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 balance of trade is a part of the balance of payment. Balance of tradeBalance Of TradeThe balance of trade (BOT) is the country’s exports minus its imports. BOT is one of the significant components for any current economic asset as it measures a country’s net income earned on global investments. simply deals with the export and import of goods. Balance of trade doesn’t include any services (not even the import and export of services; we have a different name for that).
- Balance of payment, on the other hand, is a much broader concept. It includes the balance of trade, the balance of services, balance of unilateral transfers, and balance of payment on capital account.
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 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 – Key differences
Here are the key differences between the balance of trade and balance of payments –
- The balance of trade can be calculated by deducting the value of imports of goods from the value of exports of goods. Balance of payments, on the other hand, can be calculated by adding the balance of payments at the current account and balance of payments at a capital account or by finding out the net balance between inflow of foreign exchange and outflow of foreign exchange.
- The balance of trade portrays a partial picture of foreign exchange. The balance of payments, on the other hand, provides a holistic picture.
- The net effect of the balance of trade can be positive, negative, or zero. The net effect of the balance of payments would always be zero.
- Capital and unilateral transfers are not included in the balance of trade. Capital and unilateral transfers are major parts of the balance of paymentsBalance Of PaymentsThe formula for Balance of Payment is a summation of the current account, the capital account, and the financial account balances. The term balance of payments refers to the recording of all payments and obligations pertaining to imports from foreign countries vis-à-vis all payments and obligations pertaining to exports to foreign countries. It is the accounting of all the financial inflows and outflows of a nation..
- The balance of trade is a sub-set of the balance of payments. Without calculating the balance of trade, we would not be able to see the net effect of exportNet Effect Of ExportNet exports of any country are measured by calculating the value of goods or services exported by the home country minus the value of the goods or services imported by the home country. It includes various goods and services exported and imported by the government, like machinery, cars, consumer goods. and import in the balance of payments.
Balance of Trade vs Balance of Payments (Comparison Table)
|Basis for Comparison between the balance of trade vs balance of payments||Balance of Trade||Balance of Payments|
|1. Meaning||The 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. incurred by the export and the import of goods.||The balance of payment helps to see whether everything is properly accounted for.|
|3. Difference||The 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 effect||The 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 transactions||The 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 transfers||Capital and unilateral transfers are not included in the balance of trade.||Capital and unilateral transfers are included in the balance of payments.|
|7. Holistic picture||It does only provide a partial picture.||It provides the whole picture.|
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 –