What Is The Difference Between Balance Of Trade And Balance Of Payment?

Difference Between Balance Of Trade And Balance Of Payment

Macroeconomics is all about concepts regarding general or large-scale economic factors. It is connected with national or global development in terms of income, expenditure, productivity, output, etc. Among these, the balance of trade (BOT) and balance of payments (BOP) are two key terms in the world of macroeconomics.

Businesses and nations which trade regularly, loan money, sell companies, and make investments require assessing the effects of these activities. These two macroeconomic concepts basically help the economists and think tanks evaluate trade and commerce from a broader perspective.

This calls for a need to realize the key difference between balance of trade and balance of payment. So, today, in our blog, we will be shedding light on this topic with reference to relevant examples.

Concept Of Balance Of Trade

Balance Of Trade

The balance of trade definition or net exports definition is the difference in the monetary value of a country’s exports and imports during a given time period. Let’s check out some key features of the balance of trade before jumping on to the difference between balance of trade and balance of payment.

  • Balance of Trade, a.k.a BOP, is a crucial way of using which any nation measures domestic trade.
  • To be very precise, it assesses the difference between the exports and imports of a country within a given time period.
  • BOP deals with the net loss or profit of a nation incurred from the trading activities, i.e. export and import of goods.
  • As BOP includes exports and imports of goods, they need to have physical shape, form, structure and must be tangible.

Concept Of Balance Of Payments

Balance Of Payments

What’s the balance of payments definition? It is the difference between inflowing money into a country at a certain time and money flowing out to the rest of the globe. Being familiar with the characteristics of the BOP would take us one step closer to the difference between balance of trade and balance of payment. Following are the characteristics of Balance of Payments that you must be aware of:

  • BOP is a systematic record for all forms of economic transactions between a country and the entire world. Also, transactions of various nature like capital, current are included in the Balance of payments.
  • It consists of both visible and invisible transactions.
  • BOP is actually an annual statement that is basically related to a time period.
  • Balance of Payments adopts a double-entry accounting system. The net balance here is always zero.
  • BOP works well only when its categories and subcategories are well understood by the target audiences.     

Key Difference Between Balance Of Trade And Balance Of Payment

Balance Of Trade Vs Balance Of Payment

The central theme of the present article is the difference between balance of trade and balance of payment. So here is the segment that all of you have been waiting for. Check out the comparative analysis below to detect important highlights of the balance of payments vs balance of trade.

Point Of Difference 

Balance Of Trade Balance Of Payments 
Definition The definition of balance of trade is the net balance of the exported goods and the imported goods within a given time period. 

The definition of balance of payments is the total balance of trade, the balance of unilateral transfers, the balance of services, and the capital account.  

How It Works 

Balance of trade gives net effects positive, negative, or 0. 

Balance of payments gives a net effect of 0. 

Effect in Economy 

It gives a skewed picture of the national economyIt gives the full picture of a nation’s economy from a summative viewpoint. 
Nature Of the Transactions The balance of trade entries is basically goods. 

The balance of payments entries includes transactions of goods, services, as well as transfers. 

Formula 

The formula of the balance of trade is 

BOT = country’s exports – country’s imports 

The formula of the balance of payments is 

BOP = Current Account + Financial Accounts + Capital Accounts + Balancing Items

 

That’s all about the difference between balance of trade and balance of payment. In the field of foreign exchange, trade, and commerce, both these terms are pretty common for understanding national economic health.

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Frequently Asked Questions (FAQ):

Q1. What Is The Difference Between Balance Of Trade And Balance Of Payment?

Here the question is, what is the difference between the balance of trade and the balance of payments? To answer the difference between balance of trade and balance of payment, there actually are a lot of things to tell. But the main difference lies in their functionality itself.

Balance of trade is the difference between the export and import of goods and services. On the contrary, the balance of payments is the difference between the inflow and outflow of the foreign exchange.

Q2. What Are Components Of BOP?

Balance of payments includes 3 basic constituents such as capital account, current account as well as a financial account. The summative value of the current account has to stay in line with the total of the financial and capital accounts.

Q3. What Is The Net Exports Formula?

The measure of the total trade of a nation is called net exports. In other words, the amount obtained when you subtract the value of all imported services and goods from the total exported services and goods is called net exports. If the net exports of a nation are positive, the country enjoys a trade surplus. On the other side, negative exports signify a trade deficit.

Q4. What Is The Formula For Balance Of Trade?

The formula of the balance of trade is as follows: Value of exports – Value of imports = Balance of trade. So it is actually the difference between the Value of exports and the value of imports of a nation as a whole.

Q5. What Is The Formula For Balance Of Payments?

The formula of the balance of payments is as follows: Current account + Financial Account + Capital Account + Balancing Item. So what exactly happens the current account records and tracks the income flow from one nation to another.

Summing It Up

That’s all about the difference between balance of trade and balance of payment. Both of these measures are two important metrics of macroeconomics. The financial health of a nation largely depends on the Balance of trade and the balance of payments. As a result, it is necessary to understand the difference between the balance of trade and the balance of payment.

Have we covered everything about the difference between balance of trade and balance of payment? Do not hesitate to let us know if we have missed something in the comment area below. We will be overwhelmed to learn from your viewpoints.

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