Balance of payments (BOP) records a country’s total inflows and outflows of funds and assets to and from foreign countries and offers an overview of all international monetary transactions. The balance of payments provides a summary of all transactions during the year and offers a clear snapshot of the country’s financial status. The balance of trade (BOT) is a component in the balance of payment which makes up a large part of the current account. The article clearly explains balance of payments and balance of trade, highlights the relationship between the two and explains the similarities and differences between BOT and BOP.
What is BOT (Balance of Trade)?
Balance of trade is the difference between the values of a country’s total imports and exports of goods and services. Balance of trade appears under the current account of the balance of payments. A country that has a balance of trade deficit would have higher imports than exports. A country with a balance of trade surplus will have higher exports than imports. A country must strive to achieve a surplus in their balance of trade by increasing exports and reducing imports. There are a number of key factors that affect the balance of trade. These include cost of production of the importing country in comparison to the exporting country, availability of raw materials for production, cost of raw materials, exchange rate between countries, prices of domestically produced products, quality of local products, etc.
What is BOP (Balance of Payments)
Balance of payments records all of the country’s transactions and inflows and outflows of funds between the local economy and foreign economies. All international transactions during the year are recorded in the balance of payments; transactions undertaken by both the private and the public sectors are taken into account when calculating the balance of payments. Inflows of funds to the country are recorded as credits and any outflow of funds from the country are recorded as debits. The balance of payments consists of 3 main components; current account, capital account and financial account, where each account tracks different types of transactions.
The current account records all inflows and outflows from the international sales and purchases of goods and services, earnings on investments, and unilateral transfers. The capital account records capital flows to and from a country including sales and purchases of assets, transfers of goods and assets, gifts, remittances. The financial account records all inflows and outflows of funds in relation to international investments, foreign reserves and gold, foreign direct investments, etc.
What is the difference between BOT and BOP?
Balance of payments records all international inflows and outflows of funds to and from foreign countries. The balance of trade is a component of the balance of payments and is recorded under one of the main components of the balance of payments; the current account. While the balance of trade shows only the difference between the value of a country’s total imports and exports of goods and services, the balance of payments shows an overall view of the country’s financial status by taking into consideration transfers of capital, transfers of assets and funds, international investments, sales and purchases of assets, remittances, gifts, unilateral transfers, changes in reserves, etc. The balance of trade is narrower in scope as it does not take into consideration the capital and financial transactions. The balance of payments, on the other hand, is more comprehensive as it covers all international transactions and, therefore, offers a true and fair view of country’s financial status and economic performance.
Summary:
Balance of Trade vs Balance of Payments
• Balance of trade is the difference between the values of a country’s total imports and exports of goods and services. Balance of trade appears under the current account of the balance of payments.
• Balance of payments records all of the country’s transactions and inflows and outflows of funds between the local economy and foreign economies.
• The balance of payment consists of 3 main components; current account, capital account and financial account, where each account tracks different types of transactions.
• The balance of trade is narrower in scope as it does not take into consideration capital and financial transactions. The balance of payments, on the other hand, is more comprehensive as it covers all international transactions.