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What is Balance of Payment (BOP) and Balance of Trade (BOT)?

What is Balance of Payment (BOP) and Balance of Trade (BOT)?

Owlgen
Course: M.Com

1 Answer

CONCEPT OF BALANCE OF PAYMENT:

Balance of payment refers to all economic transactions between domestic and foreign residents over a stipulated period, which is generally one year. The analysis of balance of payment is immensely useful for the policy-makers and business communities. Moreover, it is an important instrument for maintaining external economic stability. A close understanding of dependence of international business upon balance of payments is necessary for a successful strategy in international business.

BALANCE OF TRADE:

Balance of Trade (BOT) refers to the difference between physical imports and exports, i.e. visible items for a given period, say a year. Visible items are those, which are physically exported and imported, like merchandise, gold, silver and other commodities. During a. given period of time exports and imports may be exactly equal, in which case, the balance of trade is said to be balanced. If the value of exports to country exceeds the value of imports, the country is said to have an export surplus or a favorable balance of trade. When the value of imports coming to a country is greater than the value of exports, the balance of trade .is said to be unfavorable.

Global trade, however, includes not only import and export of goods but also services such as air and ocean shipping, financial and other services like banking, insurance, trade, investment income, etc. Export and import of goods are visible trades as they are physically recorded at the customs barriers of the country. Receipts and payments for services rendered are matters of invisible trade.

COMPARISON BETWEEN BOT AND BOP:

The balance of payment is broader than the balance of trade for it includes not only visible items but also invisible items. Hence, the balance of payments presents a better picture of a country’s economic and financial transactions with the rest of world than the balance of trade. Balance of payment is a comprehensive and systematic record of all economic transactions between the residents of a country and the rest of the world. It presents an account of all receipts and payments on account of goods exported, services rendered and capital received by residents/ government of a country (inflows from abroad) and goods imported, services received and capital transferred, by the residents/ government of a country (outflows abroad).

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September 14, 2019
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