Understanding the difference between the balance of trade and balance of payment helps us to understand the health of a country’s economy. The balance of trade is the difference between a country’s imports and exports, while the balance of payment is the total of all payments made by a country to foreign countries.
Balance of Trade
The balance of trade is the difference between a country’s imports and exports of goods and services. It is sometimes referred to as the ‘visible’ balance because it is the easiest to measure. The balance of trade is an important indicator of a country’s economic performance, as it can indicate whether a country is a net exporter or net importer. A positive balance of trade (exports > imports) is known as a trade surplus, while a negative balance of trade (exports < imports) is known as a trade deficit.
Balance of Payment
The balance of payment is the total of all payments made by a country to foreign countries. It is sometimes referred to as the ‘invisible’ balance because it is harder to measure. The balance of payment is a record of all international transactions made by a country in a given period. It includes not only trade in goods and services but also investment, financial transfers, and other payments. A positive balance of payments (more payments made than received) is known as a payments surplus, while a negative balance of payments (more payments received than made) is known as a payments deficit.
The balance of trade and balance of payment are both important indicators of a country’s economic performance. By understanding the difference between the two, we can better understand the economic health of a country.
With the intensification of global trade, two commonly used terms—Balance of Trade (BoT) and Balance of Payment (BoP)—are often confused and interchanged. It is essential to note that these two terms encompass two different concepts, and thus, defining them separately will be beneficial in better understanding their differences.
The Balance of Trade, also known as Net Exports or Trade Balance, is used to depict a country’s healthy ratio of exports and imports and measures the difference between the value of goods a country exports and imports from other countries. It determines if a country is a net exporter or net importer. A positive balance of trade implies that the value of exports is greater than the value of imports, and vice versa. A nation’s Balance of Trade can be impacted by a variety of factors such as products’ competitiveness, production costs and exchange rates.
On the other hand, Balance of Payment (BoP) accounts for all economic transactions between the residents of a country and citizens of other nations. It is an accounting statement within a specified period of time and involves two sides. The two sides of the Balance of Payment include current account (made up of exports and imports of goods and services) and capital account (foreign direct investments, purchase of foreign assets and changes to a country’s official gold and currency reserve). In BoP, a country needs to ensure that both its payments and receipts are approved by rest of the world. A country’s sustained deficit in Balance of Payment is a sign of a major economic issue and is often associated with an equilibrium exchange rate between domestic and foreign currencies.
To summarize, the Balance of Trade is a complete record of a country’s import and export of goods and services, and Balance of Payment is a complete statement of a nation’s financial transactions. Neither balance implies a particular outcome, and all countries work towards settling every imbalance with the aspirations of attaining a fair balance of trade and payments with foreign countries.