Balance of Trade vs. Balance of Payment

Difference Between Balance of Trade and Balance of Payment

All the countries of the world depend on each other for the goods and services. International trade constitutes the import and export of services and goods. The difference between the values of imports and exports is called balance of trade. If imports are greater than exports, it is deficit and if export is greater than import it is surplus. Balance of payment is another term which is used in international economics. People often cannot differentiate between balance of trade and balance of payment. They confused them. Let us discuss balance of trade and balance of payment differently to know about the difference between them.

Balance of trade

Every company wants to have a favorable balance of trade. If a country has an unfavorable balance of trade, it does not mean that it has a bad economy. It may be due to the fact that the country has increased internal demands due to growing infrastructure. There is always surplus balance of trade if net exports are positive.

It may be possible that a country reflects surplus balance of trade but has negative balance of trade in reality. A positive balance is the indication of excess of the export and the country is getting cash inflow. This implies that there is surplus domestic income in the country and there is higher living standard in the country.

Balance of payment

Balance of payment refers to many components and balance of trade is one of them. It is a term broader than balance of trade. Balance of payment covers all the payments under it. It covers both foreign and domestic economy. Payments such as investments and unilateral transfers are included in the balance of payment. In fact unilateral transfer is a payment without a receipt. It can be called a gift. For example, all the aids provided by a country to the other one come under the category of gifts. Investments include buying of assets by members of domestic economy in foreign countries. So, buying of factories or firms in foreign countries are investments.

 

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