International Business

Difference Between Balance Of Trade And Balance Of Payments

Balance of trade and balance of payments are two important terms in international transactions but both are not the same. To make the two terms clear, I shall first explain the two terms and then make difference between Balance Of Trade And Balance Of Payments.

Balance Of Trade :

Trade, in general connotation, means the purchase and sale of commodities. In international trade, purchase and sale are replaced by imports and exports. The balance of trade, thus, denotes the difference of imports and exports of merchandise of a country during the course of a year. It indicates the relationship between the value of exports and imports of the country in question.

If the value of its exports over a period exceeds its value of imports, it called favorable balance of trade and, conversely, if value of total imports exceeds the total value of exports over a period, it is unfavorable balance of trade. Mr. Benham has described the term as “Balance of trade of a country is the relation over a period, between the value of her exports and the value of her imports“. The favorable balance of trade indicates good economy condition of the country.

Balance of Payments:

Balance of trade i.e. difference between the value of imports and value of imports, shows only a partial picture of the total international obligations of a country. In order to have a complete enumeration of international transactions, it is necessary to add to the net trade balance all other receipts and payments on all accounts such as services rendered by shipping, insurance and banking companies, debt servicing, tourism, receipts and payments on account of rent, royalty, dividend, interest etc.

This will be the comprehensive balance of payment situation of a country in relation to the rest of the world. It signifies the real inter-nation monetary position. Thus, balance of payments of a country may be defined as a “systematic record of all economic transactions between the residents of foreign countries”. Thus balance of payments includes all visible and non-visible transactions of a country during a given period, usually a year.

Difference Between the Balance of Trade and Balance of Payments

We have made an attempt to define the two terms i.e. balance of trade and balance of payments. Now, we shall try to differentiate these two terms to make them clearer. The main points of difference are—

  • The balance of trade includes only visible items i.e. only imports and exports of merchandise. The difference of the two is called balance of trade. It may be either favorable (if exports exceeds imports) or unfavorable (if imports are. greater than exports). The balance of payments, on the other hand, includes all items visible and invisible, -imported into and exported from the country in addition to imports and export of merchandise. Thus the balance of payments includes balance of trade whereas balance of trade does not include balance of payments.
  • Balance of trade includes all revenue receipts and payments on account of imports and exports. The balance of payments, on the other hand, includes all revenue and capital items whether visible and invisible. Thus, Balance of trade forms a part of balance of payments.

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