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 Balance Of Trade And Balance Of Payments


The BOP is one of the oldest and most important statistical statements for any country in the realm of its international trade status. It is a systematic record of all economic transactions between the residents of one country and of the residents of the rest of the world in a year. Since we merely record all receipts and payments in international transactions using double entry system, the balance of payments always balances in an accounting sense. Then why do we say that the balance of payments of a particular country is favourable or unfavourable? In order to understand this, let us take a hypothetical example of a country's balance of payments. The left side of the given table shows the receipts, i.e., all the ways in which a country can get foreign currency and the right shows the payments or how the foreign currency is spent.







1. Exports of goods

2. Export of services

3. Unrequited receipts

(gifts, indemnities etc. from


4. Capital receipts

(borrowing from, capital

repayment by or sale of assets

to foreigners)

9. Net changes in external













5. Imports of goods

6. Imports of services

7. Unrequited payments

(gifts, indemnities etc. to


8. Capital payments

(lending of capital,

repayment to, or

purchase of assets from










Total receipts


Total payments



Example Explained in Detail

One Simple way of earning foreign currency is by exporting goods Row 1 of the table shows that the country has exported goods worth Rs. 550 crores. Similarly row 5th shows that the country has imported goods worth Rs. 800 crores. These two rows together constitute balance of trade and describe the country's visible trade.
Another way by which a country can earn foreign currency is by selling services to foreigners during the accounting period. Thus, the country could earn foreign currency by providing shipping services, banking services and insurance services. It could also get interests, royalties and dividends on investments made abroad or income through tourism. Together these items constituted exports. Row 2 of the above table shows that the country has invisible exports (i.e., .exports of services) worth Rs. 150 crores. In an analogous way, Row 6 shows payments which residents of the particular country make to foreigners for similar services, (shipping, banking and insurance services, payments the residents make as tourists abroad and payments in the form of dividends, interests and royalties). Rows 1, 2, 5 and 6 together constitute trade items whereas rows 3 and 7 represent transfer items i.e., those items which do not involve any present for future payments, i.e., they are free. Thus the items in Row 3 present receipts which the residents of the country in question have received 'free' without making any payments. Gifts, assistance or indemnities is received from foreigners are transfer receipts and come under the unrequited receipts. Similarly, Row 7 shows payments which the residents of the country inquisition make in the form of gifts, assistance, etc. Rows 1, 2, 3, 5, 6, 7 list all the receipts and payments made for the current period of time. These items represent flow magnitude, i.e., they have the effect of increasing or decreasing the flow of income in the country. For example, when Indian sells it’s currently produced goods to foreign countries, the producers and these goods get income.

Rows 4 and 8 are different. They express debts and claims and represent changes in stock magnitudes. When a country (whether individuals or companies) borrows money from abroad it gets foreign money. Similarly, when it sells its assets (i.e., land, building, plants shares, etc.) to foreigners, it gets foreign currency or when the foreigners who had earlier borrowed from the country in question return the money, it gets foreign currency. In an analogous way, we have Row 8. Row 8 shows capital payments in the form of lending abroad, payments for purchasing assets abroad and repaying the capital borrowed. Rows 4 and 8 also include changes in the country's stock of gold and reserves of foreign currency. These rows represent changes in stock magnitude unlike other rows which represented flow magnitudes. A country's stock consists of land, building, houses, plants, etc., when it buys or sells them, it enjoys in stock transaction, which is reported in the capital account of the balance of payments. In a nutshell, we may say that a country can acquire foreign currency in two fundamental ways-by exporting goods and services or by importing capital. These items, therefore, are show on the receipt side of a country's balance of payments. On the other hand, a country can spend its foreign currency in two ways i.e., by importing goods and services or by exporting capital. These are listed on the payments side.

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