What do you mean by the terms of balance of trade and balance of payment, Differentiate between the two


Foreign trade means export and import of goods; and goods passing from one country to another have to be paid. The difference between the exports and imports of a country is called the balance of trade. When the value of exports of a country exceeds that of its imports the balance of trade is called favourable or positive. When the value of imports of country exceeds that of its exports, it is called unfavourable or negative balance of trade. The favourable balance of trade of a country enables it to earn gold from foreign countries to the amount of balance. When balance is unfavourable the country has to pay gold to foreign countries. For instance Pakistan exported goods worth Rs. 200 million to Iran and imported goods worth Rs. 150 million from Iran. Pakistan has a favourable balance of trade with Iran to the amount of Rs. 50 million. The means, Pakistan would realize this balance from Iran in terms of gold, as ultimately foreign payments are made in terms of gold. Balance of trade is not the true index of the economic position of any country.

A country may have a favourable balance of trade, but may not have favourable balance of accounts. For instance, Pakistan has normally got the favourable balance of trade. But is doubtful whether she was favourable balance of accounts or payments. Because she has to pay a huge sum to foreign countries on account of the use of foreign ships, aeroplanes, banks, insurances and on account of the study and the travel of Pakistanis in foreign countries and also as interests of foreign capital.

England may have her balance of trade unfavourable. But she gets big sum on invisible items. So normally, her balance of accounts may be favourable.

The difference between “Balance of trade” and “Balance of Payments” should be clear “Balance of Payments” on current accounts refers to the net position of all the “credits” (payments due to a country) and “Debits” (payment made by a country) on account of merchandise, trade, services and un-required transfers. If there is a deficit this is covered by net “inflow” of foreign and in the form of loans; and what is still left is met by monetary movements i.e. short period borrowings and running down of the past accumulated balance of gold and Foreign Exchange Reserves. In the case of surplus these reserves increase in their size.

When we talk of “Balance of Trade” sometimes both goods and services are included. Invisible items are sometimes also called Invisible Trade. But unless this is specifically mentioned “Balance of Trade” means only the balance between Merchandise Trade and Visible Trade i.e. imports and exports of goods. If the value of imports exceeds the value of exports, we say that the balance of trade is unfavourable or is deficit. If the value of exports exceeds the value of imports we say that the balance of trade is favourable or surplus.

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