Difference Between Balance of Trade and Balance of Payment

Balance of Trade vs Balance of Payment

Self sufficiency does not exist in real world and all countries are dependent upon other countries to fulfill many of the needs for good and services. The goods and services imported and those exported constitute its international trade and the difference in the monetary value of total exports and imports is called its balance of trade. This could be surplus when it is exporting more than it is importing or it could be deficit if imports are greater than imports. This is known as favorable or unfavorable balance of trade. However, there is another term very common in international economics known as balance of payments that confuses many as they cannot differentiate between the two terms. Despite similarities there are many differences between balance of trade and balance of payments that will be talked about in this article.

Balance of trade

It is always the desire of a company to have a favorable balance of trade. However, just because a nation has an unfavorable balance of trade does not always reflect badly on its economy as it may be passing through a stage where its internal demand because of growing infrastructure may be more. If net exports are positive, then there is a surplus balance of trade for a country.

Now a country may have a negative balance of trade overall, but it can have surplus balance of trade with different countries. A positive balance of trade indicates that the net value of exports of the country is more than the total value of its imports and the country is receiving cash inflow from foreign sector. This means that the domestic economy has a surplus income and thus a higher standard of living.

Balance of payment

Balance of trade is just one of the many components that balance of payment refers to. This is a broader set of financial accounts than balance of trade. Balance of payment takes into account all payments, both from the foreign sector as well as domestic economy. There are other payments that are included in balance of payment such as unilateral transfers and investments. Unilateral transfers are actually gifts or payments without any receipt. Aids by a country made to other countries falls in this category. Physical assets bought by members of domestic economy in foreign countries such as factories, firms etc are taken in this category of investments.