Question

Which of the following statements is true of the difference between the balance of payments and the balance of trade?

	a.	The balance of trade includes only exports and imports of goods, while the balance of payments includes exports and imports of both goods and services.
	b.	The balance of trade considers only the two nations participating in a transaction, while the balance of trade includes all the exports and imports of a nation.
	c.	The balance of payments includes the balance of trade, but it also includes other financial flows such as foreign borrowing and lending.
	d.	The balance of trade is the sum of the balance of payments and other financial flows such as foreign borrowing and lending.

When the total value of a nation's exports is higher than the total value of its imports, that country has a(n) _____.

	a.	comparative advantage
	b.	absolute advantage
	c.	trade surplus
	d.	trade deficit

Answer 1

1. Option c is the answer.

• The balance of payment includes the balance of trade, but it also includes other financial flows such as foreign borrowing and lending.
• Balance of trade indicates the net balance between all imports and exports during a given period of time. Balance of payment has many components. Balance of trade is a part of balance of payment. Balance of payment includes balance of services, balance of unilateral transfers, etc.

2. Option c is the answer.

• When the total value of a nation's export is higher than the total value of its imports, that country has a trade surplus.
• As the exports of a country are higher than its imports, an inward flow of domestic currency from the foreign markets can be observed. Thus trade surplus is experienced and this will result in a positive balance of trade value.
• Trade deficit is observed when the value of imports are higher than that of exports. Thus trade surplus is the opposite of trade deficit.