Balance of Payments | Balance of Trade | Difference in Balance of Payment and Balance of Trade

Balance of Payment

Balance of payment shows the total economic transactions between a country and the rest of world and it includes transactions between visible goods and invisible goods in a given year.

Structure of Balance of payment:

The balance of payment account of a country is constructed on the basis or on the principle of double book keeping. Each transaction is entered on the credit show on the left side and debit on the right side. The credits and debit items are shown vertically in the BOP account of a country. Horizontally they are divided into three categories which are as follows:

a)    The Current Account covers the transactions other than those in financial items that involve economic values and occur between resident and nonresident entities.

b)    The Capital Account mainly covers capital transfers and acquisition / disposal of non produced, non financial assets.

c)     The Official Reserve Asset Account cover transactions in assets that are considered by the Central Bank, to be available for international settlements.

Types of Balance of Payment

We can classify Balance of Payments into three kinds:

1) Balanced BOP 

2) Favorable BOP

2  3) Adverse BOP 

   Balanced Balance of Payment

When total receipts from foreigners equals the payments made to foreigners the BOP is balanced or is said to be in equilibrium.

B= R_f = P_f (BOP is in equilibrium)

Here ,

B = Balance of payment

R_f = Receipts from foreigners

P_f = Payments made to foreigners

Favorable BOP

When total receipts from foreigners exceeds the payments made to foreigners then BOP is in surplus or favorable.

When,
R_f - P_f > 0 (surplus in BO or favorable BOP)

BOP Deficit or Adverse BOP

When total payments made to foreigners exceeds than the total receipts from foreigners then BOP is adverse or it is called balance of payment deficit.
When,
R_f - P_f  < 0 Rf < Pf (Deficit in BOP)

Major Causes of Deficit in Balance of Payment

Major causes or basic causes of deficit in BOP are as follows;

1.    Decrease in Exports

When the exports of the country declines as compare to its imports then deficit arises.

2.    Increase in Imports

Although exports are doing considerably well but if Import are greater that the country’s exports which causes outflow of foreign reserves from the country and thus deficit BOP arises.

3.    Currency Rate of Exchange

Instability of the currency rate of exchange of country also brings disbalance in its balance of payment.

4.    Economic Integration

Economic integrations or economic unions taking place in the world is also one of the major causes which is affecting the world trade. Country's trade is also decreased because of these integrations and eventually making BOP adverse.

5.    Inflation

At the point when there is inflation in a country, individuals will purchase from outside, homegrown or domestic market of numerous items will go down. As the homegrown market begins to decline - country's merchandise makers will attempt to diminish their items cost. Then the nation individuals will purchase from their home makers in the future. Thus, inflation is one of the strongest factors to adverse BOP.

6.    Expensive import of Services

This is also an important reason which makes BOP unfavourable. In a developing country and they don't have enough services for trade and for making trade possible they have to import the services from other countries and they are very expensive.

7.    Trade Restrictions

Due to many trade restrictions by other countries of the world country can not export its products properly. This causes deficits in BOP.

Ways of Controlling Deficit in BOP

(1) By increasing Exports:

Government can control deficit in BOP by increasing exports of the country.

(2) By Decreasing Imports:

Government can decrease imports so that exports will exceeds imports and this will make BOP favorable.

(3) By Making Exchange Rate Stable:

Government can also bring stability in the currency rate to improve BOP. Fiscal and Monetary Policies are key tools.

(4) Reduction in Importing Services:

Government can reduce importing services by making our own resources available or by utilizing own resources:

(5) Decreasing import if Pulses or by Developing Agricultures:

If country has agriculture capacity, the government should have to develop the agricultural facilities of the country so that we can be in the production of pulses.

(6) Quality Control:

Government has to keep a check on the quality of high export products in order to make our products demand in other countries.

Difference between Balance of Payment (B.O.P.) and Balance of Trade (B.O.T.)

Balance of Payment	Balance of Trade
The BOP refers to the difference in the money value of the total exports and imports including visible and invisible items both and transfer transactions.	The BOT reflects the difference between the money value of total exports and imports of visible goods only and it cover the invisible trade and transfer transactions.
The BOP transactions refers to the transfer of ownership of goods and services.	The BOT transactions refers to the transfer to ownership of goods.
The BOP gives rise to money rights and the money obligations between a country and a number or countries taken collectively.	The BOT creates money rights and obligations between two countries in trade relation with each other.
THE BOP which gives net trading result between one country and the rest of the world.	The BOT gives the net trading result between two countries.
The BOP gives a complete picture of the financial strength and economical patentability of a country.	The BOT simply gives the net effect of the transfer of goods to and from a country to another.