Balance of Payments: Difference Between Balance of Trade and Balance of Payments

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It is a record of the transactions in goods, services, and assets between residents of a country with the rest of the world for one accounting year or a particular financial year.

There are two main accounts in the Bop:

  • The current account : It records exports and imports in goods, trade in services and transfer payments.

  • The capital account : It records all international purchases and sales of assets such as money, stocks, bonds, etc. Foreign investments and loans are also included.

  • Official reserves account.

  • Official International Reserve Account : Is part of capital account and consists of gold stock, holdings of convertible foreign currencies and SDRs, and net position in the IMF.

  • Errors and Omissions : A balancing item so that total credits and debits of the three accounts must equal in accordance with the principles of double entry book-keeping.

  • Double entry bookkeeping is followed. i.e., recording each transaction twice.

  • E.g.: Purchase of Treasury bond/Bills.

Purchase of Treasury bond/Bills

Purchase of Treasury Bond/Bills

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Purchase of Treasury bond/Bills

Purchase of Treasury Bond/Bills

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Difference between Balance of Trade and Balance of Payments

  • Balance of Trade: Includes goods only. i.e., tangible items.

  • Balance of payments: Includes goods, services, transfer payments.

  • Autonomous Transactions: International economic transactions that take place due to some economic motives like earning income and profit maximization. They are known as ’above the line items’ in Bop.

  • Accommodating transactions: Transactions that take place to cover deficit (or surplus) arising from autonomous transactions. These are known as ‘below the line items’ in Bop.

Practice Questions

Q 1 Which of the following factor forms the invisible account of the Balance of Payments of a country?

(a) International trade in services.(b) Income associated with non-resident assets and liabilities.(c) Remittance of worker income.(d) All the above.

Ans: (d)

Q 2 Which of the following is part of capital account of a country?

(a) Export and import of goods.(b) Export and import of services.(c) Unilateral transfers from one country to another.(d) NRI deposits.

Ans: (d)