BALANCE OF TRADE

Balance of Trade is an accounting statement with imports and exports of only visible items are recorded.

Balance of Trade = exports of visible items - imports of visible items

Balance of trade is also prepared like the balance of payment account. It also has a debit and credit side.

The balance on Balance of Trade

1. Balanced BOT - when a debit side is equal to credit side it is termed as balanced BOT.

2.Deficient BOT - when a debit side is more than credit side it is termed as deficit BOT.

3.Surplus BOT- when credit side is more than debit side it is termed as surplus BOT.

BASIS:

BALANCE OF PAYMENT

BALANCE OF TRADE

MEANING

Balance of payment is an accounting statement showing all transactions between the normal resident of the country and the rest of the world.

Balance of trade is the difference between the number of exports and imports of visible items.

COMPONENTS

Balance of payment includes visible items , invisible items, unilateral transfers, and capital transfer.

Balance of trade includes imports and exports of visible items only.

CAPITAL TRANSACTIONS

It records all capital transactions.

It does not record capital transactions.

SCOPE

It is a wider concept & includes BOT.

It is a part of BOP account.

SETTLEMENT

Unfavorable BOT can be settled using BOP.

In favor of BOP, can not be settled using BOT.

Components of Balance of Payments

Balance of payment can broadly be categorized into:

1.Current Account- Current account is an account which records import and exports of all goods and services and unilateral transfers during a given period of time.

Components of current account-

• export and import of visible item( goods)- all imports and exports of visible items that are goods are recorded under the current account of b.o. p.
•   exports and imports of invisible items(services)- all imports and exports of invisible items that are services are recorded under the current account of b o p.
• United transfers to and from abroad- all United transfers including gifts Grand scholarships and other one-sided transactions are also recorded in the current account.
• income received to and from abroad- it includes all the income received and paid by a normal resident of a country from the rest of the world. it also includes incomes in the form of interest rent for and profits.

2. Capital account- Capital account under b o p records all the transaction which leads to change in asset or liabilities of a country or its government.

Components of capital account

1. Borrowings and lending to and from abroad-

• all the boring from abroad by private sector government, etc. the money received from the rest of the world in the form of borrowing and repayment of the loan is recorded on the credit side of a BOP.
• all the learnings to abroad by government-private sector etc in the money paid to inform of loan granted and repayment of loan taken is recorded on the debit side.

2. Investment to and from abroad- it includes;

• Any kind of investment by rest of the world in domestic securities real estate etc . the money received as the investment is recorded on credit side.
• Any kind of investment made in foreign country info what is real estate etc all the money paid as an investment is recorded on the debit side.

3. Change in foreign exchange reserve -

• foreign exchange is a financial asset of government kept by Central Bank. an increase in reserve will reduce the cast available as foreign exchange is purchased by spending cash and hence recorded on the debit side and decrease in reserve will increase in cash available as foreign exchange is sold for cash and hence recorded credit side.

Balance on Capital Account

All the payments made on the count of capital account are recorded on the debit side and all the payments received on the account of capital account are recorded on the credit side.

• The net value of the debit and credit side is the balance of the capital account.
• The surplus in the capital account arises when the credit side is more than the debit side.
• Deficit and capital account arises when the debit side is more than a credit side.

AUTONOMOUS AND ACCOMODATING ITEMS

All the transactions in b o p are categorised into autonomous items and accommodating items.

Autonomous Items-

Autonomous items refer to those items which take place due to some economic reasons that are profit maximization.

These are also known as 'above the line item ‘. Autonomous items are independent of the balance of payment account. autonomous items take place on current and capital account.

• On current account exports and imports of goods is the autonomous item.
• and Capital account receipts and payments of long term loans by private individuals are autonomous items.

Accommodating Items-

Accommodating items are those items which are undertaken to cover the deficit of surplus in an autonomous transaction that is these are the result of the autonomous transaction.

These transactions are also known as' below the line items'

Let us differentiate between autonomous and accommodating items with the help of an example.

In the above example, all the transactions until point number 7 autonomous items are there occur due to some economic reasons. but. Number it is an accommodating item as this is done to cover a deficit in BOP account.

Deficit (Disequilibrium) in the Balance of Payments

Deficit in the Balance of payments account arises when total in falls on account of autonomous transactions and less than total output outflows on account of such transaction.

Deficit=inflow > outflows.