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Balance of Trade vs Balance of Payments
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What is Balance of Trade (BOT)
In today’s world, all countries import some goods and services from other countries, and they also export certain other goods and services which are surplus in their country. The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports. The balance is said to be favorable when the value of the exports exceeded that of the imports (i.e.exports exceed imports), and unfavorable when the value of the imports exceeded that of the exports (i.e. imports exceed exports).
What are the Factors That Affect Balance of Trade Factors that can affect the balance of trade include: · The cost of production (land, labour, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy; · The cost and availability of raw materials, intermediate goods and other inputs; · Exchange rate movements; · Multilateral, bilateral and unilateral taxes or restrictions on trade; · Non-tariff barriers such as environmental, health or safety standards; · The availability of adequate foreign exchange with which to pay for imports; and · Prices of goods manufactured at home (influenced by the responsiveness of supply)
Difficulties in Measuring Balance of Trade Sometimes it is difficult to measure accurately the ‘Balance of Trade’ because of problems with recording and collecting data. One interesting example is the problem faced when official data for all the world's countries are added up. It is reported that in such a case, exports exceed imports by almost 1%. The question which baffles is as to why this difference? Normally, both these should match. However, it appears that the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely.
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What is Balance of Payment
Balance of Payment is a system of recording all the economic transactions of a country, with the rest of the world over a period, say one year. Typically, the transanctions included in BoP are country's exports and imports of goods, services, financial capital, and financial transfers. Thus, in nut shell we can say, the BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned.
To understand the same better, we can conclude : - · The balance of payments (BOP) is an accounting of a country's international transactions for a particular time period.
The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. BOP is said to be favorable balance of payments, when more payments are coming in than going out, and will be unfavourable when less payments are coming in than what is going out.
The Balance of Payments Divided: The BOP is divided into three main categories: (a) the current account,(b) the capital account and (c) financial account. Within these three categories are sub-divisions, each of which accounts for a different type of international monetary transaction.
BALANCE OF TRADE VS BALANCE OF PAYMENT OR BOT VS BOP (What is the difference between Balance of Payment and Balance of Trade)
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