Balance of trade and balance of payment. - SS1 Commerce Lesson Note

Balance of Trade:

The balance of trade refers to the difference between the value of a country's exports and the value of its imports over a specific period, usually a year. It focuses specifically on goods (tangible products) that are bought and sold between countries. When a country's exports exceed its imports, it has a trade surplus, indicating that it is exporting more than it is importing. Conversely, when a country's imports exceed its exports, it has a trade deficit, indicating that it is importing more than it is exporting.

Balance of Payments:

The balance of payments, on the other hand, is a broader measure that takes into account all economic transactions between residents of one country and residents of other countries over a specific period, usually a year. It includes not only trade in goods but also trade in services (such as tourism, transportation, and banking), income flows (such as wages, interest, and dividends), and financial transfers (such as foreign aid and remittances). The balance of payments is divided into three main components: the current account, the capital account, and the financial account.

The current account captures the balance of trade in goods and services, as well as income flows. It reflects the net result of a country's exports, imports, and income earned or paid to foreign entities. A surplus in the current account indicates that a country is receiving more income from abroad than it is paying, while a deficit indicates the opposite.

The capital account records the transfer of financial assets between countries, including capital investments, loans, and acquisitions of assets. It reflects changes in ownership of assets and liabilities.

The financial account tracks changes in ownership of financial assets and liabilities, such as foreign direct investment, portfolio investment, and changes in reserve assets held by the central bank.