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by a country's residents. A country's balance of payments tells you whether it saves enough to
pay for its imports. It also reveals whether the country produces enough economic output to pay
for its growth. The BOP is reported for a quarter or a year.
A balance of payments deficit means the country imports more goods, services and capital than
it exports. It must borrow from other countries to pay for its imports. In the short-term, that fuels
the country's economic growth. It's like taking out a school loan to pay for education. Your
expected higher future salary is worth the investment.
In the long-term, the country becomes a net consumer, not a producer, of the world's economic
output. It will have to go into debt to pay for consumption instead of investing in future growth.
If the deficit continues long enough, the country may have to sell off its assets to pay its
creditors. These assets include natural resources, land and commodities,
A balance of payments surplus means the country exports more than it imports. Its government
and residents are savers. They provide enough capital to pay for all domestic production. They
might even lend outside the country.
A surplus boosts economic growth in the short term. That's because it's lending money to
countries that buy its products. That boosts its factories, allowing them to hire more people.
In the long run, the country becomes too dependent on export-driven growth. It must encourage
its residents to spend more. A larger domestic market will protect the country from exchange
rate fluctuations. It also allows its companies to develop goods and services by using its own
people as a test market.
BOP Components
The balance of payments has three components. They are the financial account, the capital
account and the current account.The financial account describes the change in international
ownership of assets. The capital account includes any financial transactions that don't affect
economic output. The current account measures international trade, the net income on
investments and direct payments. Here are the balance of payments components and how they
work together.
Financial Account
The financial account measures 1) changes in domestic ownership of foreign assets and 2)
foreign ownership of domestic assets. If foreign ownership increases more than domestic
ownership does, it creates a deficit in the financial account. This means the country is selling off
its assets, like gold, commodities and corporate stocks, faster than it is acquiring foreign assets.
More
Capital Account
Current Account
he current account measures a country's trade balance plus the effects of net income and direct
payments. When the activities of a country's people provide enough income and savings to fund all their
purchases, business activity and government infrastructure spending, then the current account is in
balance.
A current account deficit is when a country's residents spend more on imports than they save. To
fund the deficit, other countries lend to, or invest in, the deficit country's businesses. The lender
country is usually willing to pay for the deficit because its businesses profit from exports to the
deficit country. In the short run, the current account deficit is a win/win for both nations.
But if the current account deficit continues for a long time, it will slow economic growth. Why? The
foreign lenders will begin to wonder whether they will get an adequate return on their investment. If
demand falls off, the value of the borrower country's currency may also decline. This leads to inflation as
import prices rise. It also creates higher interest rates as the government must pay higher yields on its
bonds.
The U.S. current account deficit reached a record $803 billion in 2006. That created concern
about the sustainability of such an imbalance. Even though the recession scaled it back, it
appears it's on the rise again.
The warnings made by the Congressional Budget Office, and the solutions it proposed, are
relevant again today. The safety of investing in the United States could once again become a
concern to foreign investors. Americans have cut back on credit card spending, and the savings
rate has inched up, but is it enough to fund domestic
The United States traded $4.9 trillion with foreign countries in 2016. That was $2.2 trillion
in exports and $2.7 trillion in imports. It's the third-largest exporter, but the top importer. With
its size and wealth, it should be exporting more. Find out why it isn't in U.S. Exports: Challenges
and Opportunities.
Why can't we make everything at home? Find out in U.S. Imports. America imports more than
half of its goods from just five countries
The balance of payments accounts of a country record the payments and receipts of the
residents of the country in their transactions with residents of other countries. If all transactions
are included, the payments and receipts of each country are, and must be, equal. Any apparent
inequality simply leaves one country acquiring assets in the others. For example, if Americans
buy automobiles from Japan, and have no other transactions with Japan, the Japanese must end
up holding dollars, which they may hold in the form of bank deposits in the United States or in
some other U.S. investment. The payments of Americans to Japan for automobiles are balanced
by the payments of Japanese to U.S. individuals and institutions, including banks, for the
acquisition of dollar assets. Put another way, Japan sold the United States automobiles, and the
United States sold Japan dollars or dollar-denominated assets such as Treasury bills and New
York office buildings....
Although the totals of payments and receipts are necessarily equal, there will be inequalities—
excesses of payments or receipts, called deficits or surpluses—in particular kinds of
transactions. Thus, there can be a deficit or surplus in any of the following: merchandise trade
(goods), services trade, foreign investment income, unilateral transfers (foreign aid), private
investment, the flow of gold and money between central banks and treasuries, or any
combination of these or other international transactions.
