Numerous individual transactions that make up the BOP of an economy are likely to be denominated in a variety of currencies. These transactions have to be converted into a single unit of account before they can be combined in a single statement. BOP statistics are normally expressed in domestic currencies, since BOP statistics are used in conjunction with other national statistics. However, if the domestic currency undergoes major changes in relation to other currencies, it might be useful to compile the BOP statement in a more stable currency (SDRs or US-dollars are units commonly used for this purpose).
To remain consistent with principles that requires transactions to be valued at market prices and recorded at the time of change in ownership, the exchange rate used in converting values expressed in a transaction currency to values expressed in the unit of account is the market rate prevailing when change of ownership occurs for a particular transaction. For converting the value of stocks of external assets and liabilities in the IIP, the exchange rate prevailing on the date of the statement is recommended.
The existence of multiple official exchange rates indicates implicit taxes and government subsidies of economic units involved in the transactions. The element of imputed tax or subsidy can be estimated as the difference between the actual exchange rate which applies to a particular transaction, and a rate calculated as the weighted average of all official exchange rates used for foreign exchange transactions. For practical reasons, this may be the official exchange rate predominant in the economy rather than the weighted average of all official rates. For transactions involving parallel, or black markets rates, actual transaction rates should be used to value both flows and stocks as there are no official taxes or subsidies implicit in these transactions.
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