Chapter 33, Problem 33.1LO

To determine

:

To state the differences between the balance of trade (BOT) and the balance of payments (BOP). To explain the components of BOP.

Concept Introduction:

Balance of Trade - The monetary value of the net exports of tangible goods and servicesless imports of visible goods and servicesof a country is known as the Balance of trade (BoT).It is the largest component of a country’s balance of payments and is used as a measure of relative strength of a country’s economy.

Balance of Payment - This BoP records all international payments and records all economic transactions between the residents of a country and the rest of the world. The transactions include imports and exports of goods and services and capital, as well as transfer payments such as foreign aid and remittances.

Explanation of Solution

:

The Balance of Trade (BoT) is a subset of the overall record of all international economic transactions of the country as reflected by its Balance of Payments (BoP). The two statements taken together summarize the country’s transaction in goods, services, and all other assets including capital transfers with the rest of the world.

BoT is the most significant component of the current account of the BoP of the country. The statement can be eventually favorable, unfavorable or balanced.

If, E>M, then BoT is known to show a Trade Surplus

If, E<M, then BoT is known to show a Trade Deficit

If, E=M, then BoT is known to show a Trade Equilibrium

While the BoT is depictive of a partial view of the country’s economic position in a given year, the BoP effectively represents the overall economic position of the country.

The BoP recognizes all commercial transactions of the country on goods, services and income during a defined period/year.

The Balance of Payments is broadly divided into three accounts- Current Account, Capital Account and Errors and Omissions.

The BoP is always balanced and the accounts as explained below so capture the receipts and payments of the country that the statement is not only a summary but a defined economic guideline for economic policies and initiatives.