Nowadays, international trade has become a common practice. Thanks to globalization, we see that countries can engage in transactional activities with each other. In this case, it is necessary to record such activities in the financial report of a country.
As a result, there are two distinct statements in the accounting system. These statements are called Balance of Payments (BOP) and Balance of Trade (BOT). These can be used to keep track of a country’s economic transactions done internationally.
This article is here to help you better understand the differences between the balance of payments and the balance of trade.
Balance in payment
A balance sheet is a report that is used to track a country’s international transactions over a period of time. It covers many aspects of trade of goods and services as well as any transaction with the nature of capital.
We know that products are things that are visible, which means you can see and touch the items in the business. However, we can’t actually see and touch the service, can we? Therefore, this part is often classified as an invisible item.
Moreover, the balance of payments keeps track of every money coming and going in a country as a result of international trade. It is important to keep a record so that the government can be well informed about the economic condition of the country. Only with such information can a government decide on monetary and fiscal policy which can be beneficial for the country.
The balance of trade
By definition, trade means the act of buying and selling. However, in the context of international trade, a balance of trade means a balance between the import and export of a country’s goods.
The balance of trade is a key element of the balance of payments. It only keeps records of visible items, not invisible things like services or capital transactions. With a balance of trade, we can see the balance between a country’s imports and exports.
There are two ways to analyze a country’s trade performance. This is seen in the balance of trade. If the volume of imports is greater than the volume of exports, it means that the country has a trade deficit. On the other hand, large exports mean that the country has a trade surplus.
There are several differences between the balance of trade and the balance of payments, you can see it in the list below.
1. Balance of Payments Keeps records of all international trade transactions, including goods, services and capital. Meanwhile, the balance of trade only keeps records of commodity transactions.
2. Balance of trade Trade may show trade surplus or trade deficit, but the balance of payments is always balanced.
3. The balance of trade is a part of the balance of payments Therefore, the balance of payments can offer a more comprehensive view and cover more aspects than the balance of trade.
In conclusion, we can see that the balance of payments as a part of a country’s economic report is extremely important. It covers international transactions of goods, services and capital. A major part of the balance of payments is the balance of trade, and it only covers commodity transactions. Both reports can be used by the government to measure the economic condition of a country.