Main Difference – Balance of Payment vs Balance of Trade
Economists use different economic indicators to measure the performance of different economies. Balance of payment and balance of trade are two terms widely used in macroeconomic vocabulary and are commonly used to analyze the economic conditions for a defined period of time. Calculation of balance of payment considers all the receipts and payments made by residents of an economy between the other countries whilst Balance of trade considers the difference between imports and exports of an economy. This is the main difference between balance of payment and balance of trade.
This article discusses,
1. What is Balance of Payment? – Definition, Formula to Calculate Balance of Payment
2. What is Balance of Trade? – Definition, Formula to Calculate Balance of Trade
3. Difference Between Balance of Payment and Balance of Trade
What is Balance of payment
Balance of payment can simply be defined as the difference between total receipts and payments of a particular economy during a specified period of time. It is a summarized record of all the transactions done by the residents of a particular economy with the other economies in the world.
In other words, it includes cash inflows and outflows generated by international receipts and payments made by individuals, business firms and government entities for acquiring / vending both visible and non-visible business transactions. This is commonly calculated quarterly and annually. The balance of payment primarily takes two components into consideration; current account and capital account.
- Current Accounts – consist of all the transactions made for buying / selling goods, services, short-term transfers and investment income.
- Capital Account – indicates transactions done on financial instruments
Balance of Payment can be calculated using following formula.
Current accounts balance + Capital account balance + Reserve balance = BOP
Theoretically, the value of the Balance of Payment should be zero. The reason behind is that the economy uses net capital inflows to finance if there are any deficits in the current account, whilst surplus of the current account is used to balance the capital and finance accounts.
What is Balance of Trade
The definition of Balance of Trade is the difference between imports and exports of a given economy during a defined period of time. This is symbolized as net exports/net imports.
BOT = Value of Exports – Value of Imports
If a particular economy’s exports value is higher than its imports value, it is identified as a trade surplus, whereas if the import value is higher than the export value it is called a trade deficit.
Similarities between Balance of Payment and Balance of Trade
- Both are mathematical tools used in macroeconomics to measure economic performance of a given country during a specified time period.
- Balance of trade is a part of the Balance of Payment.
Difference Between Balance of Payment and Balance of Trade
Balance of Payment: Balance of Payment captures all visible and non-visible economic transactions within the entire world.
Balance of Trade: Balance of Trade captures all imports and exports values of goods.
Balance of Payment: Balance of Payment gives an overall view on the strength of a particular economy.
Balance of Trade: Balance of Trade gives a partial view of the import and export condition of an economy.
Balance of Payment: Balance of Payment considers capital transactions.
Balance of Trade: Balance of Trade considers only current account transactions.
Results of the Calculation
Balance of Payment: Results of the calculation is theoretically zero as receipts are always balanced with payments
Balance of Trade: Results of the calculation can be favorable, unfavorable or equal.
Balance of Payment vs Balance of Trade Summary
Balance of payment is a measure of payments and receipts of the all the transactions done by the residents of a particular economy with the residents of other economies. In fact, it represents an overall view of the performance of an economy. On the other hand, Balance of Trade measures the positive or negative condition of the import-export transactions of a given economy during a defined time period. It gives a partial understanding of the economy and is used to calculate the balance of payment.