Friday, August 28, 2009
Difference between Balance of Trade and Balance of Payments
Balance of trade represents the difference between visible exports and imports of a country. Balance of payments represents invisible items included in addition to visible items.
Balance of Payments includes the following items.
1. Export and Import of Commodities: Every country exports some goods and imports some goods. By exporting goods it becomes a creditory country on the other hand by importing goods it becomes a debtor country.
2. Cost of Transportation: Cost of transportation has to pay for export and import of goods. If export and import trade are carried in foreign shipping then country is a debtor country in respect of this item.
3. Interest on Capital lent Abroad: Rich and wealthy countries lend their capital to needy countries. The debtor countries have to pay interest on borrowed capital.
4. Banker’s Commission: Banks working in foreign countries earn commission and foreign countries stand as debtors to the countries to which the banks belong.
5. Expenses of Tourists: Foreigners may visit a country for tourism. They spent money in that country where they go for tourism. Such expenses may increase the value of import or export.
6. Foreign Education: When a student goes abroad for higher studies then he spent a lot of money in that country which increase the value of import or export.7. Political Expenses: For payment of diplomatic services a country spends money in foreign country. Such expenses must be included in the calculating indebtedness. In view of Meade visible and invisible exports and imports are regarded trade items on the other hand the loans and grants which are taken or given to different countries are regarded as transfer item. The difference of trade items is called as balance of trade. But when transfer items are included in trade item, it is called balance of payment. Tags: International Relations
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