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Commerce · Ch 4 — International Trade

Balance of Trade and Balance of Payments

4

Balance of Trade and Balance of Payments

Two related but distinct ideas describe a country's trading position with the rest of the world: the Balance of Trade (BOT) and the Balance of Payments (BOP).

The Balance of Trade is the difference between the value of a country's visible exports (physical merchandise sent out) and its visible imports (physical merchandise brought in) during a given period, usually a year. If exports exceed imports, the balance of trade is favourable (or in surplus); if imports exceed exports, it is unfavourable (or in deficit).

The Balance of Payments is a far wider, systematic record of all economic transactions — not merchandise alone — between the residents of a country and the rest of the world during a given period. It has two broad accounts: the Current Account, which records trade in goods (visible trade, i.e., the balance of trade itself), trade in services (invisibles such as shipping, insurance, tourism, software services), investment income, and unilateral transfers (remittances, gifts); and the Capital Account, which records cross-border movements of capital — loans, foreign direct investment, portfolio investment, and changes in foreign exchange reserves. Because the balance of payments is constructed on a double-entry basis, it always balances in an accounting sense, even though the current account or the trade account taken alone may show a surplus or a deficit.

BasisBalance of TradeBalance of Payments
ScopeOnly visible/merchandise trade (goods)All economic transactions — goods, services, income, transfers, capital flows
ComponentsExports of goods minus imports of goodsCurrent account + Capital account
NatureNarrower concept; a part of the current accountBroader, comprehensive concept
Can be in deficit/surplusYes, commonly shown as favourable or unfavourableThe overall BOP always balances by accounting convention; individual accounts within it can show a surplus or deficit
RelationForms one component of the current account of the BOPIncludes the balance of trade as one of its several components
Definition 1Visible Trade

Trade in tangible, physical goods that can be seen and physically verified at customs — recorded in th …

Definition 2Invisible Trade

Trade in services and other intangible items (shipping, insurance, tourism, banking, software services) and transfers, recorded in the current account of the balance of payments …

Definition 3Current Account

The section of the balance of payments recording trade in goods and services, investment income, and un …

Definition 4Capital Account

The section of the balance of payments recording cross-border capital flows — loans, investments, and changes in forei …