Balance of Trade vs Balance of Payments

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Balance of Trade vs Balance of Payments Differences

To understand how the business happens beyond borders, you need to understand imports and exports. Along with that, you should learn how the balance of trade and balance of payments works as well.

  • The balance of trade is a part of the balance of payment. Balance of trade deals with the export and import of goods. It does not include any services (even the import and export of services; we have a different name).
  • On the other hand, the balance of payment is a much broader concept. It includes the balance of trade, the balance of services, the balance of unilateral transfers, and the balance of payment on the capital account.

The idea behind the balance of payment is to identify whether both sides match. In other words, we will examine whether the total of both sides (debit and credit) will equal zero (we will see the examples in later sections).

This article discusses head-to-head differences between the balance of trade and payments.

Table of contents
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Balance of Trade vs Balance of Payments Infographics

The balance of trade is just a smaller part of the balance of payments. Let us look at the differences between the balance of trade and balance of payments below: -

Balance-of-Trade-vs-Balance-of-Payments

Balance of Trade vs Balance of Payments - Key differences

Here are the key differences between the balance of trade and balance of payments: -

  • One can calculate the balance of trade by deducting the value of imports of goods from the value of exports of goods. On the other hand, one can calculate the balance of payments by adding the balance of payments at the current account and the balance of payments at a capital account or by ascertaining the net balance between inflow of foreign exchange and outflow of foreign exchange.
  • The balance of trade portrays a partial picture of foreign exchange. On the other hand, the balance of payments provides a holistic view.
  • The net effect of the trade balance can be positive, negative, or zero. The net result of the balance of payments can always be zero.
  • Capital and unilateral transfers are not included in the balance of trade. Capital and unilateral transfers are major parts of the balance of payments.
  • The balance of trade is a subset of the balance of payments. Without calculating the balance of trade, we would not see the net effect of export and import in the balance of payments.

Balance of Trade vs Balance of Payments (Comparison Table)

The basis for comparison between the balance of trade and the balance of paymentsBalance of TradeBalance of Payments
1.    The MeaningThe balance of trade can be defined as the net balance of the export of goods and the import of goods in a given period.The balance of payments is the total balance of trade, services, unilateral transfers, and capital accounts.
2.    What is it all about?The balance of trade helps a country look at the net profit or net loss incurred by exporting and importing goods.The balance of payment helps to see whether everything is properly accounted for.
3.    DifferenceThe balance of trade is the difference between exports of goods and imports of goods.The balance of payments is the difference between the inflow of foreign exchange and the outflow of foreign exchange.
4.    Net effectThe net effect of the balance of trade is either positive, negative, or zero.The net effect of the balance of payments is always zero.
5.    Type of transactionsThe entries in the balance of trade are related to goods.The transactions related to goods, services, and transfers are included in the balance of payments.
6.    Capital and unilateral transfersCapital and unilateral transfers are not included in the trade balance.Capital and unilateral transfers are included in the balance of payments.
7.    Holistic pictureIt only provides a partial view.It provides the whole picture.

Conclusion

Understanding the balance of trade and payments is largely important if you know foreign exchange.

In reality, the calculation is much more complex because the analysis needs a lot of details to find out the exports and imports of goods and services, determine how much is being transferred to foreigners and how much is being received from the foreigners, and so on and so forth.

However, conceptualizing and knowing how to calculate the balance of trade and payments will allow you to understand the foreign exchange policies quite well.