Invisible Balance - Balance of Payments and Invisibles

Balance of Payments and Invisibles

In many countries a useful distinction is drawn between the balance of trade and the balance of payments. 'Balance of trade' refers to the trade of both tangible (physical) objects as well as the trade in services – collectively known as exports and imports (in other words, 'visibles plus services') – while the 'balance of payments' also includes transfers of Capital in the form of loans, investments in shares or direct investment in projects.

A nation may have a visibles balance surplus but this can be offset by a larger deficit in the invisibles balance (creating a Balance of Trade deficit overall) – if, for example, there are large payments made to foreign businesses for invisibles such as shipping or tourism. On the other hand a Visibles Balance deficit can be offset by a strong surplus on the invisibles balance if, for example, foreign aid is being provided.

In a similar way, a nation may also have a surplus 'balance of trade' because it exports more than it imports but a negative (or deficit) 'balance of payments' because, it has a much greater shortfall in transfers of capital. And, just as easily, a deficit in the 'balance of trade' may be offset by a larger surplus in capital transfers from overseas to produce a Balance of Payments surplus overall.