Balance of payment is considered as a systematic record of a nation’s total payments to foreign countries including the price of imports and the outflow of capital and gold, along with total receipts from abroad including the price of exports and inflow off capital. It also measures the payments that flow between any individual country and all other countries. It is used to summarise all International economic transactions for that country during specific time period, usually a year.
The balance of payment is determined by the country’s exports and imports of goods, services and financial transfers. It reflects all payments and liabilities to foreigners and all payments and obligations received from foreigners. Balance of Payment is one of the major indicators of country’s status in international trade, with net capital outflow. The balance of payments for a country is the sum of the current account, capital account and financial account.
However, the balance of trade is the difference in value between total exports and total imports of a nation during specific time period. The balance of trade tries into account only the transactions arising out of the exports and imports of the visible terms, it does not consider the exchange of invisible terms such as the Services rendered by shipping, insurance, payment of interest and dividend, etc.
The balance of payment takes into account the exchange of both the visible and invisible terms. Hence, the balance of payments presents a better picture of a country’s economic and financial transactions with the rest of world then the balance of trade. However, measuring the balance of payment can be problematic because of problem, with recording collecting data. As an illustration of this problem, when official data for the entire world’s countries are added up, exports exceeds imports by a few per cent, it appears that world is running a positive balance of trade with itself. This cannot be true because all transactions involve an equal credit or debit in the account of each nation. The discrepancy is widely believed to be explained by transactions intended to evade taxes, smuggling and other visibility problems. However, especially for developed countries, accuracy is likely to be good.