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Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Complete Information

Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Complete Information

Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments : Economics focuses on the behavior and interactions of economic agents and how economies work. Consistent with this focus, textbooks often distinguish between microeconomics and macroeconomics. Microeconomics examines the behavior of basic elements in the economy, including individual agents and markets, their interactions, and the outcomes of interactions. Individual agents may include, for example, households, firms, buyers, and sellers. Macroeconomics analyzes the entire economy (meaning aggregated production, consumption, savings, and investment) and issues affecting it, including unemployment of resources (labour, capital, and land), inflation, economic growth, and the public policies that address these issues (monetary, fiscal, and other policies).

Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Complete Information

Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments :  Here we provide direct download links for Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Important Notes in pdf format. Download and read well. In this article you can see deference between Balance Of Trade And Balance Of Payments.

Download Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Important Notes in Pdf Format 

BALANCE OF PAYMENTS: The balance of payments accounts of a country record the payments and receipts of the residents of the country in their transactions with residents of other countries. If all transactions are included, the payments and receipts of each country are, and must be, equal. Any apparent inequality simply leaves one country acquiring assets in the others.

BALANCE OF TRADE: The difference between the value of goods and services exported out of a country and the value of goods and services imported into the country. The balance of trade is the official term for net exports that makes up the balance of payments. The balance of trade can be a “favorable” surplus (exports exceed imports) or an “unfavorable” deficit (imports exceed exports). The official balance of trade is separated into the balance of merchandise trade for tangible goods and the balance of services….

A balance of trade surplus is most favorable to domestic producers responsible for the exports. However, this is also likely to be unfavorable to domestic consumers of the exports who pay higher prices.

Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Complete Information

Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments :  The differences between balance of trade (BOT) and balance of payment (BOP)  are as follows:

Balance of Trade (BOT)

i. It records only merchandise (i.e., goods) transactions.

ii. It does not record transactions of capital nature.

iii. It is a part of current account of BOP.

iv. It may be favourable, unfavourable or in equilibrium.

v. Defect in BOT cannot be met by BOP

vi. It is not true indicator of economic relations or economic prosperity of a country.

Balance of Payment (BOP)

(i) It records transactions relating to both goods and services.

(ii) It records transactions of capital nature.

(iii) It includes balance of trade, balance of services, balance of unilateral transfers and balance of capital transactions.

(iv) It always remains in balance in the sense that receipt side is always made to be equal to payment side.

(v) Defect in BOP can be met through BOT.

(vi) It is true indicator of economic performance of an economy.

Summary of BOX, Services, Unrequited Transfers and Capital Payment:

A close look at the hypothetical data and further clarifies the distinction.

Balance of Trade = Rows (1) and (5)

= 550-800 = -250

Balance of Services = Rows (2) and (6)

= 150-50= 100

Balance of Unilateral Transfers = Rows (3) and (7)

= 100-80 = 20

Balance of Payment on Current A/c = -250 + 100 + 20 = -130

Balance of payment on Capital A/c = Rows (4) and (8)

= 200-70= 130 Balance of Payment = Rows (1 to 4) – (5 to 8)

= (550 + 150 + 100 + 200) – (800 + 50 + 80 + 70)

= 1000- 1000 = Zero

A deficit in balance of payment on current account (i.e., -130 crore) has been offset by surplus in BOP on capital account (i.e., + 130 crore). As a result, balance of payment is in equilibriu

Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments Complete Information

Karnataka Class 12 Commerce Economics Balance Of Trade And Balance Of Payments : The economic balance between developed and emerging economies is shifting, reversing trends of the past five years. While the rate of growth in non-OECD (Organisation for Economic Co-operation and Development) economies is expected to still outpace those of the OECD countries, the gap between them has shrunk since the global financial crisis.

Difference between Balance of Trade and Balance of Payments

Balance of Trade:

A comparison of the total imports and exports of a country is its balance of trade.

The balance of trade is regarded as favourable’ or ‘active’ or ‘positive’ when the value of exported goods exceeds that of imported goods.

It is ‘unfavorable’ or ‘adverse’ or ‘negative’ when imports exceed the value of exports. In the middle Ages, it was thought that a favourable balance was the only way to make a country “rich”, as it brought in gold and silver from outside. Now, however, this idea has been discarded, and it is believed that, in the long run, exports and imports, including services of all kinds, should balance.

If, however, an unfavorable balance of trade persists for a long time and is very large in amount, gold shall have to be exported. In that case, steps shall have to be taken to set it right. It should, however, be noted that the ‘visible’ unfavorable balance of trade may be corrected by the export of ‘invisible’ items which do not enter into the account books.

