9 Key Difference between Balance of Trade and Balance of Payments

The balance of trade account is a part of the current account of the balance of payment, but the balance of payment account is more comprehensive.

Difference between Balance of Trade and Balance of Payments

Following is the relationship between Balance of Trade and Balance of Payments:

(1). The balance of trade is a narrow concept, while the balance of payment is a wider concept. in fact, the balance of payments includes in its structure is the nation of the balance of trade.

(2). Balance of trade refers to only the value of imports and exports of goods, like visible items only. Import or export of goods is a visible item because it is an open trade between the countries and can be easily certified by the Customs officials.

On the other hand, the balance of payments is more compressive in scope and covers the total debits and credits of all items visible- as well as invisible.

It includes all international economic transactions and items such as Merchandise trade, services, banking, insurance, capital flows, gold buying, and selling, etc.

Thus, the balance of trade is only a segment of the balance of payments, which simply refers to the difference between the value of visible exports and visible imports.

(3). BOT is only a partial study of the total economic transactions in international trade(IT) it has little analytical significance.

On the other hand, the balance of payments provides a complete record of international economic transactions/pictures of international economic relations. It has great analytical and economic significance.

(4). The balance of trade takes into account only the payments and receipts on the account of visible exports and imports.

Hence, it does not indicate truly the international monetary position of a nation, it shall be more appropriate to refer to the BOP of the nation concerned.

The BOP includes a value of non-commodity items that give rise to the International Monetary receipt and payments.

(5). The balance of trade account does not record transactions of capital nature, whereas the BOP account records transaction nature.

(6). The balance of trade account is a part of the current account of the balance of payment, but the balance of payment account is more comprehensive.

(7). In the accounting sense, BOT may be deficit or surplus. It may, thus, be imbalanced. But the balance of payments as a whole must always balance. For that reason, there is an item like “Errors and Omission” in its structure.

(8). The balance of trade is useful in economic calculations, while BOP is more useful in economic calculation.

(9). The exchange rate is affected by the balance of payment, not by the balance of trade.