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The statement that the balance of payments is narrower than the balance of trade is incorrect. In fact, the balance of payments is a much broader concept than the balance of trade. The balance of trade constitutes only one component of the balance of payments. The distinction between the two is particularly important for understanding India’s foreign trade, external sector position, foreign exchange situation and international economic relations. The balance of trade refers to the difference between the monetary value of a country’s visible exports and visible imports of goods during a particular period, usually one year. Goods that are physically exported or imported are called visible items because they can be recorded and measured through customs statistics. If the value of exports of goods exceeds the value of imports, the country has a favourable or surplus balance of trade. If imports exceed exports, it has an unfavourable or deficit balance of trade. When exports and imports of goods are equal, the balance of trade is said to be in equilibrium. For example, if India exports merchandise worth ₹100 lakh crore and imports merchandise worth ₹110 lakh crore during a particular period, its merchandise balance or balance of trade would show a deficit of ₹10 lakh crore. This figure, however, does not tell us the complete position of India’s international economic transactions because India also earns and spends foreign exchange through services, investment income, transfers, capital flows and other transactions. The balance of payments, on the other hand, is a systematic record of all economic transactions between the residents of a country and the rest of the world during a specified period. It includes transactions relating not only to goods but also to services, income, transfers, investments, loans, banking transactions and changes in foreign exchange reserves. Therefore, the balance of payments provides a comprehensive picture of a country’s external economic position. The broader nature of the balance of payments can be understood from its major components. The current account records transactions involving exports and imports of goods and services, primary income and secondary income. The capital account records certain capital transfers and transactions in non-produced, non-financial assets. The financial account records international financial transactions such as foreign ________ _______ ____ ____ _____ __________.
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