BALANCE OF TRADE and BALANCE OF PAYMENT

BALANCE OF TRADE and BALANCE OF PAYMENT

 

               Here, we would like to make a sharp distinction between balance of international trade and balance of international payments as they are often confused by the readers. By balance of international trade we mean, statement that takes into account the total value of exports and imports of visible commodities of a country during a year. By visible commodities is meant the commodities which when exported or imported are recorded to the trade accounts at the ports. Balance of imported are recorded to the trade accounts at the ports. Balance of payments, on the other hand, is a statistical statement of income and expenditure both of the visible and invisible items of trade on international account during a calendar year. Invisible items are those items which are not shown in the trade accounts at the time of their imports. Under this heading comes all the receipts and payment made for the international services such as banking, shipping, educational, insurance, travel, etc. when the total value of visible exports is in excess to total value to visible imports during a year, the country is said to have favourable or positive balance of trade. Conversely, when the total value of goo imported exceeds the total value of goods exported, the country is said to have unfavourable balance of trade. The mercantilists believed that a favourable balance of trade indicates that country is heading towards prosperity while unfavourable balance of trade is a sign of approaching national disaster. When exports are greater than imports, they say gold is brought into country and national wealth in increased. When imports exceed exports, gold is taken out of the country and this leads to reduction in national wealth. The importance of service transactions and other invisible item was under estimated by them.

       The modern economists, however, differ with this view. They are of the opinion that a country’s prosperity or adversity in not judged by its favourable or unfavourable balance of trade but by its favourable or unfavourable balance of payment in England, for instance with the exception of 1958 had an adverse balance of trade since 1890 but its national wealth during these long years was increasing at a very last rate. It was because of this fact that its debt balance visible trade was offset by its credit balance on invisible trade. We conclude therefore, that favourable balance of trade is not an index of the economic prosperity or poverty of the country. It is the balance of payment which serves as a better guide to its economic position. If a country has persistently unfavourable balance of payments, it can be safely taken as a sing of apporoaching national disaster. Temporarily, a country may have favourable or unfavourable balance payments but on the long run, it must balance its payment, otherwise, it will be inviting troubles.