Difference between Balance of Payment and Balance of Trade

Balance of Payment and Balance of Trade are two important terms that are sometimes confused as the same. The former is a statement of all transactions between entities in one country and the outside world over a specified time period; however, the latter is the difference between the Export and Import of Goods.

Table of Content

• What is Balance of Payment?
• What is Balance of Trade?
• Difference between Balance of Payment and Balance of Trade

What is Balance of Payment?

Balance of Payment is a statement of all transactions between entities in one country and the outside world over a specified time period, such as a quarter or a year. It lists all interactions between residents of one country and residents of other countries that involve businesses, organizations, or governments. Balance of Payments includes all the economic transactions, which involve the transfer of holding or title of goods and services. It is also known as the Balance of International Payments.

BoP is a self-balancing account like Trial Balance, as it also follows the Double Entry System. But in reality, there are cases when it is not equal. Thus, BoP can be:

• Balanced (When, Credit Side = Debit Side)
• Surplus (When, Credit Side > Debit Side)
• Deficit (When, Credit Side < Debit Side)

What is Balance of Trade?

Balance of Trade refers to the difference between the Export and Import of Goods. Exports are listed on the credit side (positive items) and Imports are listed on the debit side (negative items). 

Balance of Trade = Exports of Goods – Imports of Goods

Balance of Trade is just a part of the Balance of Payment but plays an important role in understanding the BoP of the country. It is also known as the Balance of Visible Trade and Trade Balance.

Balance on Balance of Trade

Generally, the Balance of Trade has balanced itself; but sometimes the value of exports is not equal to the value of imports. Therefore, the Balance of Trade (BoT) can be surplus (positive) or deficit (negative).

• Surplus Balance of Trade (BoT): If the exports of goods of a country are more than its imports, then the Balance of Trade is said to be in surplus. It means that the balance of trade is favourable for the country.
• Deficit Balance of Trade (BoT): If the imports of goods of a country are more than its exports, the Balance of Trade is said to be in deficit. It means that the balance of trade is unfavourable for the country.

Difference between Balance of Payment and Balance of Trade

Basis	Balance of Payment	Balance of Trade
Meaning	Balance of Payment is a statement of all transactions  between entities in one country and the outside world  over a specified time period, such as a quarter or a year.	Balance of Trade refers to the difference between the  Export and Import of goods.
Components	Balance of Payment includes visible items, invisible items, unilateral transfers, and capital transfers.	Balance of Trade includes only visible items.
Records	All transactions of capital nature are included in the Balance of Payment.	It records transactions related to goods only.
Capital Transfers /Transactions	All transactions of capital nature are included in the Balance of Payment.	Transactions of capital nature are not included in the Balance of Trade.
Scope	Balance of Payment is a wider concept and includes Balance of Trade.	Balance of Trade is a narrow concept and is a part of  Balance of Payment account.
Economic View	Balance of Payment gives a clear view of the  country’s economic position.	Balance of Trade gives a partial view of the country’s economic status.
Result	Both receipts and payment side of the Balance of Payment account tallies.	The result of Balance of Trade can be favourable,  or unfavourable or balanced.
Settlement	Unfavourable BoP cannot be settled out of favourable BoP.	Unfavourable BoT can be settled out of favourable BoT.