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.
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)
✍ Manishika