Foreign Trade: Balance of Payments

Foreign Trade

Meaning of Balance of Payments:

It is an accounting statement that provides a systematic record of all the economic transactions, between residents of a country and the rest of the world in a given period of time.

Structure of Balance of Payments:-

a) Balanced BOP: BOP is balanced when receipts of foreign exchange are equal to payments of foreign exchange.

b) Surplus BOP: BOP is surplus when receipts of foreign exchange are more than payments of foreign exchange.

c) Deficit BOP: BOP is in deficit when receipts of foreign exchange are less than payments of foreign exchange.

Meaning of Balance of Trade:

It refers to difference between the amounts of exports and imports of visible items(goods).

Balance of Trade= Exports of goods – Imports of goods

Difference between Balance of Trade and Balance of Payments:

 Basis                                          Balance of Trade(BOT)                       Balance of Payments(BOP)

Meaning                                 It refers to difference between                       It is an accounting statement that provides a

amounts of exports and imports of               systematic record of all economic                                                                            visible items.                                                     transactions , between residents of a country                                                                                                                                     and rest of the world in a given period of time.

Components                          It includes only visible items.                          It includes visible items, invisible items and                                                                                                                                       capital transfers.

Components of Balance of Payments

a) Current Account:- It refers to an account which records of all the transactions relating to export and import of goods and services and unilateral transfers during a given period of time.

b) Capital Account:- It records all those transactions, between the residents of a country and the rest of the world, which cause a change in the assets or liabilities of the residents of the country or its government.

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