Explain, with example, the distinction between balance of trade and balance of payments.
Or, Show the distinction between balance of trade and balance of payments.
| Points of Difference | Balance of Trade | Balance of Payments |
|---|---|---|
| 1. Definition | Trade relations between a country and other countries in a particular year when expressed in the form of a balance sheet is called Balance of Trade (BOT). | All the economic transactions and receivable-payable of a country with all other countries in a particular financial year are expressed in the form of a balance sheet, called the Balance of Payments (BOP). |
| 2. Accounting | Balance of Trade shows only the visible export and import and invisible export and import on the credit and debit side of the current account. | Balance of Payments shows receivables and payables of both the current account and capital account. |
| 3. Classification | Balance of Trade can be classified into three categories- (a) Favourable Balance of Trade (If X>M) (b) Unfavourable Balance of Trade (If X<M) (c) Equality of Balance of Trade (If X=M) [Where, X = Export Value, M = Import value] | The Balance of Payments is always in equilibrium because the total payments equals the total receivables. However, in case of disequilibrium- (a) Favourable Balance of Payments (If R>P) (b) Unfavourable Balance of Payments (If R<P) [Where, R = Total Receivables, P = Total Payables] |
| 4. Scope | Balance of Trade is only a part of international trade. | Balance of Payments is an integral part of international trade. So, the Balance of Payments is broader than the Balance of Trade. |
| 5. Impact on National Income | Balance of Trade directly affects national income. If there is a deficit in the Balance of Trade, the national income decreases, but if the Balance of Trade is favourable, the national income increases. | Favourable and unfavourable Balance of Trade affects the Balance of Payments. As a result, the country’s liabilities increase or its assets decrease. Thus, the economic condition of the country is reflected. |
| 6. Item | Visible export and visible import are shown in the Balance of Trade. | Visible exports, invisible exports, unilateral receipts and capital receipts are shown on the receipts side of Balance of Payments whereas visible imports, invisible imports, unilateral payments and capital payments are shown on the payments side of the Balance of Payments. |
Like our post?
We are available with lots and lots of commerce-related content.
[…] Difference between Balance of Trade and Balance of Payments […]
[…] Difference between Balance of Trade and Balance of Payments […]
[…] Difference between Balance of Trade and Balance of Payments […]