Difference between Balance of Trade and Balance of Payment
Balance of Trade
Balance of trade is the summary of the total volume of exports and imports of visible goods and services of a country with the rest of the countries in the world. Therefore, it shows the trade of visible goods with the rest of the countries in the world during a year.
Visible goods are those goods which are duly recorded at custom barriers of the country. Since it studies only the visible trade, it is taken as a partial study of the total economic transactions in the international trade. That is why it cannot show the whole economic performance of a country.
According to F. Benham, “The trade balance of a country is the relation over a period between the values of her export and the value of her import.”
There are three possibilities in Balance of Trades. They are as follows:
- Surplus in BOT
- Deficit in BOT
- Balanced in BOT.
Types of Balance of Trade:
- If the value of export exceeds the value of import, it is known as favorable or surplus balance of trade, which is a healthy indicator of economic development.
- If the value of export is less than the value of import, it is called deficit or unfavorable or adverse balance of trade.
- Similarly, if the value of export is equal to value of import, it is called balanced balance of trade.
Balance of Payment
Balance of payment is the sum of all transactions that take place between its residents and the residents of all foreign countries in the world. It is a comprehensive record of all economic transactions of the residents of a country with the rest of the world during a given period of time. It includes the transaction of visible as well as invisible items. Invisibles items are those goods and services which are not recorded in the custom barriers.
Therefore, it covers all transactions which include export and import of goods and services, tourists’ expenditure, interest and dividends received or paid abroad and purchase and sales of financial or real assets abroad. Since it includes all the amount of export and import of visible as well as invisible goods and services, it is a broad concept in comparison to balance of trade. So it is taken as an important index to summarize the statement of all international receipts and payments. It reflects the economic position of the country.
There are three possibilities in Balance of Payments. They are as follows.
- Surplus in BOP
- Deficit in BOP
- Balanced in BOP.
Types of Balance of Payment:
- if receipts are greater than payments, it is known as surplus or favorable balance of payment and
- when receipts are less than payments it is deficit balance of payment, which is harmful for a country for its economic development.
Balance of payment is a record or overall statement of all economic transactions of a country with the rest of the world during a year.
As it adopts double-entry bookkeeping system, it has two sides; credit side and debit side.
- All payments to be received from abroad are recorded on the debit side and
- all payments to be made to the foreigners are included on the credit side.
- In that condition, if the value of payments and value of receipts made for all visible and invisible transactions are equal, it is called balanced balance of payment or equilibrium balance of payment.
Main Differences between Balance of Trade and Balance of Balance:
|Basics of Differences||Balance of Trade (BOT)||Balance of Payment (BOP)|
|Definition||It is the summary of total volume of export and import of visible items of a country with the rest of the world.||It is a comprehensive record of economic transaction of a country with the rest of the world in a year.|
|Deals with||It deals only with transactions of visible goods.||It deals with transactions of visible goods and invisible items like services.|
|Nature of Study||It is a practical study of total economic transactions of a nation.||It is a broad study of total economic transactions of a country.|
|Correction||Unfavorable BOT can be recovered from favorable BOP.||Unfavorable BOP cannot be recovered from favorable BOT.|
|Concept||It is a narrow concept of international trade.||It is a broad concept of international trade.|