BALANCE OF TRADE
Balance of Trade:
It is the difference between the value of goods
exported and value of goods imported.
BOT = Export value – Import value
[Only Tangible/ Visible goods]
It is a Narrow concept as Compared to Balance of
payments.
Types of Balance of Trade
Favourable or Surplus Unfavourable or Deficit Equilibrium
Balance of Trade Balance of Trade Balance of Trade
BALANCE OF PAYMENTS
It is a statement that records all economic
transactions of a country with the rest of the
world.
Balance of payments includes the following
Visible items: It includes all types of physical goods exported & imported. These are seen crossing the
01
borders. e.g. Machines and many other tangible goods.
02 Invisible items: Which include all types of services. These are invisible like Banking Services, shipping
services, insurance services, etc.
03 Unilateral transfers: These are one-way transfers of money, goods or services from one country to
another. These are transfer for free e.g. gifts, grants, donations, aid to flood victims, etc.
04 Capital transfers: Which are connected with capital receipts and capital payments. These involves
transfer of capital Assets
Balance of Payment have two Accounts
Current Account Capital Account
in BOP in BOP
Current Account in Balance of payment
It is that account in BOP which records export and import of goods, services and unilateral transfers.
Components of Current account in a BOP
Export and import of goods
Export and Import of Service
Unilateral transfers
•Current account surplus
•A country has a current account surplus when it exports more than it imports, bringing in more money from
abroad than it spends. This indicates that the country is a net creditor to the rest of the world.
•Current account deficit
•A country has a current account deficit when it imports more than it exports, spending more on imports and
foreign investments than it earns from exports. This indicates that the country is a net debtor to the rest of the
world.
Capital Account in Balance of payment
It is that account of BOP which records all such transactions between resident of a country and rest of the
world which cause a change in Assets or liabilities of the Resident of a country or its government.
Components of Capital Account in BOP
Foreign Investments
a) Foreign direct investment (FDI)
b) Portfolio investment (foreign institutional investment)
Borrowings / Loans
a) Commercial Borrowings
b) Borrowing from international monetary fund (IMF)
Change in foreign exchange reserves
Equilibrium in BOP: Current account balance + Capital account balance = 0
There is no movement of official reserves of the Central Bank.
i.e. inflow of foreign exchange = outflow of foreign exchange.
Disequilibrium in BOP: When current account Balance + Capital account Balance is not equal to zero. (It
may be Positive and Negative).
(i) Surplus BOP: Here autonomous receipts are more than the autonomous payments.
(ii) Deficit BOP: Here autonomous receipts are less than the autonomous payments.
BOP is always balances, in case there is imbalance, it is corrected through accommodating transactions.
POINTS TO BE REMEMBER
A Negative Balance in Current Account of the Balance of payment is usually compensated by a surplus in
the Capital Account in Balance of payment.
A Negative Balance in Capital Account of the Balance of payment is usually compensated by a surplus in
the Current Account in Balance of payment.
A Negative Balance in Balance of Trade is usually compensated by a surplus in the Current Account in
Balance of payment.
But a Negative balance in Balance of Payment Account is not compensated by the balance of Trade
Account
Difference between Autonomous and Accommodating Transactions
Autonomous Transaction Accommodating Transactions
Autonomous items refers to those international Accommodating items refer to those transaction
which occur due to some economics motive such which take place to cover deficit or surplus in
as profit maximization e.g. Import of machinery autonomous transactions. e.g. withdrawal from
from Japan, FDI, etc. foreign exchange reserve, loan from IMF, etc. to
maintain BOP
These items are independent in nature These items are dependent in nature
These item take place on both current and capital These item take place only on capital account
account
These items are also known as above the line These items are also known as below the line
items as they are recorded as first item before items, as they are recorded as secondary item
calculating deficit or surplus in BOP after calculating deficit or surplus in BOP
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