Notes on Balance of Trade and Balance of Payment | Micro Economics

Notes on Balance of Trade and Balance of Payment!

(a) Balance of Trade:

It is the difference between the money value of exports and imports of material goods [called visible items or merchandise) during a year.

Examples of visible items are clothes, shoes, machines, etc. Clearly, the two transactions which determine BOT are exports and imports of goods.

Exports and imports of services (invisible items like shipping, insurance, banking, payment of dividend and interest, expenditure by tourists, etc.) are not included.

The difference between values of exports and imports is called Balance of trade or Trade balance. Remember export means sending goods abroad to earn foreign exchange whereas imports means buying goods from abroad and pay in foreign exchange. Exports are considered as income and imports as expenditure. It includes only visible items and does not consider exchange of services.

Surplus or Deficit BOT:

Balance of trade may be in surplus or in deficit or in equilibrium. If value of exports of visible items is more than the value of imports of visible items, balance of trade is said to the positive or favourable. Thus, BOT shows a surplus. In case the value of exports is less than the value of imports, the balance of trade is said to be negative or adverse or unfavourable.

Then BOT is called in deficit. In case value of exports equals its imports, BOT is said to be balanced or in equilibrium. Rows (1) and (5) of the table given in Section 10.1 show balance of trade for the country as a hypothetical example .This country exported goods worth Rs 550 crore and imported goods worth Rs 800 crore. It had a deficit in its balance of trade of Rs 250 crore.

Balance of Trade = Rows (1) and (5) of table = 550-800 = Rs -250

Even though the country had a deficit in its balance of trade, this might be offset by items on other accounts especially by capital account. Balance of trade (merchandise) provides substantial account of payments emerging from international transactions but it does not reflect a complete picture of all the payments due to the country and the payments due from the country. For that we require Balance of Pa5Tnent Account. Mind, balance of visible items in BOP account is called BOT.

(b) Balance of Payment:

It is the difference between a nation’s total payments to foreign countries and its total receipts from them. In other words, it is a systematic record of a country’s receipts and payments in international economic transactions in a specific period of time.

Since BOP takes into account exchange of both visible and invisible items, therefore, it represents a wider and better picture of a country’s international transactions than balance of trade. Each transaction is entered on the credit and debit side of the balance sheet.

Main items (or components) on credit side:

They are:

(i) Exports of Goods (visible exports) (ii) Exports of Services [invisible exports) (iii) Unrequited Receipts [unilateral transfers) and (iv) Capital Receipts.

Similar items are shown on debit side. They are:

(i) Imports of Goods, (ii) Imports of Services, (iii) Unrequited Payments and (iv) Capital Payments. All these items have been discussed in detail in the preceding Section 10.2. Clearly, the balance of payment is an application of double entry book-keeping with the result that debits and credits will always balance. In other words, balance of payment will always be in equilibrium.

(c) Comparison:

Balance of payment is a wider concept as compared to balance of trade which is just one of the four components of the former. The other three components of balance of payment are export/import of services, unilateral receipts/payments and capital receipts/payments.

BOT does not include any of these three components. Therefore, BOP represents a better picture of a country’s economic transactions with the rest of the world than the Balance of Trade. Both are compared below.