Here, we would like to make a sharp
distinction between balance of
international trade and balance of international payments as they are often
confused by the readers.
By balance of International trade we mean, 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 comes 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 to visible imports during a year,
the country is said to have favorable or positive balance of trade.
Conversely, when the total value of
the good imported exceeds the total value of goods exported, the country is said
to have unfavorable balance of trade. The Mercantilists believed that a
favorable balance of trade indicates that country is heading towards prosperity
while unfavorable balance of trade is a sign of approaching national disaster.
exports are greater than imports, they say, gold is brought into the country and
the national wealth is increased. When imports exceed 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 by them.
The modern economists, however, differ with this view. They are of the
opinion that a country's prosperity or adversity is not judged by its favorable
or unfavorable balance of trade but by its favorable or unfavorable balance
of payment England, for instance with the exception of 1958 had an adverse
balance of trade since 1890 but its national wealth during these long
years was increasing at a very fast rate.
It was because of this fact that its
debt balance of visible trade was offset by its credit balance on invisible
trade. We, conclude, therefore, that a favorable balance of trade is not an
index of the economic prosperity or poverty of the country. It is the
balance of payments which serves as a better guide to its economic position.
If a country has persistently unfavorable balance of payments, it can be safely
taken as a sign of approaching national disaster.
country may have favorable or unfavorable balance of payments but in the long
run, it must balance its payments, otherwise, it will be inviting