IMPORTS: Goods and services produced by the foreign sector and purchased by the domestic
economy. In other words, imports are goods purchased from other countries. The United States,
for example, buys a lot of the stuff produced within the boundaries of other countries, including
bananas, coffee, cars, chocolate, computers, and, well, a lot of other products. Imports,
together with exports, are the essence of foreign trade--goods and services that are traded
among the citizens of different nations. Imports and exports are frequently combined into a
single term, net exports (exports minus imports)....
EXPORTS: The sale of goods to a foreign country. The United States, for example, sells a lot of
the stuff produced within our boundaries to other countries, including wheat, beef, cars,
furniture, and, well, almost every variety of product you care to name. In general, domestic
producers (and their workers) are elated with the prospect of selling their goods to foreign
countries--leading to more buyers, a higher price, and more profit. The higher price, however, is
bad for domestic consumers. In that domestic consumers tend to have far less political clout
than producers, very few criticisms of exports can be heard....
BALANCE OF TRADE: The difference between the value of goods and services exported out of a
country and the value of goods and services imported into the country. The balance of trade is
the official term for net exports that makes up the balance of payments. The balance of trade
can be a "favorable" surplus (exports exceed imports) or an "unfavorable" deficit (imports
exceed exports). The official balance of trade is separated into the balance of merchandise trade
for tangible goods and the balance of services....
A balance of trade surplus is most favorable to domestic producers responsible for the exports.
However, this is also likely to be unfavorable to domestic consumers of the exports who pay
higher prices.
After the implementation of globalization policy, world has become a small village and now
every contry freely transacts with the other countries of the world. In this context, two statements
are prepared to keep a record of the transactions made by the country internationally; they are
Balance of Trade (BOT) and Balance of Payments (BOP). The balance of payment keeps a
track of transaction in goods, services, and assets between the country’s residents, with the rest
of the world.
On the other hand, the balance of exports and import of the product and services is termed as
Balance of Trade.
The scope of BOP is greater than BOT, or you can also say that Balance of Trade is a major
section of Balance of Payment. Let’s understand the difference between Balance of Trade and
Balance of Payment in the article given below.
1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion
Comparison Chart
Basis for
Balance of Trade Balance of Payment
Comparison
Capital
Are not included in the Balance of Trade. Are included in Balance of Payment.
Transfers
Which is It gives a partial view of the country's It gives a clear view of the economic position
better? economic status. of the country.
Trade refers to buying and selling of goods, but when it comes to buying and selling of goods
globally, then it is known as import and export. The Balance of Trade is the balance of the
imports and exports of commodities made to/by a country during a particular year. It is the most
important part of the current account of the country’s Balance of Payment. It keeps records of
tangible items only.
The Balance of Trade shows the variability in the imports and exports of merchandise made by a
country with the rest of the world over a period. If the imports and exports made to/by the
country tallies, then this situation is known as Trade Equilibrium, but if imports exceed exports,
then the condition is unfavourable as it states that the economic status of the country is not good,
and so this situation is termed as Trade Deficit. Now, if the value of exports is greater than the
value of imports, this is a favourable situation because it indicates the good economic position of
the country, thus known as trade surplus.
It combines all the public-private investments to know the inflow and outflow of money in the
economy over a period. If the BOP is equal to zero, then it means that both the debits and credits
are equal, but if the debit is more than credit, then it is a sign of deficit while if the credit exceeds
debit, then it shows a surplus. The Balance of Payment has been divided into the following sets
of accounts:
Current Account: The account that keeps the record of both tangible and intangible items.
Tangible items include goods while the intangible items are services and income.
Capital Account: The account keeps a record of all the capital expenditure made and income
generated collectively by the public and private sector. Foreign Direct Investment, External
Commercial Borrowing, Government loan to Foreign Government, etc. are included in Capital
Account.
Errors and Omissions: If in case the receipts and payments do not match with each other then
balance amount will be shown as errors and omissions.
The following are the major differences between the balance of trade and balance of payments:
1. A statement recording the imports and exports done in goods by/from the country with the
other countries, during a particular period is known as the Balance of Trade. The Balance of
Payment captures all the monetary transaction performed internationally by the country during
a course of time.
2. The Balance of Trade accounts for, only physical items, whereas Balance of Payment keeps track
of physical as well as non-physical items.
3. The Balance of Payments records capital receipts or payments, but Balance of Trade does not
include it.
4. The Balance of Trade can show a surplus, deficit or it can be balanced too. On the other hand,
Balance of Payments is always balanced.
5. The Balance of Trade is a major segment of Balance of Payment.
6. The Balance of Trade provides the only half picture of the country’s economic position.
Conversely, Balance of Payment gives a complete view of the country’s economic position.
Conclusion
Every country of the world keeps the record of inflow and outflow of money in the economy
with the help of a Balance of Trade and Balance of Payments. They reflect the actual position of
the whole economy. With the help of BOT and BOP, analysis and comparisons can also be made
that how much trade has increased or decreased, since the last period.