Difference between Balance of Trade and Balance of Payment

This article will help you to learn about the difference between balance of trade and balance of payment.

Difference between Balance of Trade and Balance of Payment

Difference – Balance of Trade (BOT):

i. It records only merchandise (i.e., goods) transactions.

ii. It does not record transactions of capital nature.

iii. It is a part of current account of BOP.

iv. It may be favourable, unfavourable or in equilibrium.

v. Defect in BOT cannot be met by BOP

vi. It is not true indicator of economic relations or economic prosperity of a country.

Difference – Balance of Payment (BOP):

(i) It records transactions relating to both goods and services.

(ii) It records transactions of capital nature.

(iii) It includes balance of trade, balance of services, balance of unilateral transfers and balance of capital transactions.

(iv) It always remains in balance in the sense that receipt side is always made to be equal to payment side.

(v) Defect in BOP can be met through BOT.

(vi) It is true indicator of economic performance of an economy.

Summary of BOX Services, Unrequited Transfers and Capital Payment:

A close look at the hypothetical data and further clarifies the distinction.

Balance of Trade = Rows (1) and (5)

= 550-800 = -250

Balance of Services = Rows (2) and (6)

= 150-50= 100

Balance of Unilateral Transfers = Rows (3) and (7)

= 100-80 = 20

Balance of Payment on Current A/c = -250 + 100 + 20 = -130

Balance of payment on Capital A/c = Rows (4) and (8)

= 200-70= 130 Balance of Payment = Rows (1 to 4) – (5 to 8)

= (550 + 150 + 100 + 200) – (800 + 50 + 80 + 70)

= 1000- 1000 = Zero

A deficit in balance of payment on current account (i.e., -130 crore) has been offset by surplus in BOP on capital account (i.e., + 130 crore). As a result, balance of payment is in equilibrium.