Balance of Trade and Balance of Payments
‘Balance of Payments’ is a term that is used to refer to an accounting record for all the monetary transactions conducted by a country with other countries within a specified period of time. Usually one year. Balance of Payments is actually a numerical summary of all international transactions, and is preferably presented in the country’s domestic currency. In a balance of payments document, exports are recorded as positive items, due to the fact that they earn revenue for the government. Imports and other expenditures are recorded as negative items. The balance between these two is very important, and is perhaps the reason why such a transaction is referred to a balance of payment. In a balance of payments, all the items need to measure up to each other, that is, they should all add up to zero in order for there to be a perfect balance. Even if the country is in a deficit situation, where it is spending more than what it is earning, this deficit ought to be countered by returns from investments, utilizing of reserves, or borrowing of loans either from other sovereign nations or from international financial institutions. In essence a balance of payments is an accounting statement, much like a balance sheet, and should be perfectly balanced for it to qualify as such.
Two primary components of a current account are a current account and a capital account. A current account is essentially the recordings of the country’s financial situation at that very moment, while the capital account is involved with the exchange, or transfer of assets and items between that country and its trading partners. Although there always has to be a perfect balance in a balance of payments, it is generally acceptable for there to be imbalances in either the capital account or the current account of a country at any given moment in the economy.
A ‘balance of trade’ on the other hand, is a relationship between the country’s imports and exports, in monetary value. A country is said to be experiencing positive balance of trade, or surplus, if the value of its exports exceed the value of its imports. Conversely, a country is said to be in deficit, or to be having a negative balance of exchange, if the value of its imports is higher than the value of its exports. Needless to say, countries strive to have a positive balance of trade, and it is imperative upon governments to do as much as possible to boost the country’s income and at the same time decrease the country’s expenditures.
Perhaps one of the most notable emerging issues that have a direct issue on the balance of trade as well as the balance of payments would have to be taxes and exchange rates. Governments all over the world have been under pressure to lower or remove duty on some goods in order to boost their income. Also, governments have had a lot of pressure to lift trade barriers and restrictions in order to encourage trade with the international community. This is indeed a welcome trend for the global economy.