BALANCE OF TRADE AND BALANCE OF PAYMENTS
BALANCE OF TRADE
AND
BALANCE OF PAYMENTS –
An Introduction
The balance of payments account indicates a systematic record of all export incomes and import payments of a country during any year. Any import from abroad has to be paid for. On the other hand, any export will bring money flow into the country. If we subtract the total value of the imported commodities from the total value of the exported commodities of a country, what we obtain is called the ‘Balance of Trade’ of the country. If the difference is positive, i.e. if the value of commodity exports exceeds the value of commodity imports, we say that the balance of trade is favourable. If the difference is negative, we say that the balance of trade is unfavourable.
Since commodities are visible but services are not, the difference between the values of exports and imports of commodities are referred to as the ‘Balance of Visible Trade’. On the other hand, the difference between the values of exports and imports of services is called the ‘Balance of Invisible Trade’. This balance of invisible trade is not included in the balance of trade. In other words, by Balance of Trade we mean the balance of visible trade only.
Foreign exchange can also be earned or spent in many other ways. If we subtract the total outflow or spending of foreign exchange by a country from the total inflow of foreign exchange, what we get is called the ‘Balance of Payments’. Therefore, the balance of trade of a country is an accounting of its exports and imports of goods only. On the other hand, the balance of payments is an accounting of its total exports and imports (including goods and services as well as other items).
Items Entering Into Balance of Payments
We have already said that exports and imports of goods and services enter into the balance of payments. But foreign exchange can be earned and spent in other ways too. For instance, the country earns foreign exchange when a foreigner gives some money to a citizen of
AND
BALANCE OF PAYMENTS –
An Introduction
The balance of payments account indicates a systematic record of all export incomes and import payments of a country during any year. Any import from abroad has to be paid for. On the other hand, any export will bring money flow into the country. If we subtract the total value of the imported commodities from the total value of the exported commodities of a country, what we obtain is called the ‘Balance of Trade’ of the country. If the difference is positive, i.e. if the value of commodity exports exceeds the value of commodity imports, we say that the balance of trade is favourable. If the difference is negative, we say that the balance of trade is unfavourable.
Since commodities are visible but services are not, the difference between the values of exports and imports of commodities are referred to as the ‘Balance of Visible Trade’. On the other hand, the difference between the values of exports and imports of services is called the ‘Balance of Invisible Trade’. This balance of invisible trade is not included in the balance of trade. In other words, by Balance of Trade we mean the balance of visible trade only.
Foreign exchange can also be earned or spent in many other ways. If we subtract the total outflow or spending of foreign exchange by a country from the total inflow of foreign exchange, what we get is called the ‘Balance of Payments’. Therefore, the balance of trade of a country is an accounting of its exports and imports of goods only. On the other hand, the balance of payments is an accounting of its total exports and imports (including goods and services as well as other items).
Items Entering Into Balance of Payments
We have already said that exports and imports of goods and services enter into the balance of payments. But foreign exchange can be earned and spent in other ways too. For instance, the country earns foreign exchange when a foreigner gives some money to a citizen of