Balance of Trade vs Balance of Payments Differences

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 works 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.read more deals with the export and import of goods. It does not include any services (even the import and export of services; we have a different name).On the other hand, the balance of payment is a much broader concept. It includes the balance of trade, the balance of services, the balance of unilateral transfers, and the balance of payment on the capital account.

The idea behind the balance of payment is to identify whether both sides match. In other words, we will examine whether the total of both sides (debitDebitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more and credit) will equal zero (we will see the examples in later sections).

This article discusses head-to-head differences between the balance of trade and 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 us 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: –

  • One can calculate the balance of trade by deducting the value of imports of goods from the value of exports of goods. On the other hand, one can calculate the balance of payments by adding the balance of payments at the current account and the balance of payments at a capital account or by ascertaining the net balance between inflow of foreign exchange and outflow of foreign exchange.The balance of trade portrays a partial picture of foreign exchange. On the other hand, the balance of payments provides a holistic view.The net effect of the trade balance can be positive, negative, or zero. The net result of the balance of payments can 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.read more.The balance of trade is a subset of the balance of payments. Without calculating the balance of trade, we would not see the net effect of export Net 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.read more and import in the balance of payments.

Balance of Trade vs Balance of Payments (Comparison Table)

Conclusion

Understanding the balance of trade and payments is largely important if you know foreign exchange.

In reality, the calculation is much more complex because the analysis needs a lot of details to find out the exports and imports of goods and services, determine 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 payments will allow you to understand the foreign exchange policies quite well.

This article is a guide on the balance of trade and balance of payments. Also, we discussed the top differences with examples and a comparison table. You may also have a look at the following articles for gaining further knowledge in Economics: –

  • Trial Balance FormatInternational Trade ExamplesTrial Balance vs Balance SheetCurrent Account vs Capital Account Differences