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Balance of Trade and Balance of Payment
Balance of payments means a systematic record of all the economic transactions of a country with the rest of the world during a given period, say one year. It throws light on the international economic position of a country. The international economic performance of a country is reflected in its balance of payments. Each country enters into economic transactions with other countries of the world. As a result of such transactions, it receives and makes payments to other counties. So balance of payments is a statement of accounts of these receipts and payments. Benham defined Balance of payments as follows: 'Balance of Payments of a country is a record of its monetary transactions over a period with the rest of the world'
In the words of Kindleberger, 'the balance of payments of a country is a systematic record of all economic transactions between its residents and residents of foreign countries'.
Balance of payments is a statement or an account, which records all the foreign receipts and payments of a country. It records all the visible and invisible items. Visible items mean the imports and exports of commodities. Invisible items mean the imports and exports of services and other foreign transfers and transactions. BOPs is classified as balance of payments on current account and capital account. The BOPs on current account records the current position of the country in the transfer of goods, services and merchandise as well as invisible items such as donations, unilateral transfers etc.
Balance of payments on capital account shows the country's financial position in the international scenario, the extent of accumulated foreign exchange reserves, foreign assets and liabilities and the impact of current transactions on international financial positions.
Balance of trade confines to trade in visible items only. Visible items are those, which are physically exported and imported like merchandise, gold, silver and other commodities. The invisible items are the services mutually rendered by shipping, insurance and banking companies, payment of interest and dividend, tourist spending and so on. The balance of trade refers to the difference between physical imports and exports of visible items only for a given period, say, a year.
During a given period, exports and imports may be exactly equal. Then, the balance of trade is said to be balanced. If the value of exports is in excess of the value of imports, the balance of trade is said to be favourable. If the value of imports is greater than the value of exports, the balance of trade is said to be unfavourable.
If a country has a deficit in its current account balance, there will be always offsetting transactions on the capital account to bring the balance of payments into equilibrium. This may be possible either through autonomous capital flows or through accommodating capital flows.
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