difference between balance of trade and balance of payment

Difference between Balance of trade and Balance of payment

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Following the implementation of globalization policy, the world has downsized to the size of a small village, with each country freely transacting with the rest of the world. 

In this context, two statements are prepared to keep track of the country’s international transactions: Balance of Trade and Balance of Payment. The balance of payment records transactions in goods, services, and assets between residents of the country and the rest of the world.

In this article, you will know what is difference between balance of trade and balance of payment

Balance of trade(BOT):

The Balance of Trade depicts the fluctuations in a country’s imports and exports of goods to the rest of the globe over time. 

  • If the country’s imports and exports are equal, the situation is known as Trade Equilibrium; 
  • If the value of exports exceeds the value of imports, this is a positive condition since it demonstrates the country’s strong economic position, which is referred to as a trade surplus.
  • However, if imports exceed exports, the situation is unfavorable since it indicates that the country’s economic situation is poor, and the situation is known as Trade Deficit.

Balance of payment(BOP):

The Balance of Payments is a set of accounts that records all of a country’s business dealings with the rest of the world over a specific time period. It keeps track of all of the country’s global monetary transactions on commodities, services, and revenue throughout the year.

If the BOP is zero, it suggests that both the debits and credits are equal; however, if the debit exceeds the credit, it indicates a deficit; nevertheless, if the credit exceeds the debit, it indicates a surplus. Balance of payment divided into the following sets of accounts:

  1. Current account 
  2. Capital account 
  3. Errors and omissions

Difference between Balance of trade and Balance of payment

Below is the difference between the balance of trade and balance of payment with basis:

Balance of trade Balance of payment
Meaning
Balance of trade refers to the difference between the exports and imports of the visible items Balance of payment refers to an accounting statement that shows the economic transactions of a resident with the rest of the world in each period.
Scope
Narrow scope It is also narrow but wider than the balance of trade
Settlement
If there is any negative balance it can be set off from the balance of payment(BOP) But here it cannot be set off from the positive balance of the balance of trade(BOT)
Includes
Includes only visible items Includes visible items, invisible items, unilateral transfers, and capital transfers
Transactions
Does not include capital transfers Includes transactions of capital nature

Bottom line:

As a result of the preceding discussion, With the use of a Balance of Trade and a Balance of Payments, every country in the world maintains track of the inflow and outflow of money in its economy. They reflect the current state of the economy as a whole. Analysis and comparisons of how much trade has increased or reduced since the past period may also be done with the help of BOT and BOP.

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