The BOP of a country is a systematic record of all economic transactions between the residents of the home country and 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, 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 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.
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However, as far as balance of trade is concerned, different countries follow some sort of different pattern. In the USA, the difference between a country’s exports of goods (i.e., visibles) and services (i.e., invisibles) and imports of visible goods and invisibles is its BOT.
While BOT as defined by the British authority excludes invisibles and considers only visible items. As far as our discussion goes, we have followed the US tradition. India, however, follows the British tradition.
Whether invisibles are included or not in BOT, it is clear that BOP is a much broader concept than BOT. BOT is classified into balance of invisible trade.
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 is said to be favourable if its total receipts exceed total payments.
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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.