What is Balance of Trade (BOT)

In todays world, all countries import some goods and services from other
countries, and they also export certain other goods and services which are surplus
in their country.
The difference between the value of goods and services exported out of a country
and the value of goods and services imported into the country.
If a country has a balance of trade deficit, it imports more than it exports, and if it
has a balance of trade surplus, it exports more than it imports.
The balance is said to be favourable when the value of the exports exceeded that
of the imports (i.e.exports exceed imports), and unfavourable when the value of
the imports exceeded that of the exports (i.e. imports exceed exports).

What are the Factors That Affect Balance of Trade

Factors that can affect the balance of trade include:

The cost of production (land, labour, capital, taxes, incentives, etc.) in the
exporting economy vis--vis those in the importing economy;

The cost and availability of raw materials, intermediate goods and other
inputs;

Exchange rate movements;

Multilateral, bilateral and unilateral taxes or restrictions on trade;

Non-tariff barriers such as environmental, health or safety standards;

and

The availability of adequate foreign exchange with which to pay for imports;

Prices of goods manufactured at home (influenced by the responsiveness of

supply)

Difficulties in Measuring Balance of Trade

Sometimes it is difficult to measure accurately the Balance of Trade because of
problems with recording and collecting data. One interesting example is the
problem faced when official data for all the world's countries are added up. It is
reported that in such a case, exports exceed imports by almost 1%. The question
which baffles is as to why this difference? Normally, both these should match.
However, it appears that the world is running a positive balance of trade with itself.
This cannot be true, because all transactions involve an equal credit or debit in
the account of each nation. The discrepancy is widely believed to be explained by
transactions intended to launder money or evade taxes, smuggling and other
visibility problems. However, especially for developed countries, accuracy is likely.

What is Balance of Payment

Balance of Payment is a system of recording all the economic transactions of a
country, with the rest of the world over a period, say one year.

Typically, the transactions included in BoP are country's exports and imports of
goods, services, financial capital, and financial transfers. Thus, in nut shell we can
say, the BoP accounts summarize international transactions for a specific period,
usually a year, and are prepared in a single currency, typically the domestic
currency for the country concerned.

To understand the same better, we can conclude :

The balance of payments (BOP) is an accounting of a country's international
transactions for a particular time period.

Any transaction that causes money to flow into a country is a credit to its
BOP account, and any transaction that causes money to flow out is a debit.

The BOP includes the current account, which mainly measures the flows of
goods and services; the capital account, which consists of capital transfers
and the acquisition and disposal of non-produced, non-financial assets; and
the financial account, which records investment flows.

The BOT is typically the biggest bulk of a country's balance of payments as it makes up total
imports and exports.
BOP is said to be favourable balance of payments, when more payments are coming in than
going out, and will be unfavourable when less payments are coming in than what is going out.

The Balance of Payments Divided:

The BOP is divided into three main categories: (a) the current account,(b) the capital
account and (c) financial account. Within these three categories are sub-divisions, each of
which accounts for a different type of international monetary transaction.

BALANCE OF TRADE VS BALANCE OF PAYMENT OR BOT VS BOP

(What is the difference between Balance of Payment and Balance of Trade)
Basis of
Difference Balance of Trade (BOT)

1.
Definition

Balance of Trade is defined as

'difference between export and
import of goods and services'

2. How Is It BOT = Net Earning on Exports Calculated? Net payment made for imports

Balance of Payment (BOP)

Balance of Payment is defined as the 'flow of

cash between domestic country and all other
foreign countries'. It includes not only import
and export of goods and services but also
includes financial capital transfer.

BOP = BOT + (Net Earning on foreign

investment i.e. payments made to foreign
investors) + Cash Transfer + Capital Account
+or - Balancing Item
or
BOP = Current Account + Capital Account + or

- Balancing item ( Errors and omissions)

3. When is
it
considered
as
Favourable
or
Unfavourab
le?

If export is more than

import, at that time, BOT will be
favourable. If import is more than
export, at that time, BOT will be
unfavourable.

4. Solution
of being
To Buy goods and services
Unfavourab from domestic country.
le

5. Factors

Following are main factors which

affect BOT
a) cost of production
b) availability of raw materials
c) Exchange rate
d) Prices of goods manufactured at
home

Balance of Payment will be favourable, if the

country has surplus in current account for
paying your all past loans in her capital
account.
Balance of payment will be unfavourable, if
country has current account deficit and it took
more loan from foreigners. After this, it has
to pay high interest on extra loan and this will
make BOP
unfavourable.

To stop taking of loan from foreign countries.

Following are main factors which affect BOP

a) Conditions of foreign lenders.
b) Economic policy of Govt.
c) all the factors of BOT