Balance of Trade vs Balance of Payments

Balance of Trade vs Balance of Payments Differences

If you want to understand how the business happens beyond borders, you need to understand imports and exports. Along with that, you should learn how the balance of trade and balance of payments work as well.

The idea behind the balance of payment is to see whether both sides match. In other words, we will see whether the total of both sides (debit and credit) will equal zero (we will see the examples in later sections).

In this article, discuss head to head differences between the balance of trade vs balance of payments.

Balance-of-Trade-vs-Balance-of-Payments

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Balance of Trade vs Balance of Payments Infographics

The balance of trade is just a smaller part of the balance of payments. Let’s look at the differences between the balance of trade and balance of payments below –

Balance-of-Trade-vs-Balance-of-Payments

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Balance of Trade vs Balance of Payments – Key differences

Here are the key differences between the balance of trade and balance of payments –

Balance of Trade vs Balance of Payments (Comparison Table)

Basis for Comparison between the balance of trade vs balance of paymentsBalance of TradeBalance of Payments
1.    MeaningThe balance of trade can be defined as the net balance of the export of goods and the import of goods in a given period of time.Balance of payments is the sum total of a balance of trade, the balance of services, the balance of unilateral transfers, and capital account.
2.    What it’s all about?Balance of trade helps a country look at the net profit or net lossNet LossNet loss or net operating loss refers to the excess of the expenses incurred over the income generated in a given accounting period. It is evaluated as the difference between revenues and expenses and recorded as a liability in the balance sheet.read more incurred by the export and the import of goods.The balance of payment helps to see whether everything is properly accounted for.
3.    DifferenceThe balance of trade is the difference between exports of goods and imports of goods.The balance of payments is the difference between the inflow of foreign exchange and the outflow of foreign exchange.
4.    Net effectThe net effect of balance of trade is either positive, negative or zero.The net effect of the balance of payments is always zero.
5.    Type of transactionsThe entries in the balance of trade are related to goods.Transactions related to goods, services, transfers are included in the balance of payments.
6.    Capital and unilateral transfersCapital and unilateral transfers are not included in the balance of trade.Capital and unilateral transfers are included in the balance of payments.
7.    Holistic pictureIt does only provide a partial picture.It provides the whole picture.

Conclusion

Understanding the balance of trade and balance of payments is quite important if you want to understand foreign exchange.

In reality, the calculation is much more complex because the calculation needs a lot of details to find out the exports and imports of goods and services, finding out how much is being transferred to foreigners and how much is being received from the foreigners and so on and so forth.

However, conceptualizing and knowing how to calculate the balance of trade and balance of payments will allow you to understand the foreign exchange policies quite well.

This has been a guide to the top differences between the balance of trade vs balance of payments. Here we also discuss the balance of trade and balance of payments differences with examples, infographics, and comparison tables. You may also have a look at the following articles for gaining further knowledge in Economics  –