Difference Between Balance of Payment and Balance of Trade

Edited by Diffzy | Updated on: October 05, 2022

       

Difference Between Balance of Payment and Balance of Trade Difference Between Balance of Payment and Balance of Trade

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Introduction

It is perfectly all right to be forgetful sometimes. You forget where you left your keys or yell at your sibling for borrowing the sunglasses that are on your head or feed your dog twice because they gave you the saddest eyes and the sloppiest kiss. The last one isn't being forgetful, just being overly affectionate. Another common thing people forget is their wallets. This is a special occurrence when you go out with your friends for some downtime and at the end of the meal, one of them admits that they forgot their wallet and their share has to be covered by someone else. It could even be you. While this excuse to get out of paying may indeed be genuine (it mostly is not), their promise to make up the next time makes you and your other friends forego the blunder. It is quite all right. What are friends for anyway? However, if this occurs repeatedly, your friend is probably taking advantage of your goodness. In such a case, instead of shunning them and ruining your friendship, it is better to keep track of the expenses, no?

For every penny you spend for them, make sure you keep a record of the expense. Let it be a debt that the friend owes you. Perhaps, someday you might forget your wallet and may need to borrow from them. You ought to keep a record of that too. A clear document stating the expenses and gains reveals how much you truly have. It also makes you appreciate what you have. This record-keeping is done on a large scale too. Think, internationally large. Due to globalization, trade among countries has seen a shooting rise. It isn’t uncommon to hear Darjeeling Tea in England or Columbian Coffee in the United States of America. All kinds of amenities can be imported and exported nowadays. And on such a large scale, it is imperative to keep track of all these transactions since it affects the global economy.

Balance of Trade vs Balance of Payment

Balance of Trade and Balance of Payment are two kinds of statements used to record these international transactions. They do sound similar but they record different things. Balance of Trade records the imports, exports and other services. Balance of Payment records the transaction in goods and services among the residents of the country as well as the rest of the world. Let us see how else they differ from one another.

Differences Between Balance of Trade and Balance of Payment in Tabular Form

Table: Balance of Trade vs Balance of Payment
Parameter of Comparison
Balance of Trade
Balance of Payment
Definition
Balance of trade can be defined as the total balance of the export of goods and the import of goods in a given period in a country with the rest of the world.
Balance of payment can be defined as the total sum of all economic transactions – the balance of trade, the balance of services, the balance of unilateral services and, the capital account.
Purpose
The balance of trade helps a country get an overview of the total profits or losses incurred due to the import and export of goods.
The balance of payment helps a country keep proper accounts of all the economic transactions.
Records
Balance of trade records transactions that are only related to goods.
Balance of payment records transactions of goods and services.
Difference
Balance of trade records the difference between the import and export of goods.
Balance of payment records the difference between the inflow and outflow of foreign exchange.
Net effect
In the balance of trade, the net effect is either positive, negative or zero.
In the balance of payment, the net effect is always zero.
Account
The balance of trade is a component of the current account of the balance of payment.
The balance of payment has a current account and a capital account. It also has a errors and omissions account for the errors in receipts and payments.
Transfers
Capital transfers and unilateral transfers are not included in the balance of trade.
Capital transfers and unilateral transfers are included in the balance of payment.
Holistic picture
Balance of trade only provides a partial view of the country’s economic state.
Balance of payment provides a clear view of the economic state of a country.

What is the Balance of Trade?

In simple words, trade is the buying and selling of products. When applied to the global scenario – buying and selling of goods across the globe, it is referred to as exporting and importing goods. The balance of trade is the record of the balance of such imports and exports of goods and forms a large part of the balance of payment. It is the financial statement of a country at a given time that showcases the balance of imports and exports. Balance of trade is also known as trade balance, commercial balance and net exports. This record is one of the most important records in the current account of the balance of payment.

The balance of trade also keeps a record of the differences between imports and exports. A country could have a trade deficit, where the goods imported exceed the goods exported. This is also known as the unfavourable scenario. The alternate scenario is also possible, where the country experiences a trade surplus also called the favourable scenario. Here, the goods exported exceed the goods imported. A third possibility is that there is a trade equilibrium. The country, here, has a similar value of goods imported and exported. These scenarios – trade deficit, trade surplus and trade equilibrium – do not necessarily imply the economic status of the country. A country could prefer a trade deficit or a surplus. However, the imbalance is important to take into account along with other factors to determine the economic standing of a country.