These terms ‘favourable’ and ‘unfavorable’ are only technical terms. Thus, the ‘favourable’ balance may not really be favourable and make the country rich and prosperous. For a long time under the British regime. India had a favourable balance of trade: still India was poor. Britain has always had an unfavorable balance, but she has always been prosperous. It is not the balance of trade, but the balance of payments, which throws light on the economic condition of a country.

Balance of Payments:

The balance of trade includes only the visible items in foreign trade. They are material goods exported and imported. Only these are entered in the port registers maintained by the customs authorities. But there are a large number of other items which fall outside and are called ‘invisible’. The balance of payments includes all ‘visible’ and ‘invisible’ items.

The invisible items are:


India uses a good deal of foreign banking, shipping and -insurance services. She does not have enough of her own ships, insurance companies and exchange banks. Hence foreign agencies, like Lloyds Bank provided these services. India has to pay for all such services. Now, however, India has filled up the gap almost.

Tourists’ expenses:

When Indian students and tourists purchase goods and services in Europe, it is like importing these goods and services. The only difference is that instead of goods coming to the consumers, the consumers have gone to them. They have to be paid for in goods exported from India. In the case of Indian students receiving education abroad, India is importing education as ii were and has to pay for it.

Interest on borrowed capital:

The services of capital have to be paid for by the borrowing country. An investment- made abroad is an export item and remains so till withdrawn. Ultimately, all loans borrowed in foreign money markets have to be paid back and adjusted through exports. Besides the above, there are various minor items like gifts, donations and money remitted home by foreign settlers; these are also invisible items.

All these invisible items produce exactly the same effect on a country’s account with the rest of the world as the export and import of commodities. When they are added to the balance of trade, we have a complete list of all the items which have to be paid for or received by trading countries. Their sum-total is called the balance of payments.


The balance of payments is a comprehensive record of economic transactions of the residents of a country with the rest of the world during a given period of time. This record is so prepared as to provide meaning and measure to the various components of a country’s external economic transactions. Thus, the aim is to present on account of all receipts and payments on account of goods exported, services rendered and capital transferred by the residents of a country.

The main purpose of keeping these accounts is to inform the government of the country of the international economic position of the country and to help it in making decisions on monetary and fiscal policies to be pursued as well as on the trade and payments issues.

Current and Capital Accounts:


The balance of payments has two parts:

(a) Balance on current account and

(b) Balance on capital account.

The balance of payments on current account includes items like imports and exports, expenses on travel, transportation, insurance, investment income, etc. These relate to current transactions.

The Capital Account:

The capital account, on the other hand, is made up of capital transactions, e.g. borrowing and lending of capital, repayment of capital, sale and purchase of securities and other assets to and from foreigners—indivi­duals, governments and international organisations.

When both current and capital accounts are taken, it is called Over-all Balance of payments. It is the over-all balance of payments which must balance. By way of illustration we give below India’s overall balance of payments for 1982-83, the latest year for which figures are yet available.

1. Merchandise: Credits:

Exports f.o.b., Debits: Imports c.i.f. (f.o.b. stands for free-on-board and c.i.f. for cost, insurance and freight).

2. Transfers: Official:

Credits include grants received from various foreign governments and international agencies.

3. Transfers:

Private credits include contra entries for imports under PL 480 Title II Programme.

4. Private:

Includes foreign official loans received and repaid by the private sector.

5. Banking:

Represents movement in banking capital, excluding Reserve Bank of India (RBI).

6. Loans:

Credits represent utilisation of various foreign loans and credits received by the official sector, including drawings from the (IMF).

7. Amortization:

Credits cover repayments by the countries of official loans extended to them while debits show repayments of loans on official account.

8. Miscellaneous:

Cover other official receipts and payments, including those of RBI.

9. Reserves:

Represent changes in official foreign exchange holdings, gold holdings of the RBI and SDR holdings of Government. It is not very harmful if the balance of payments is unfavorable now and then But the balance of payments must balance over a long period, just as a man’s income and expenses must be equal.

If he is spending more than he is earning, he must borrow. And if he is earning more, he must be saving something. He may keep it in a bank or hoard it or lend it. Thus, if his savings and borrowings are included in his budget, it will balance, Similar is the case with countries.

A country may be collecting a balance in its favour or against itself in another country. But over a sufficiently long period, its balance of payments must show the two sides to be exactly equal, if it does not want to become bankrupt. That is why it is said “exports pay for imports” or, in the long run, exports and imports must be equal.

How does the Balance of Payments Balance?

The balance 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 the 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.

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