What is Invisible Trade?
Invisible trade is the exchange of services, income, or transfers between countries without involving physical goods. Some examples of invisible trade are:
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Customer service outsourcing
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Overseas banking transactions
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Medical tourism
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Foreign aid
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Education
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Intellectual property and patents
Invisible trade is an important component of a country’s balance of trade, as it reflects the value of intangible transactions. Invisible trade can be positive or negative, depending on whether a country earns more or spends more on such transactions.
Invisible Trade Explained
The balance of payments records all economic transactions between residents of a country and the rest of the world. The balance of invisible trade measures the net value of services, income, and transfers exchanged across borders.
In developing countries, the invisible payments may be lower than the invisible receipts. The interest payments on external debt may offset this surplus.
The balance of trade is the difference between the value of goods exported and imported. A country can have a balanced trade if its visible surplus compensates for its invisible deficit. For instance, this may happen when a country receives large payments from foreign businesses for services, such as transportation or tourism. Conversely, a country can have a balanced trade if its invisible surplus compensates for its visible deficit. For example, this may occur when a country receives foreign aid or remittances.
Example of Invisible Trade
If a consulting firm based in the United States provides advisory services to a technology company in India. The consulting firm offers expertise in simplifying business processes and improving operational efficiency. The Indian technology company pays the U.S. consulting firm fees for their services.
In this case, the consulting services constitute an invisible trade because no physical product is changing hands between the two countries. The transaction is based on the exchange of intangible services, making it a part of invisible trade. The payment for the consulting services would be recorded in the balance of payments as an export of services for the United States and an import of services for India.