imports as the price paid by the importer, which includes shipping, handling, and insurance charges. The net result is to reduce the value of imports. For a net importing country such as the United States, the magnitude of the foreign trade deficit (exports - imports) is reduced.
The system also uses the IMF's approach of treating retained profits of foreign-owned businesses as if they had been repatriated to the home country.
The SNA's balance sheets include the value of resources that can be developed such as minerals and forests. The depletion of these resources will reduce the value of a nation's domestic product.