When a country has a large trade deficit, it borrows money from other countries to pay for its goods and services. Alternately, when a country has a large trade surplus, it lends money to other countries for their deficits. While the balance of trade accounts only for goods imported or exported and not the services or assets, it may correlate to a country’s financial as well as political stability since it reflects the amount of foreign investment in the country. 

What is the Balance of Payment?

The balance of payment, also known as the balance of international payment, is a financial statement of a country that has an account of all the economic transactions performed by the country with other countries at a given time. It summarizes all the financial transactions of a country at the global scale of the commodities or goods, services, transfer payments (foreign aid and remittances) and assets at the level of the government, companies and individuals.

The balance of payment includes the balance of trade, the balance of services and the balance of unilateral transfers. It also records the difference between the inflow and outflow of the exchange. The concept of balance of payment is to ensure the net balance remains zero i.e. the debit (outflows from the country) equals the credit (funds entering the country). The balance of payment combines all the private and public investments of the country and monitors the monetary inflow and outflow. The transactions are divided into two accounts. The current account and capital account.

Current Account

It is the account that keeps a record of both the tangible and intangible assets. The tangible assets are the goods and commodities. The intangible assets include the services and revenue.

Capital Account

It is the account that tracks the flow of investments in a country. It includes external borrowing, foreign investments, the loans the government makes to other governments etc.

There is a third set of accounts – the errors and ommissions account, which records the discrepancies in the receipts and payments.

If the balance of payment of a country is zero, it indicates that the debit and credit are both equal. However, imbalances in the balance of payment also occur. If the amount of debit is high, it shows a deficit in the economy. Conversely, if the credit is high, it means that there is a surplus. Knowing the balance of payment and the international investment position is essential for both national and international economic policy.

Main Differences Between Balance of Payment and Balance of Trade in Points

Following are the main differences between Balance of Trade and Balance of Payment:

  1. Balance of trade is the financial statement of a country that records the imports and exports of goods in a given period. Balance of payment in the financial statement of a country that records all the economic transactions of the country including the balance of trade, the balance of services etc.
  2. The balance of trade records transactions that are only related to goods, while the balance of payment records transactions that are goods, services and assets.
  3. The balance of trade serves the purpose to provide a view of a country’s total profits and losses gained via imports and exports, whereas the balance of payment serves to provide an overview of all the financial transactions of the country.
  4. The balance of trade calculates the difference between imports and exports, while the balance of payment calculates the difference between the inflow and outflow of foreign exchange.
  5. In the balance of trade, the net effect can either be positive, negative or zero, while the net effect in the balance of payment is always zero.
  6. The balance of trade is the current account of the balance of payment. The balance of payment has a current account and a capital account.
  7. In the balance of trade, capital and unilateral transfers are not included, whereas, in the balance of payment, capital and unilateral transfers are included.
  8. The balance of trade only provides a partial view of the country’s economic status. The balance of payment, on the other hand, provides a clear picture of the country’s economic status.

Conclusion

It can thus be seen that the balance of trade and the balance of payment are crucial for the global economy. The balance of trade is a part of the balance of payment. It is the financial record of all the imports and exports of goods of a country. It does not include services or assets. It offers a view of the country’s profits or losses. In the balance of trade, the net effect could be positive, negative or zero indicating a trade surplus, a trade deficit or a trade equilibrium respectively. The balance of trade forms the current account in the balance of payment. It only offers a partial view of the economic stature of the country.

The balance of payment offers a broader view of the economic status of a country. It includes the balance of trade, the balance of services and the balance of unilateral transfers. It is the record of all the financial transactions of the country. The basic concept of the balance of payment is to ensure that the credit or the incoming funds are equal to the debit or the outgoing commodities. There can be an imbalance seen at times but the goal is to make sure that the net effect is zero. The balance of payment includes a current account for all the tangible and intangible assets, a capital account for the capital expenditure and income generated by both public and private sectors and the errors and omissions account that records the errors when the receipts and payments do not match. With the help of the balance of payment, a country can analyze and compare how it has fared and track its progress. Similarly, you can keep track of your financial records – of all the amount you are credited and all the amount you debit to your friend. Surely there will be imbalances that need balancing. These records will serve as physical proof to yourself and your friend of your charity and their selfishness. If nothing, you will at least have a piece of paper to look sadly at while you wonder how you let your money go. You can then take comfort from the knowledge that you are one of the few kind souls that grace the planet.

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"Difference Between Balance of Payment and Balance of Trade." Diffzy.com, 2022. Fri. 09 Dec. 2022. <https://www.diffzy.com/article/difference-between-balance-of-payment-and-balance-509>.



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