Difference Between Balance of Trade and Balance of Payment

>> April 14, 2011


Following is the list which is showing difference between balance of trade and balance of payment. It has been made on some basis.


Basis of Difference
Balance of Trade (BOT)

 Balance of  Payment (BOP)
1. Definition




Balance of trade may be defined as difference between export and import of goods and services.

Balance of payment is flow of cash between domestic country and all other foreign countries. It includes not only import and export of goods and services but also includes financial capital transfer.
2. Formula






BOT = Net Earning on
Export - Net payment for imports





BOP = BOT + (Net Earning
on foreign investment - payment made to foreign investors) + Cash
Transfer + Capital Account +or - Balancing Item
or
BOP = Current Account + Capital Account  + or - Balancing item ( Errors and omissions)
3. Favourable  or
Unfavourable







If export is more than
import, at that time, BOT will be favourable. If import is more than export, at that time, BOT will be unfavourable.




Balance of Payment will be
favourable, if you have surplus in current account for paying your all
past loans in your capital account.
Balance of payment will be unfavourable, if you have current account deficit and you took more loan from foreigners. After this, you have to
pay high interest on extra loan and this will make your BOP
unfavourable.
4. Solution of Unfavourable
Problem

To Buy goods and services
from domestic country.

To stop taking of loan
from foreign countries.

5. Factors





Following are main factors
which affect BOT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods manufactured at home
Following are main factors
which affect BOP
a) Conditions of foreign lenders.
b) Economic policy of Govt.
c) all the factors of BOT

6. Meaning of Debit and
Credit





If you see RBI' Overall
balance of payment report, it shows debit and credit of current account.
Credit means total export of different goods and services and debit means total import of goods and services in current account.
Credit means to receipt and earning both current and capital account and debit means total outflow of cash both current and capital account and difference between debit and credit will be net balance of payment.






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6 comments:

Anonymous,  March 22, 2012 at 11:41 PM  

Very Good

Anonymous,  April 11, 2012 at 10:00 PM  

nice difference

Anonymous,  July 16, 2012 at 11:31 AM  

Excellent!

Anonymous,  January 31, 2013 at 8:26 PM  

Thankyou for the great work.it is very helpful for me as today i have economics paper

Anonymous,  April 19, 2013 at 5:04 AM  

this is very helpful for me and
very very nice

Anonymous,  May 19, 2014 at 4:44 AM  

nice man.....good work.....simple and to the point.

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