The Balance of Payments

Balance of Trade and Balance of Payment

By balance of international trade we means, 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 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 a the time of their imports. Under this heading come all the receipts and payments made for the international services such as banking, shipping, insurance, educational, travel, etc., etc. when the total value of visible exports is in excess to total value of visible imports during a year, the country is said to have favorable or positive balance of trade. Conversely, when the total value of the goods imported exceeds the total value of goods exported, the country is said to have unfavorable balance of trade.

The Mentalists believed that a favorable balance of trade indicates that country is heading towards prosperity while unfavorable balance of trade is a sign of approaching brought into the country and the national wealth is increased. When imports exceeds exports, gold is taken out of the country and this leads to reduction in national wealth. The importance of service transactions and other invisible items was under estimated bye them.

Temporarily, a country may have favourable or unfavourable balance of payments but in the long run, it must balance its payments, otherwise, it will be inviting troubles.