Major Difference Between Balance Of Trade And Balance Of Payment (With Chart)

What Is Balance Of Trade (BoT)?

The balance of trade also referred to as commercial balance is the difference between the monetary value of a nation’s exports and imports over a certain period of time. The balance of trade figures shows whether the country had achieved to sell locally produced goods and services to foreign countries more than it bought products from abroad in the focused period. Therefore, balance of trade is considered as the main economic indicator of a country’s international commerce activities and an important parameter to assess economic growth.

Balance of trade formula is as follow: TB (Trade balance)=X (total export value) –M (total import value).

A country that imports more goods and services that it exports in terms of value has a trade deficit whereas a country that exports more goods and services than it imports has a trade surplus.

To the misconception of many, a positive or negative trade balance does not necessarily indicate a healthy or weak economy. Whether a positive or negative balance of trade is beneficial for an economy depends on the countries involved, the trade policy decisions, the duration of the positive or negative balance of trade, and the size of the trade imbalance, among other things.

In other words, the balance of trade figure alone does not provide much of an indication regarding how well an economy is doing. Economists generally agree that neither trade surpluses nor trade deficits are inherently bad or good for the economy.

Components Of Balance Of Trade

Economic products included in the balance of trade calculation are categorized into goods or services and their prices have a direct influence on the exports and import values. The major components of Balance of Trade financial statement include:

• Services. Services are usually based on human interactions and involve offering support for or assuming the responsibility of performing a task. The scope of services can range anywhere from entertainment and education to sales and healthcare.
• Goods. These are tangible merchandise produced either locally or in foreign countries and they range from food, medicine, electronics, fertilizer etc.
• Prices. Prices of goods and services depend initially on the production costs like raw materials, storage, transportation and personal expenses.  

What You Need TO Know About Balance Of Trade

1. Balance of trade is a financial statement that captures the nation’s import and export of commodities with the rest of the world.
2. Balance of trade is a subset of the balance of payment. Without calculating the balance of trade, it is difficult to estimate the net effect of exports and imports in the balance of payments.
3. Balance of Trade only records the physical items.
4. Balance of Trade does not include capital receipts or payments.
5. The balance of trade can be calculated by deducting the value of imports of goods from the value of exports of goods.
6. Unilateral transfers are not included in the balance of trade.
7. The net effect of balance of trade can be positive, negative or zero.
8. The entries in the balance of trade are related to goods.
9. Balance of trade helps a country to look at the net profit or net loss incurred by the export and import of goods and services.
10. The balance of trade provides half-picture of a country’s economic position in comparison to other foreign countries.

What Is Balance Of Payment (BoP)?

The balance of payment (BoP) also referred to as balance of international payments is the difference between all money flowing into a country in a particular period of time and the outflow of money to the rest of the world. These financial transactions are made by a country’s individuals, firms and government bodies. The transactions consist of imports and exports of goods, services and capital as well as transfer payments such as foreign aid and remittances.

The balance of payments divides transactions into two accounts: the current account and the capital account. Sometimes the capital account is referred to as the financial account, witha separate, usually very small, capital account listed separately. The current account includes transactions in goods, services, investment income and current transfers. The capital account, broadly defined, includes transactions in financial instruments and central bank reserves. Narrowly defined, it includes only transactions in financial instruments. The current account is included in calculations of national output while the capital account is not.  

The sum of transactions recorded in the balance of payments must be zero as long as the capital account is defined broadly. The reason is that every credit appearing in the current account has a corresponding debit in the capital account and vice-versa. If a country exports an item (current account transaction, it effectively imports foreign capital when that item is paid for (a capital account transaction).  

Importance Of Balance Of Payments

• The balance of payments is a factor in demand and supply of a country’s currency.
• A country’s balance of payment data may signal the country’s potential as a business partner for the rest of the world.
• The balance of payments data can be used to evaluate the performance of a country in international economic competition.

What You Need To Know About Balance Of Payment

1. Balance of payment is a financial statement that keeps record value of all the transactions between a countries residence and all the rest of the world during a particular period of time.
2. The balance of trade is a major segment of balance of payment.
3. Balance of payment records physical items along with non-physical items.
4. Capital receipts or payments are major parts of the balance of payment.  
5. Balance of payments can be calculated by adding the balance of payments at the current account and balance of payments at a capital account or by finding out the net balance between inflow of foreign exchange and outflow of foreign exchange.
6. Unilateral transfers are major parts of the balance of payments.
7. The net effect of the balance of payments would always be zero.
8. Transactions related to goods, services, transfers are included in the balance of payments.
9. Balance of payments helps a country in analysis of foreign exchange earnings and transactions.
10. Balance of payment provides a complete overview of a country’s economic position when compared to other countries.

Also Read: Difference Between Modern And Traditional Trade

Difference Between Balance Of Trade And Balance Of Payment In Tabular Form