Balance of Trade vs Balance of Payments

What is Balance of Trade (BOT)

In todays world, all countries import some goods and services from other countries, and they also export certain other goods and services which are surplus in their country. 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. If a country has a balance of trade deficit, it imports more than it exports, and if it has a balance of trade surplus, it exports more than it imports. The balance is said to be favourable when the value of the exports exceeded that of the imports (i.e. exports exceed imports), and unfavourable when the value of the imports exceeded that of the exports (i.e. imports exceed exports).

What are the Factors That Affect Balance of Trade

Factors that can affect the balance of trade include:

The cost of production (land, labour, capital, taxes, incentives, etc.) in the exporting economy vis--vis those in the importing economy; The cost and availability of raw materials, intermediate goods and other inputs; Exchange rate movements; Multilateral, bilateral and unilateral taxes or restrictions on trade;

Non-tariff barriers such as environmental, health or safety standards;

The availability of adequate foreign exchange with which to pay for imports; and Prices of goods manufactured at home (influenced by the responsiveness of supply)

Difficulties in Measuring Balance of Trade

Sometimes it is difficult to measure accurately the Balance of Trade because of problems with recording and collecting data. One interesting example is the problem faced when official data for all the world's countries are added up. It is reported that in such a case, exports exceed imports by almost 1%. The question which baffles is as to why this difference? Normally, both these should match. However, it appears that the world is running a positive balance of trade with itself. This cannot be true, because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to launder money or evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely.

Indias Balance of Trade

India recorded a trade deficit of 733.33 INR Billion in July of 2013. Balance of Trade in India is reported by the Ministry of Commerce and Industry. India Balance of Trade averaged -122.75 INR Billion from 1978 until 2013, reaching an all time high of 13.91 INR Billion in April of 1991 and a record low of 1111.46 INR Billion in October of 2012. India had been recording sustained trade deficits due to low exports base and high imports of coal and oil for its energy needs.

India is leading exporter of petroleum products, gems and jewellery, textiles, engineering goods, chemicals and services.
Main trading partners are European Union countries, United States, China and UAE.

Source: http://www.tradingeconomics.com/india/balance-of-trade

Definition
The Balance Of Payments of a country is a systematic record of all economic transactions between the residents of a country and the rest of the world.

It presents a classified record of all receipts on account of goods exported, services rendered and capital received by residents and payments made by them on account of goods imported and services received from the capital transferred to non-residents or foreigners. Reserve Bank of India (RBI)

What is Balance of Payment

Balance of Payment is a system of recording all the economic transactions of a country, with the rest of the world over a period, say one year. Typically, the transactions included in BoP are country's exports and imports of goods, services, financial capital, and financial transfers.

Thus, in nut shell we can say, the BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned.

Importance of BoP
The BoP is an important indicator of pressure on a countrys foreign exchange rate . The BOP helps to forecast a countrys market potential, especially in the short run. Changes in a countrys BOP may signal the imposition or removal of controls over payment of dividends and interest, license fees, royalty fees, or other cash disbursements to foreign firms or investors.

Balance of Payment
To understand the same better, we can conclude : The balance of payments (BOP) is an accounting of a country's international transactions for a particular time period. Any transaction that causes money to flow into a country is a credit to its BOP account, and any transaction that causes money to flow out is a debit. The BOP includes the current account, which mainly measures the flows of goods and services; the capital account, which consists of capital transfers and the acquisition and disposal of non-produced, non-financial assets; and the financial account, which records investment flows. The BOT is typically the biggest bulk of a country's balance of payments as it makes up total imports and exports. BOP is said to be favourable balance of payments, when more payments are coming in than going out, and will be unfavourable when less payments are coming in than what is going out.

Contents of BoP
Current

account Capital account Financial account Net errors and omissions account Reserves and related items: official reserve account

Current account

Net export/import of goods (trade balance) Net export/import of services Net income (investment income from direct and portfolio investment plus employee compensation) Net transfers (sums sent home by migrants and permanent workers aboard, gifts, grants and pensions)

Capital account
Capital

transfers related to the purchase and sale of fixed assets such as real estate

Financial account
Net

foreign direct investment Net portfolio investment Other financial items

Net errors and omissions account

Missing

data such as illegal transfers

Reserves and related items: official reserve account

Changes in official monetary reserves including gold, foreign exchange, and IMF position.

Basis of Difference Definition

Balance of Trade (BOT) Balance of Trade is defined as 'difference between export and import of goods and services'

Balance of Payment (BOP) Balance of Payment is defined as the '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. BOP = BOT + (Net Earning on foreign investment i.e. payments made to foreign investors) + Cash Transfer + Capital Account +or - Balancing Item or BOP = Current Account + Capital Account + or - Balancing item ( Errors and omissions)

How is it Calculated

BOT = Net Earning on Exports - Net payment made for imports

Basis of Difference
When is it considered as Favourable or Unfavourable?

Balance of Trade (BOT)

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 (BOP)

Balance of Payment will be favourable, if the country has surplus in current account for paying your all past loans in her capital account. Balance of payment will be unfavourable, if country has current account deficit and it took more loan from foreigners. After this, it has to pay high interest on extra loan and this will make BOP unfavourable. To stop taking of loan from foreign countries.

Solution of To Buy goods and services being Unfavourab from domestic country. le Following are main Factors 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