INDUS UNIVERSITY

MACRO ECONOMICS – Third Semesters

BALANCE OF TRADE / BALANCE OF PAYMENT
SUBMITTED TO SIR ABDUL KARIM
DATED: 16-06-2019
Iqbal 349-2018
Moiz 565-2018
Sabee Ahmed 1199-2018
Rizwan 1351-2018

Balance of Trade:
It is the comparison between value of export and imports of the physical items (goods, not
services) of a Country in a given period of time usually a year.

A country has to deal with other countries in respect of 3 items:-

Visible items: which include all types of physical goods exported and imported.

Invisible items: which include all those services whose export and import are not visible. e.g.
transport services, medical services etc.

Capital transfers: which are concerned with capital receipts and capital payment.

Balance of Payment:
It is the record of all economic
Transaction between the resident of the country and rest of the world in particular period of a
year or more commonly over a year.
Components of BOP

The three major components of balance of payment are as follows:

1. Current Account
2. Capital Account
3. Balancing Item

Current Account
It refers to an account which records all the transactions relating to export and import of goods
and services and unilateral transfer It contains the receipts and payments relating to all the
transactions of visible items, invisible items and unilateral transfers It shows the net income
generated in the foreign sector.
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.

Capital Account is used to:

 It is related to claims and liabilities of financial nature

 Finance deficit in current account; or
 Absorb surplus of current account

Balancing Item
It is simply an amount that accounts for any statistical errors and assures that the current and
capital accounts sum to zero.

By the principles of double entry accounting, an entry in the current account gives rise to an
entry in the capital account, and in aggregate the two accounts automatically balance current
account.

BASIS FOR
BALANCE OF TRADE BALANCE OF PAYMENT
COMPARISON

Meaning Balance of Trade is a statement Balance of Payment is a statement

that captures the country's export that keeps track of all economic
and import of goods with the transactions done by the country with
remaining world. the remaining world.

Records Transactions related to goods only. Transactions related to both goods

and services are recorded.

Capital Transfers Are not included in the Balance of Are included in Balance of Payment.
Trade.

Which is better? It gives a partial view of the It gives a clear view of the economic
country's economic status. position of the country.

Result It can be Favorable, Unfavorable or Both the receipts and payment sides
balanced. tallies.

Component It is a component of Current Current Account and Capital Account.

Account of Balance of Payment.