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Balance of Trade and Balance of Payments


 


Balance of Trade and Balance of Payments

Balance of Trade and Balance of Payments are two related terms but doesn’t mean the same. The main distinguishing factors are given below:

1. Definition

Balance of Trade (BOT) refers to the difference between the amounts of export goods and the amount of import goods (visible items).

Balance of Payment (BOP) is a summary statement in which all the economic transactions between the resident and the rest of the world are recorded during a particular period of time (usually a year). Hence BOP is a Flow concept.


2. Components

Balance of Trade includes only visible items.

Balance of Payments includes visible items, invisible items, unilateral transfers and capital transfers.


3. Nature of capital transactions

Balance of Trade does not record capital transactions.

Balance of Payments records all capital transactions.


4. Scope

Balance of Trade is a narrow concept. In the sense that it is a part of the Balance of Payment account.

Balance of Payments is a wider concept. In this sense, it includes Balance of Trade.


5. Adjustment

Unfavourable Balance of Trade can be met by favourable Balance of Payments.

Unfavourable Balance of Payments cannot be met by favourable Balance of Trade.


6.

Different types of BOT:-

  • Surplus/Favorable BOT: when a country exports more goods than imports.
  • Deficit/Unfavorable BOT: when a country imports more goods than exports.

Different types of BOP:-

  • Balanced BOP: whenever the receipts of foreign exchange equal to the payments of foreign exchange.
  • Surplus BOP: whenever the receipts of foreign exchange exceed the payments of foreign exchange.
  • Deficit BOP: whenever the receipts of foreign exchange are less than the payments of foreign exchange



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