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