Balance of Trade vs Balance of Payments
The key difference between Balance of Trade and Balance of Payments lies in the fact that balance of trade records a country’s imports and exports of goods over the world while the balance of payment records all the transactions of a country’s economy with other countries. Balance of trade does not record capital transfers whereas the balance of payment records all the capital transfers from one country to another.
Trade and Payments are the terms that decide a nation’s GDP(Gross Domestic Product), of course, along with other factors! Trading outside the country is significant while estimating the Balance of Trade.
Financial analysts often watch out imports and exports keenly to estimate both these financial elements i.e., Balance of Trade and Balance of Payments.
The latter considers transactions within the nation and the rest of the world, which means, payments are its key elements.
Though both these terms are tricky to understand, in layman’s terms we can explain ‘Balance of Trade’ deals with imports & exports whereas ‘Balance of Payments’ deals with payments.
So the flow of funds is in different currencies in the former whereas, in the latter, it is mostly in a single currency. Let’s check out their difference in detail below.
Comparison Table Between Balance of Trade and Balance of Payments (in Tabular Form)
|Parameter of Comparison||Balance of Trade||Balance of Payments|
|What is it?||It is the monetary difference between a country’s export and import||It is the monetary difference between transactions of the residents of a country and the rest of the world|
|Also known as||Commercial balance or Net exports||Balance of International payments|
|Abbreviated as||NX||BOP or B.O.P|
|Currency||Includes the currencies of countries where trade(import and export) happens.||Estimated in single currency i.e., the currency of a country|
|What impact is created when it is positive?||It means that the country has a Trade surplus i.e., exports more||Country’s currency faces appreciation|
|Formula to calculate||Country’s (Export-Import)||Country’s Fund flow (Within the country - rest of the world)|
|How to fix a deficit?||By saving more and consuming less foreign goods.||Bringing policies that support healthy competition in the domestic industry|
|Steps that are usually taken by Governments to improve it?||Imposing higher import taxes to lessen the import of goods||Encouraging people to use products that are manufactured within the country|
|What is the Net Effect?||It may be positive or negative or zero.||It is always zero.|
What is the Balance of Trade?
It is the difference between the monetary values of exports and imports of a nation. The more the nation exports, the more its Balance of Trade is!
It means that there is a demand for the goods of that nation in the rest of the world.
Financial analysts often advise to save more and consume less foreign products when there is a trade deficit happens in a country.
It leads to a slow down in importing goods from other countries and thus paves a way to create a surplus Balance of Trade.
What is the Balance of Payments?
It is the difference between the monetary values of transactions within the country and the rest of the world. We can say that the greater the fund flow within a country, the greater its Balance of Payments.
Such a situation creates a demand for the country’s currency and hence it starts appreciating. The country’s currency faces depreciation on the other hand.
Usually, investments inside a country lead to a surplus balance of payments, though it is a loan from a local bank as it is within the country.
Main Differences Between Balance of Trade and Balance of Payments
- Balance of Trade is the difference in the monetary values of a country’s export and import whereas Balance of Payment is the difference in the monetary values of transactions within the country and the rest of the world.
- Balance of Trade is also known as commercial balance or net balance whereas Balance of Payments is also known as Balance of International Payments.
- The former is abbreviated as NX and the latter is abbreviated as BOP or B.O.P.
- Currencies of traded countries are involved in calculating the Balance of Trade whereas the currency of that particular country is involved while estimating the Balance of Payments.
- The country exports more when there is a trade surplus and the country’s currency starts appreciating when there is a BOP surplus. Both surpluses boost the country’s economy with enhanced internal production or services.
- NX is formulated as Country’s (Export-Import) whereas BOP is formulated as Country’s Fund flow (Within the country – rest of the world).
- If there is a deficit in the Balance of Trade, then it is better to save more &consume less foreign goods to bring it to surplus. Similarly, when there is a deficit in BOP, supporting healthy competition within the local manufacturers or industry can help to improve it.
- The government usually imposes a higher import tax to reduce the imports and thus to improve the Balance of Trade. Also, an encouragement to use domestically manufactured goods can improve BOP.
- The net effect of the former can be positive or negative or zero whereas the latter is always zero.
How to Remember the Difference Between Balance of Trade and Balance of Payments
Time Needed : 2 minutes
Remembering the differences is very simple, just follow our mind mapping guide given below:
- Associate the first word with a thing or item which you see daily
For e.g.: Middle line in letter H for Horizontal.
- Associate the second word with a thing or item which you see daily
For e.g.: The two lines in letter V for Vertical.
- Recall the two words daily two times
During morning and evening bring up the two words in front of you and then recall the things that you had associated with each word.
- Repeat for 7 days
Repeating this process for a week will help you remember the difference between words for a long time.
Frequently Asked Questions (FAQ) About Balance of Trade and Balance of Payments
- What are the types of balance of payment?
The balance of payment is the record of all the transactions that are made internationally. It includes both, the amount of money which a company has received known as credit and the amount a country has to pay, known as a debit.
The BOP should be balanced i.e. zero but it is not the case most of the time.
The three main types of BOP are:
I. The current account – It includes the products and services which have been imported and exported in and out of the country respectively.
II. The capital account – Here all the capital transfers are kept in the record that occurred internationally. This includes assets that are non-financial like lands, etc.
III. The financial account – It includes all the records related to real estate, business, etc.
- What are the objectives of the balance of payment?
The objective of the balance of payment of a country is to determine whether that country is making an ample amount of money to pay for its imports.
- What is the Favourable balance of trade?
When a country exports more products than it imports from other countries, then that positive situation is called as favorable balance of trade.
You can measure it by calculating the difference between the total amount of items exported and the total amount of items imported.
- Does the trade balance include services?
No, it does not include any services but only the value of material goods.
- What is an example of the balance of trade?
In some countries, it is a sure thing that trade deficit will occur. However, it does not always correctly state the health of an economy.
For example, in the year 1976, the United States has faced a deficit because they were importing oil from outside.
- What do you mean by free trade?
Free trade is meant to reduce obstructions during exports and imports. This ensures the process of exporting and importing to go smoothly.
Under this policy between two or more nations, the tariffs and subsidies get reduced which ensures the easy ongoing of exports and imports.
Learn More With the Help of Video
As their name suggests, Balance of Trade and Balance of Payments are financial terms that reflect the economy of a nation. The former is a statistical calculation of a nation’s trade whereas the latter is a statistical calculation of transactions.
In a nutshell, they both deal with the monetary values of a nation through imports, exports, and related payments.
The net effect of Balance of Trade can be a positive value or negative or can even be zero based on the quantity of export & import.
The net effect of the Balance of payments all over the world is always considered as zero.
Whatever the terms may be, saving more than what is consumed can lead to a better home, a better country and, in turn, a better world!
Word Cloud for Difference Between Balance of Trade and Balance of Payments
The following is a collection of the most used terms in this article on the Balance of Trade and Balance of Payments. This should help in recalling related terms as used in this article at a later stage for you.