Nowadays, international trade is becoming a common practice. Thanks to globalization, we see that countries can engage in transactional activities with each other. In this case, there is a need to record such activities in a country’s financial report.
Consequently, there are two distinctive statements in the accounting system. These statements are called Balance of Payments (BOP) and Balance of Trade (BOT). They can be used to keep track of a country’s economic transactions done internationally.
This article is here to help you understand the differences between Balance of Payments and Balance of Trade more carefully.
Balance of Payments
The balance of Payments is a report that is used to keep track of a country’s international transactions within a certain period of time. It covers many aspects including the trade of goods and services, as well as any transactions with capital nature.
As we know, goods are things that are visible, meaning you can see and touch the items that are in the trade. However, we can’t actually see and touch services, can we? Hence, this part is often categorized as invisible items.
Moreover, Balance of Payments keeps track of every money that comes and goes within a country as a result of international trade. It is important to keep this in the record so that the government can be well informed about the country’s economic conditions. Only with such information can a government make decisions on monetary and fiscal policies that can be beneficial for the country.
Balance of Trade
By definition, trade means the act of buying and selling. However, in the context of international trade, Balance of Trade means the balance between imports and exports of goods in one country.
The balance of Trade is a key component of Balance of Payments. This keeps records of only the visible items, not the invisible ones like services or capital transactions. With Balance of Trade, we can see the balance between a country’s import and export transactions.
There are two ways in analyzing a country’s trade performance. This can be seen in the Balance of Trade. If the import amount is bigger than the export amount, it means that the country has a trade deficit. On the other hand, if the amount of export is bigger, it means that the country is in a trade surplus situation.
There are several differences between Balance of Trade and Balance of Payments, you can see it in the list below.
1. The balance of Payments keeps a record of all international trade transactions including goods, services, and capital. Meanwhile, Balance of Trade only keeps a record of goods transactions.
2. The balance of Trade can show trade surplus or trade deficit, but Balance of Payments are always balanced.
3. A Balance of Trade is a part of Balance of Payments. Hence, Balance of Payments can give a more comprehensive view and covers more aspects than Balance of Trade.
To conclude, we can see that Balance of Payments is crucial as a part of a country’s economic reporting. It covers international transactions of goods, services, and capital. A major part of Balance of Payments is Balance of Trade, and it covers only transactions of goods. Both reporting can be used by the government to measure a country’s economic conditions.