Balance of Trade & Balance of Payment
A countries balance of payments account records all the flow of money between residents of that country and the rest of the world. A country’s balance of payments thus shows the difference between the receipt for goods and services exported and payments made for goods and services imported and movements of capital in and out of the account. The two main parts of the balance of payments accounts are the current account and the capital account.
The current account records payments for imports and exports of goods and services. The balance of trade or visible balance records imports and exports of physical goods only. The current balance includes both the balance of trade and net invisible trade balance. A negative balance is a deficit balance and a positive balance is a surplus balance. In the table below there is a balance of trade deficit for 2001 (-800) and in 2002 (-1000). There is a current account surplus of US$200MN in 2001 but a deficit of US$300MN in 2002.
Example BOP for Country X (US$MN)
Balance of Trade/Visible balance = Export ($) – Imports ($)
Invisible balance = Net transportation +net interest & profits + net government
Net figures are arrived at by subtracting payment from the receipt for each service. For example, subtracting the out flow of money spent by locals on trips overseas from payments received from visiting tourist, will give a net figure for tourism.
Current Balance = visible balance + invisible balance
The capital account
The capital account or financial account shows the flows of capital between countries i.e. Flows of capital into a country and flows of capital leaving a country.
The Balance of Payments Accounts must balance
The sum of the current account and the capital account must be zero. A firm’s balance sheet shows its financial position after one year of trading. The balance of payment similarly shows the countries financial position on a yearly basis. Similar to a firm’s balance sheet the balance of payments account must balance, since a debit or a credit balance must be covered in some way.
Credit items are- Inflows /receipts
Debit items are- outflows /payments