Difference between Balance of Trade and Balance of Payment

The upcoming discussion will update you about the difference between balance of trade and balance of payment.

Difference between Balance of Trade and Balance of Payment

1. The balance of trade includes only visible imports and exports i.e., imports and exports of merchandise, the difference between the two (imports and exports) is called balance of trade.

If imports are more than exports, it is unfavorable balance of trade or if exports exceeds imports it is favourable balance of trade.

Whereas the balance of payment includes all visible and invisible items exported from and imported into the country in addition to exports and imports of merchandise. Thus, Balance of Payment includes Balance of Trade whereas balance of trade does not include Balance of Payments.

2. Balance of Trade includes revenues received of paid on account of imports and exports of merchandise. In other words it shows only revenue items. Where as the Balance of Payments include all revenue and capital items whether visible or invisible. Balance of Trade thus forms a part of balance of payment.

3. Balance of Trade may be favourable or unfavorable but Balance of Payment always balances just like Trading, Profit and Loss Account of a business shows a Profit or Loss but the two sides of Balance Sheet (assets and liabilities) always tally.

4. The Balance of Payments tallies and never shows a balance. Any balance (deficit or surplus) is to be financed by an external source (Loan or assistance) or be utilised on the other hand. Balance of Trade always shows a balance (favourable or unfavorable) and it is not to be arranged from any outside source.

5. Balance of Trade (favourable or unfavorable) in-fact has no meaning for a country because it can be supported or mitigated by other invisible imports and exports. Where as the unfavorable balance of payments position or deficit is very crucial for a country.

The deficit balance of payments situation is a Strain on Country’s resources. They are either to be corrected by increasing exports or by borrowings from the international markets or agencies (I.M.F. ; IBRD or World Bank etc.). Thus, the balance of payments position should not be negative for long or it will be an index of poor economy.