After the implementation of globalization policy, world has become a small village and now every contry freely transacts with the other countries of the world. In this context, two statements are prepared to keep a record of the transactions made by the country internationally; they are Balance of Trade (BOT) and Balance of Payments (BOP). The balance of payment keeps a track of transaction in goods, services, and assets between the country’s residents, with the rest of the world.
On the other hand, the balance of exports and import of the product and services is termed as Balance of Trade.
The scope of BOP is greater than BOT, or you can also say that Balance of Trade is a major section of Balance of Payment. Let’s understand the difference between Balance of Trade and Balance of Payment in the article given below.
Content: Balance of Trade Vs Balance of Payments
|Basis for Comparison||Balance of Trade||Balance of Payment|
|Meaning||Balance of Trade is a statement that captures the country's export and import of goods with the remaining world.||Balance of Payment is a statement that keeps track of all economic transactions done by the country with the remaining world.|
|Records||Transactions related to goods only.||Transactions related to both goods and services are recorded.|
|Capital Transfers||Are not included in the Balance of Trade.||Are included in Balance of Payment.|
|Which is better?||It gives a partial view of the country's economic status.||It gives a clear view of the economic position of the country.|
|Result||It can be Favorable, Unfavorable or balanced.||Both the receipts and payment sides tallies.|
|Component||It is a component of Current Account of Balance of Payment.||Current Account and Capital Account.|
Definition of Balance of Trade
Trade refers to buying and selling of goods, but when it comes to buying and selling of goods globally, then it is known as import and export. The Balance of Trade is the balance of the imports and exports of commodities made to/by a country during a particular year. It is the most important part of the current account of the country’s Balance of Payment. It keeps records of tangible items only.
The Balance of Trade shows the variability in the imports and exports of merchandise made by a country with the rest of the world over a period. If the imports and exports made to/by the country tallies, then this situation is known as Trade Equilibrium, but if imports exceed exports, then the condition is unfavourable as it states that the economic status of the country is not good, and so this situation is termed as Trade Deficit. Now, if the value of exports is greater than the value of imports, this is a favourable situation because it indicates the good economic position of the country, thus known as trade surplus.
Definition of Balance of Payments
The Balance of Payments is a set of accounts that recognises all the commercial transactions performed by the country in a particular period with the remaining countries of the world. It keeps the record of all the monetary transactions done globally by the country on commodities, services and income during the year.
It combines all the public-private investments to know the inflow and outflow of money in the economy over a period. If the BOP is equal to zero, then it means that both the debits and credits are equal, but if the debit is more than credit, then it is a sign of deficit while if the credit exceeds debit, then it shows a surplus. The Balance of Payment has been divided into the following sets of accounts:
- Current Account: The account that keeps the record of both tangible and intangible items. Tangible items include goods while the intangible items are services and income.
- Capital Account: The account keeps a record of all the capital expenditure made and income generated collectively by the public and private sector. Foreign Direct Investment, External Commercial Borrowing, Government loan to Foreign Government, etc. are included in Capital Account.
- Errors and Omissions: If in case the receipts and payments do not match with each other then balance amount will be shown as errors and omissions.
Key Differences Between Balance of Trade and Balance of Payments
The following are the major differences between the balance of trade and balance of payments:
- A statement recording the imports and exports done in goods by/from the country with the other countries, during a particular period is known as the Balance of Trade. The Balance of Payment captures all the monetary transaction performed internationally by the country during a course of time.
- The Balance of Trade accounts for, only physical items, whereas Balance of Payment keeps track of physical as well as non-physical items.
- The Balance of Payments records capital receipts or payments, but Balance of Trade does not include it.
- The Balance of Trade can show a surplus, deficit or it can be balanced too. On the other hand, Balance of Payments is always balanced.
- The Balance of Trade is a major segment of Balance of Payment.
- The Balance of Trade provides the only half picture of the country’s economic position. Conversely, Balance of Payment gives a complete view of the country’s economic position.
Every country of the world keeps the record of inflow and outflow of money in the economy with the help of a Balance of Trade and Balance of Payments. They reflect the actual position of the whole economy. With the help of BOT and BOP, analysis and comparisons can also be made that how much trade has increased or decreased, since the last period.