Commerce

Balance of Trade and Balance of Payments

Olawunmi Omosanya - Sat, 01st June, 2019 @ 11:03: AM



Balance of Trade and Balance of payments:

Your country does business with other countries. Nigeria as an instance does business with China. Lots of goods are imported into Nigeria from China. On the other hand, Nigeria is also a major exporter of oil to other countries of the world. Simply put; Balance of Trade deals with the import and export of goods only.

 

BALANCE OF TRADE

Balance of Trade can be defined as the total value of goods imported and exported by a country during a specific period; usually yearly or annually.

A country is said to have reached a balance of trade when the money generated from the exportation of goods equals that from the importation of goods.

Balance of trade can be either positivenegative or zero

  • A positive Balance of Trade implies that a country exports more goods than its imports. China as a country is very likely to have a positive balance of trade since it exports a variety of goods to other countries.
  • A negative Balance of Trade is sometimes considered as an unfavorable balance of trade since the country's importation exceeds its exportation. Nigeria is likely to have a negative balance of trade.
  • A zero Balance of Trade is reached when imports equal exports.

It is noteworthy that balance of trade has nothing to do with services. The import and export of services is NOT a concept of balance of trade.

 

BALANCE OF PAYMENTS

The idea behind the balance of payments is much broader than that of balance of trade. In fact, balance of trade is only one aspect of balance of payments. Other aspects or components of balance of payment are:

  • Balance of Services
  • Balance of Unilateral Transfers
  • Balance of payments on Current Account
  • Balance of payments on Financial Account
  • Balance of payments on Capital Account

By definition, Balance of Payments is the record showing the relationship between a country’s total payment made to other countries and the total money received by them from other countries within a time period.

The Balance of Payments is a guide that tells a country whether it has enough savings to pay for all its imports. It will also show the amount of economic output produced by a country.

A balance of payments can be on the surplus or deficit direction.

BALANCE OF PAYMENTS DEFICIT implies that a country imports more goods, services and capital compared to its exports. As a result, such countries will have to borrow from other countries, IMF (International Monetary Fund) or World Bank to pay for its imports. A continual balance of payment deficit will make a country a consumer nation. Such countries are likely to end up as debtors to other countries or international banks. This is not the ideal way to go for any country since their creditors may eventually seize their assets; and such asset could be the country’s natural resources.

Balance of Payment Deficit is also called Unfavorable Balance of Payments or Deficit Balance of Payments

Solutions to balance of payment deficit
  1. The country should implement the control of foreign exchange transaction.
  2. The country should devaluate its domestic currency.
  3. The country should establish industries that will produce similar goods which will act as substitutes for imported goods.
  4. The country should impose tariffs on importation of goods and services.
  5. They country can borrow from financial institutions like World Bank and IMF to support its domestic production.

 

BALANCE OF PAYMENTS SURPLUS means that the country exports more goods, services and capital when compared to its imports. This is the ideal way to go because such country will have enough capital to support its local or domestic production; simultaneously increasing job opportunities within it. The citizens of such countries are gainfully employed. These countries are generally lenders to other nations. Please read on production here.

Balance of Payments Surplus is also called Favorable Balance of Payments or Surplus Balance of Payments

 

Note the followings

Balance of payments for current account comprise of the receipts and payments for services. The services could be visible or invisible.

Balance of payments for capital account comprise of the capital that comes into and goes out of a country. It is simply capital inflow and outflow and can both be short term and long term. Capital movement in the form of investments and loans are all included here.

Balance of payments for Monetary Movement Account shows how the balances of both the current and capital accounts are settled.

 

Below are some differences between Balance of Trade and Balance of Payments

BALANCE OF TRADE

BALANCE OF PAYMENTS

It is the total value of goods imported and exported by a country during a specific period; usually yearly or annually

It  is the record showing the relationship between a country’s total payment made to other countries and the total money received by them from other countries within a time period

It helps a country evaluate its net profit and net loss incurred only from the importation and exportation of goods

It gives us a proper accountability beyond the importation and exportation of goods

Unilateral and capital transfers are not part of balance of trade

Unilateral and capital transfers are part of balance of payments

It deals with the difference between the export and import of goods only

It deals with the differences between the inflow and outflow of foreign exchange

Topics in Commerce

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Topics in Commerce

Meaning, Scope, Functions and Characteristics of commerce Marketing Explained Commodity market explained Deferred payment and its benefits Meaning and Types of Production Balance of Trade and Balance of Payments



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