This article will help you to learn about the difference between Balance of Payments and Balance of Trade.
Difference between Balance of Payments and Balance of Trade
The BOP of a country is a systematic record of all economic transactions between the residents of the home country and the residents of the rest of the world during a given year. By all transactions we mean exports and imports of both goods and services, unrequited transfers as well as capital movements.
Thus, the BOP of a country is a complete picture of its international transactions. On the other hand, the ‘balance of trade’ (henceforth, BOT) is the difference between visible exports and visible imports. This difference is also called merchandise balance or balance of visible trade. Similarly, one obtains the balance of invisible trade which represents the difference between invisible exports and invisible imports.
The difference between a nation’s exports of goods and services and its imports is called balance of trade in goods and services or ‘balance of trade.’ Whether invisibles are included or not in the BOT, it is clear that the BOP is a broader concept than BOT. BOT is classified into balance of visible and invisible trade.
The BOT is said to improve when exports of visible items (and invisible items) rise more than or fall less than imports of visible items (and invisible items). Conversely, the trade balance deteriorates. A country’s BOP to be is and favourable if its total receipts exceed total payments.
An important point to note is that there may be a BOT deficit but a BOP surplus, or vice versa. In other words, a trade deficit does not necessarily imply that a country is losing its foreign reserves— the difference is accounted by long term capital movements.