Chapter 33, Problem 33.1LO

To determine

Evaluating the differences between the balance of trade (BOT) and the balance of payments (BOP).

Explanation of Solution

Balance of trade captures only the goods that are imported and exported by a country. Whereas balance of payments captures all transactions related to goods and services that are recorded. Capital transfers are not included in the balance of trade, but are included in the balance of payments. Balance of trade gives only a partial view of a country’s economic status, whereas balance of payments gives a clear view of economic condition of a country. Balance of trade is a component of the current account balance of payments, while the balance of payment components includes current account as well as capital account.

Economics Concept Introduction

Introduction:

Balance of trade:

Balance of trade is the difference between the value of a country’s imports and exports of goods. 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 payments:

The balance of payments furnishes all transactions made between entities in one country with 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.