Meaning of Balance of payment:
Balance of payment(BoP) is an accounting statement which records economic transactions between Normal Resident of a specific country with the rest of the world.
It is a double entry system, which means it compromises of debit and credit.
In this we ‘Credit’ All Incomes and Gains.
‘Debit’ All Expenses and Loses.
In an ideal scenario, BoP should be zero. But it rarely happens.
Either a country has surplus BoP(favourable) or Deficient BoP(unfavourable). Surplus BoP happens when exports are more than imports. Deficient BoP means when imports are more than exports. In India’s case we mostly have a deficient BoP.
Components of BoP
BoP consists of two main components:
- Current Account
- Capital Account
Meaning of Balance of Trade:
Balance of trade(BoT) is a part of Balance of Payment. BoT is the difference between visible goods of a country with the rest of the world. It comprises of goods which can be seen, touched and measured. It is also known as Merchandise goods. It is a part of current account in Balance of Payment. It is also known as net exports or trade balances.
Balance of Trade = Export of Goods-Import of Goods.
Now let’s look at the difference between Balance of Payment and Balance of Trade.
Difference Between BOP and BOT
Difference Between BOP and BOT – Meaning
Balance of Payment – Balance of payment(BoP) is an accounting statement which records economic transactions between Normal Resident of a specific country with the rest of the world.
Balance of Trade – Balance of Trade is the difference between visible goods of a country with the rest of the world
Difference Between BOP and BOT – Components
Balance of Payment – It consists of current account and capital account.
Balance of Trade – It is part of current account of Balance of Payment.
Difference Between BOP and BOT – Records
Balance of Payment – It consists of visible goods, invisible goods,unilateral transfers and capital account.
Balance of Trade – It consists only in trading of visible goods and merchandise goods between a country and rest of the world.
Difference Between BOP and BOT – Capital transactions
Balance of Payment – It records transactions of capital nature.
Balance of Trade – It maybe surplus, deficient or in equilibrium.
Difference Between BOP and BOT – Indicator
Balance of Payment – It is better indicator of nation’s economy.
Balance of Trade – Since it’s a part of Balance of Payment it’s not a true indicator of nation’s economy.