Thursday, 1 May 2014

Balance of Trade(BoT) v/s Balance of Payment(BoP)



Basis of Difference
Balance of Trade(BoT)
Balance of Payment(BoP)
1. Definition
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.
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 transfers.
2. How is it calculated?
BoT= Net earnings on exports – Net payment made for imports.
BoP= BoT + Net earnings on foreign investment + Cash Transfers + Capital Account.

OR
BoP= Current Account + Capital Account
3. When is it considered as favorable or unfavorable?
·         If export is more than import, at that time, BoT will be favorable.
·         If import is more than export, at that time, BoT will be unfavorable.
·         BoP will be favorable, if the country has surplus in current account for paying all past loans in the capital account.
·         BoP will be unfavorable if the country has current account deficit and it took more loan from foreigners.
4. Solution of being unfavorable?
To Buy goods from domestic market as far as possible.
To stop or reduce taking loans from foreign countries.

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