Difference Between

Balance of Trade and

Balance of Payments
Name Revati Khade
Division A
Class TYBA
Roll number 54
From DEPARTMENT OF ECONOMICS
The balance of payments (BOP) is a record of all economic transactions
between the residents of a country and the rest of the world over a
specified period, typically a year.

The BOP consists of three main components:

the current account, the capital account, and the financial account.
These components measure different types of transactions, such as
trade in goods and services, financial investments, and transfers.
The BOP is an important indicator of a country’s economic health and its
interaction with the global economy. It provides insights into a country’s
international trade, investment flows, and foreign exchange reserves.
● There is no such formula. The concept is that by adding balances of the
three accounts, the net should be zero. So:
● BOP = Current Account + Capital Account + Financial Account
● =0
● Differences will show if there is a deficit or surplus of foreign exchange
 EXAMPLE
● An example of a transaction recorded in the BOP could be in a case
where Country A purchases $10 million worth of goods from Country B.
The $10 million worth of goods in INFLOW to Country A is a debit and
will be recorded as -$10 million. The payment of Country A to Country
B, which is a $10 million check, will be recorded as a $10 million credit
(+ $10 million). The amounts offset each other, so the overall BOP is
zero.
OUTFLOW INFLOW
Money Goods
+$10 million (credit) -$ 10 million (debit)
 What is Balance of Trade?
● The balance of trade is one of the significant components for any
economy’s current asset as it measures a country’s net income
earned on global investments.
● An economy with a trade surplus lends money to deficit
countries, whereas an economy with a large trade deficit
borrows money to pay for its goods and services. In addition, in
some cases, the trade balance may correlate to a country’s
political and economic stability, reflecting the amount of foreign
investment. Therefore, most nations view this as a favorable
trade balance.
When exports are less than imports, it is known as a trade deficit.
Countries usually regard this as an unfavorable trade balance.
However, there are instances when a surplus or favorable trade balance is
not in the country’s best interests.
For a balance of trade examples, an emerging market, in general, should
import to invest in its infrastructure.
Common debit items include foreign aid, imports, domestic spending
abroad, and domestic investments abroad.
In contrast, credit items include foreign spending in the domestic
economy, exports, and foreign investment in the domestic economy.
 Formula
The balance of trade formula is as follows:
Balance of Trade = Country’s Exports – Country’s Imports.

For example, suppose the USA imported $1.8 trillion in 2016 but
exported $1.2 trillion to other countries. Then, the USA had a
trade balance of -$600 billion, or a $600 billion trade deficit.
$1.8 trillion in imports – $1.2 trillion in exports = $600 billion
trade deficit
 EXAMPLE
● Let us consider the example to see how to calculate the balance of trade figures:
● The US has had a trade deficit since 1976, whereas China has had a trade surplus
since 1995.
A trade surplus or deficit is not always a final indicator of an
economy’s health.
It must be considered along with the business cycle and other
economic indicators.
For example, for the balance of trade examples in economic growth,
countries prefer to import more to promote price competition,
limiting inflation.
Conversely, in a recession, governments export more to create
economic jobs and demand.
 Major differences between the balance of
trade and balance of payments:
● A statement recording the imports and exports done in goods by/from the
country with the other countries, during a particular period is known as the
Balance of Trade. The Balance of Payment captures all the monetary
transaction performed internationally by the country during a course of
time.
● The Balance of Trade accounts for, only physical items, whereas Balance of
Payment keeps track of physical as well as non-physical items.
The Balance of Payments records capital receipts or payments, but
Balance of Trade does not include it.
The Balance of Trade can show a surplus, deficit or it can be balanced too.
On the other hand, Balance of Payments is always balanced.
The Balance of Trade is a major segment of Balance of Payment.
The Balance of Trade provides the only half picture of the country’s
economic position. Conversely, Balance of Payment gives a complete view
of the country’s economic position.
 Conclusion
● Every country of the world keeps the record of inflow and
outflow of money in the economy with the help of a Balance of
Trade and Balance of Payments. They reflect the actual position
of the whole economy. With the help of BOT and BOP, analysis
and comparisons can also be made that how much trade has
increased or decreased, since the last period.