Balance of Trade and Balance of Payment

Balance of trade and balance of payment are two commonly used terms in international economics. These terms are different but related to each other as Balance of trade is a component of Balance of Payment. BOT include as current item in balance of payment and described as:

“It is the sum of the balance of trade (net earnings on exports – payments for imports), factor income (earnings on foreign investments – payments made to foreign investors) and cash transfers. It’s called the current account as it covers transactions in the "here and now" – those that do not give rise to future claims”

Balance of trade can be in deficit or surplus as per the tangible business transactions of one country to another.  If imports of a country increase to its exports the balance of payment will be negative or deficit, and if country has more exports than its imports the balance of trade will be considered positive or surplus. The deficit or surplus balance of trade cannot represent or guarantee the economic growth of a country. When the economy is in expansion phase there may be positive economic indicators with deficit or negative balance of trade.

[linkunit]Adding all receipts and subtracting payment the outcome deficit or surplus figure is called Balance of Payment. Normally these statistics represent one year economic activities of a country. It is a broader term includes trade of physical goods, services and capital employment.  BOP of a country must be equal to zero even if the payment and receipts are not equal.  For example if the imports are excessive to exports and country has to pay the balance amount, it will pay by incomes earned from investments overseas, form its reserves or even by borrowing form other countries.

International trade’s imbalances can be problematic of not as per economic condition and trade cycle of the country. Balance of trade has a current account affect in Balance of Payment. The Equation of Balance of Payment by IMF is as under:

BOP = Current Account—Financial Account – Capital Account +Balancing Item

The BOP account records the payments and receipt in terms of current account (Tangible goods), services (intangible goods) and foreign investments of the residents of the country in their transactions with residents of other countries. The balance of these receipts and payments must be equal. Any apparent inequality simply leaves one country acquiring assets of the others.

[adsense]

Foreign exchange rate have its significant impact of balance of trade and balance of payments. In 2010 a cold war can be seen of competitive currency devaluation. Brazil’s finance minister spoke out as “International Currency War”. Countries are trying to devalue their currencies to increase exports. Recently US have passed a bill to push china to increase its currency value.