Difference Between Balance of Trade and Balance of Payment

The main difference between balance of trade and balance of payment is that a balance of trade statement is a type of statement that records a nation’s exports and imports of goods to other countries over a given period. In contrast, a balance of payment is a type of statement that records all of a country’s economic transactions over a given period.

Balance of Trade and Balance of Payment are key economic terms. They relate to a country’s financial status. Balance of Trade focuses on goods and services. It’s the difference between exports and imports. Balance of Payment includes all financial transactions. It covers goods, services, and financial transfers. Understanding both helps in analyzing a country’s economic health. In this article, we will explore the difference between balance of trade and balance of payment in detail.

Table of Contents (TOC)

• Difference between balance of trade and balance of payment
• What is balance of trade?
• Balance of trade example
• What is balance of payment?
• Balance of payment example
• Key differences between balance of trade and balance of payment

Difference between Balance of Trade and Balance of Payment 

For better understanding, let’s explore the difference between balance of trade and balance of payment in a tabular format:

What is the Balance of Trade?

Balance of trade definition: A balance of trade (BoT) is a statement that records a nation’s exports and imports of goods to other countries over a given period.

A BoT statement only records the physical items, including no record of the amount spent on services. It is essential to maintain a BoT statement as it gives a partial view of the country’s economic status. With the help of the BoT statement, a country can find the state of the country, such as whether the country has achieved trade equilibrium, trade deficit, or trade surplus. Let’s go through these terms to understand them in a better way:

• Trade equilibrium: This is when a country’s amount gained from exports and the amount spent on imports are the same.
• Trade deficit: This is the situation that happens when a country’s import is more than its export.
• Trade surplus: This is the situation that happens when a country’s import is less than its export.

To understand the balance of trade in a better way, let’s go through an example in the next section.

Balance of trade example

Suppose India made only one export and import in October 2022. India imported crude petroleum from Russia worth ₹60 million and exported spices worth ₹40 million to another country. So, the balance of the trade statement for October 2022 will be like this:

Imported good’s worth = ₹40 million

Exported good’s worth = ₹60 million

Balance of trade (BoI) = Export – Import = 60 – 40 = 20.

Hence, in October 2022, India is in a trade surplus situation which is a good thing. Currently, India can use that profit amount of ₹20 million for other purposes.

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What is Balance of Payment? 

Balance of payment definition: A balance of payment (BoI) is a statement that records a country’s economic transactions over a given period.

A BoP statement records both goods as well as services. Hence, the balance of trade (BoT) is a part of the balance of payment (BoP). It is essential to maintain BoP statement records all of a country’s economic transactions, and due to that, we can get a complete picture of a country’s condition. As in, is everything properly accounted for or not?

Balance of payment statement also helps a country to identify whether the country has achieved trade equilibrium, trade deficit, or trade surplus after including each and everything. (Including goods (BoT) + Services). Balance of Payment is categorized into three accounts: capital, current, and errors and omissions. Let’s go through these terms to understand them in a better way:

• Capital account: This account records all expenditures and money made by the private and public sectors combined.
• Current account: This account records goods, services, and income.
• Errors and omissions: This account records the difference in the amount when payment and receipt do not match.

To understand the balance of payment in a better way, let’s go through an example in the next section.

Balance of payment example

Suppose India brings in goods in October 2022 worth ₹60 million (inflow amount), and in exchange for these goods, India pays ₹60 million to Russia (outflow amount) for the goods that India purchased. In the same month, India got aid from America in the amount of ₹30 million (inflow amount), and India aided Bangladesh and Sri Lanka by giving ₹10 million and ₹20 million, respectively (outflow amount).

Balance of Payment = Import – Export (Total Inflow – Total outflow)

Total inflow = (60 + 30) million = 90 million

Total outflow = (60 + 10 +20) million = 90 million

Hence, the balance of payment is zero.

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Key Differences Between the Balance of Trade and Balance of Payment 

Here are the key differences between balance of trade and balance of payment:

• Balance of payment (BoP) includes capital transfers and not the balance of trade.
• The balance of trade can be positive, negative, and balanced. Balance of payment, on the other hand, shall always be balanced.
• Balance of trade only keeps records of goods. On the other hand, BoP records keep records of goods and services.
• Balance of trade records a country’s imports and exports of goods. On the other hand, the balance of payment records all the economic transactions.

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Conclusion

You will understand government policies much better now that you understand the difference between the balance of trade and the balance of payment. With the BoT and BoI, the government analyses the potential of a specific industry and export growth and formulates a policy to support that growth.