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 balance of payment. Balance of trade 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 to zero (we will see the examples in later sections).
In this article, discuss head to head differences between balance of trade vs balance of payments.
Balance of Trade vs Balance of Payments Infographics
Balance of trade is just a smaller part of balance of payments. Let’s look at the differences between balance of trade and balance of payments below –
Balance of Trade vs Balance of Payments – Key differences
Here are the key differences between balance of trade and balance of payments –
- 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 balance of payments at current account and balance of payments at capital account or by finding out the net balance between inflow of foreign exchange and outflow of foreign exchange.
- Balance of trade portrays a partial picture of foreign exchange. Balance of payments, on the other hand, provides a holistic picture.
- The net effect of balance of trade can be positive, negative, or zero. The net effect of 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 balance of payments.
- Balance of trade is a sub-set of balance of payments. Without computing balance of trade, we would not be able to see the net effect of export and import in the balance of payments.
Balance of Trade vs Balance of Payments (Comparison Table)
|Basis for Comparison between balance of trade vs balance of payments||Balance of Trade||Balance of Payments|
|1. Meaning||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 balance of trade, balance of services, 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 loss incurred by the export and the import of goods.||Balance of payment helps to see whether everything is properly accounted for.|
|3. Difference||Balance of trade is the difference between exports of goods and imports of goods.||Balance of payments is the difference between inflow of foreign exchange and outflow of foreign exchange.|
|4. Net effect||The net effect of balance of trade is either positive, negative or zero.||The net effect of balance of payments is always zero.|
|5. Type of transactions||The entries in balance of trade are related to goods.||Transactions related to goods, services, transfers are included in 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||Does only provide partial picture.||Provides the whole picture.|
Understanding balance of trade and balance of payments is quite important if you want to understand foreign exchange.
In reality, the computation 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 balance of trade and balance of payments will allow you to understand the foreign exchange policies quite well.
This has a been a guide to the top differences between 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 table. You may also have a look at the following articles for gaining further knowledge in Economics –