Question

Differentiate between Balance of Trade and Balance of Current Account.

Hint:

Balance of trade is exports minus imports of goods only. Balance on current account is exports minus imports of goods, services and unilateral transfers together.

Answer 1

Step 1: Understand the two terms:
Both terms belong to the balance of payments account. They look alike, but they do not cover the same items.
Balance of trade looks at goods only. Balance on current account looks at goods, services and transfers together.

Step 2: Meaning of Balance of Trade:
Balance of Trade (BOT) is the difference between the value of exports and the value of imports of goods of a country over a given period.
It counts only visible items, that is, goods that can be seen and counted at the customs.

Step 3: Meaning of Balance on Current Account:
Balance on Current Account is the difference between the value of exports of visibles, invisibles and unilateral transfers from abroad and the value of imports of visibles, invisibles and unilateral transfers to abroad over a given period.
So it includes goods, services such as shipping and banking, and one-way transfers such as gifts and remittances.

Step 4: Compare the two:
The main difference is the coverage. BOT has one item, goods. Current account balance has three: goods, services and unilateral transfers.
Because of this, the two balances can have different values. A country with a trade deficit may still have a current account surplus if its service exports and remittances are large.

Final Answer:
Balance of Trade covers only the export and import of goods. Balance on Current Account covers goods, services and unilateral transfers, so it is the wider concept.