Question

Discuss the difference between Balance of Payment and Balance of Trade.

Hint:

Remember: Balance of Trade deals with Tangible items only. Balance of Payments is the "Big Picture" that includes everything.

Answer 1

Step 1: Understanding the Concepts:
Balance of Trade (BoT) and Balance of Payments (BoP) are both statements that record a country's international economic transactions. However, BoP is a much broader concept than BoT.

Step 2: Differentiation Table:
The key differences between the Balance of Payments and the Balance of Trade are as follows:\[\begin{array}{|c|c|c|} \hline Basis of Difference & Balance of Trade (BoT) & Balance of Payments (BoP) \\ \hline \text{Meaning} & \text{It is a statement that records the difference between the value of a country's exports and imports of visible items (physical goods) only.} & \text{It is a comprehensive and systematic statement of all economic transactions between a country and the rest of the world.} \\ \hline \hline \text{Components} & \text{It includes only the export and import of tangible goods.} & \text{It includes all transactions: trade in goods, trade in services (invisibles), unilateral transfers, and all capital transactions (investments and loans).} \\ \hline \hline \text{Scope} & \text{It is a narrow concept. It is only one part of the Current Account of the BoP.} & \text{It is a very broad concept, encompassing the entire spectrum of international economic dealings.} \\ \hline \hline \text{Balance} & \text{The Balance of Trade can be favorable (surplus), unfavorable (deficit), or balanced.} & \text{The Balance of Payments, in an accounting sense, always balances. A deficit or surplus in the current account is matched by a corresponding surplus or deficit in the capital account.} \\ \hline \hline \text{Economic Picture} & \text{It provides a partial view of a country's international economic position, focusing only on merchandise trade.} & \text{It provides a complete and true picture of a country's economic and financial relations with the rest of the world.} \\ \hline \end{array}\]

Step 3: Final Answer:
The Balance of Trade is a narrow concept that only considers the trade of physical goods, whereas the Balance of Payments is a broad concept that records all economic transactions, including goods, services, transfers, and capital flows. BoT is merely a component of the BoP.