Balance of Payments ami Balance of Trade

As we have already said, balance of trade refers only to the merchandise balance or balance of visible transactions alone. On the other hand, the balance of payments refers to the sum of both thc balance on visible as well as invisible items. It also includes capital  and financial accounts. We have already c plain the meaning of he terms visible and invisible. To repeat, visible items arc those which arc duly recorded all the customs barriers, while invisible transactions arc incapable of being so recorded. For the country’s overall international economic position, what really matters IS Its balance of payments and not the balance of trade alone. A country may have a deficit on trade balance, while it may have a surplus ill balance of payments on current   England for a long time used to have a deficit on trade account and this deficit w!s more than made up by surplus on invisible account so that her balance of payments position remained favourable. Ax against this, India under the British rule used to have a favourable trade balance, but her surplus Oil balance of payments was considerably reduced because of a host of invisible payments like the ‘home charges’ that she had to make to England

How Does the Balance of Payments Balance?

The of payments (on current account) is said to balance when the total of the credit items is exactly equal to the total of the debit items. But, it is seldom so. Hence, there is either a deficit or a +surplus in the current account of the balance of payments. This deficit or surplus is met by transfers in the capital account. In other words, the balance of payments is made to balance through the capital account. Suppose there is a deficit in the current account of thc balance of payments. This deficit will be covered by (a) drawing upon the country’s foreign exchange reserve, (b) by borrowing from abroad, and (c) by exporting gold. Now the I.M.F. grants temporary accommodation to bridge the gap.