Trade: Introduction, Meaning and Types

11th February 2020 0 By indiafreenotes

Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties. Trade can take place within an economy between producers and consumers. International trade allows countries to expand markets for both goods and services that otherwise may not have been available to it. It is the reason why an American consumer can pick between a Japanese, German, or American car. As a result of international trade, the market contains greater competition and therefore, more competitive prices, which brings a cheaper product home to the consumer.

Trade broadly refers to transactions ranging in complexity from the exchange of baseball cards between collectors to multinational policies setting protocols for imports and exports between countries. Regardless of the complexity of the transaction, trading is facilitated through three primary types of exchanges.

Trading globally between nations allows consumers and countries to be exposed to goods and services not available in their own countries. Almost every kind of product can be found on the international market: food, clothes, spare parts, oil, jewelry, wine, stocks, currencies, and water. Services are also traded: tourism, banking, consulting, and transportation. A product that is sold to the global market is an export, and a product that is bought from the global market is an import. Imports and exports are accounted for in a country’s current account in the balance of payments.

International trade not only results in increased efficiency but also allows countries to participate in a global economy, encouraging the opportunity of foreign direct investment (FDI), which is the amount of money that individuals invest into foreign companies and other assets. In theory, economies can, therefore, grow more efficiently and can more easily become competitive economic participants. For the receiving government, FDI is a means by which foreign currency and expertise can enter the country. These raise employment levels, and, theoretically, lead to a growth in the gross domestic product. For the investor, FDI offers company expansion and growth, which means higher revenues.

A trade deficit is a situation where a country spends more on aggregate imports from abroad than it earns from its aggregate exports. A trade deficit represents an outflow of domestic currency to foreign markets. This may also be referred to as a negative balance of trade (BOT).

Types of Trade

  1. Home Trade (Internal Trade)

Internal trade is also known as Home trade. It is conducted within the political and geographical boundaries of a country. It can be at local level, regional level or national level. Hence trade carried on among traders of Delhi, Mumbai, etc. is called home trade.

Internal trade can be further sub-divided into two groups, viz.,

(i) Wholesale Trade

It involves buying in large quantities from producers or manufacturers and selling in lots to retailers for resale to consumers. The wholesaler is a link between manufacturer and retailer. A wholesaler occupies prominent position since manufacturers as well as retailers both are dependent upon him. Wholesaler act as a intermediary between producers and retailers.

(ii) Retail Trade

It involves buying in smaller lots from the wholesalers and selling in very small quantities to the consumers for personal use. The retailer is the last link in the chain of distribution. He establishes a link between wholesalers and consumers. There are different types of retailers small as well as large. Small scale retailers includes hawkers, pedlars, general shops, etc.

  1. Foreign Trade

External trade also called as Foreign trade. It refers to buying and selling between two or more countries. For instance, If Mr. X who is a trader from Mumbai, sells his goods to Mr. Y another trader from New York then this is an example of foreign trade.

External trade can be further sub-divided into three groups, viz.,

(i) Export Trade

When a trader from home country sells his goods to a trader located in another country, it is called export trade. For e.g. a trader from India sells his goods to a trader located in China.

(ii) Import Trade

When a trader in home country obtains or purchase goods from a trader located in another country, it is called import trade. For e.g. a trader from India purchase goods from a trader located in China.

(iii) Entrepot Trade

When goods are imported from one country and then re-exported after doing some processing, it is called entrepot trade. In brief, it can be also called as re-export of processed imported goods. For e.g. an indian trader (from India) purchase some raw material or spare parts from a japanese trader (from Japan), then assembles it i.e. convert into finished goods and then re-export to an american trader (in U.S.A).

Importance of Trade

(i) Growth of the Economy

Trade Provide growth to the economy because when trade started in any country it brings new opportunities to people. Which also brings money in public. So, trade is the most important pilar for growth of any economy.

(ii) Provide Global Presence

When a country started trading in the domestic and International market. Global reach started automatically because the people of other countries started buying the product. So, trade provides global presence to the economy.

(iii) Helps in Civilizations

When trade started in any country it helps in improving personal growth of the people because trade run in a systematic way. So, when trade starts it does not only give to the people it also teach them administrations.

(iv) Provide High Quality Products

When trade starts it brings high compositions as well. when the compositions it remove monopoly of the products. In last when trade started it provide high quality products to the consumers.

(v) Trade improves financial performance

Once trade brings it started providing tax to the goverments. This allows them to augment the returns they achieve on their investments into research and development.

ADVANTAGES OF TRADE

(i) Maximum utilization of natural resources

Trade helps each country to utilize their natural resources in effective ways to produces high-quality products at the cheapest rate. Wastage of resources automatically reduced because once trade starts it brings high skilled employees.

(ii) Trade encourages market competition

When more brands come in the market competitions increase that gives more options and quality to the consumers at a low price and remove monopoly. Example; In India there are a lot mobiles brands has came that is providing more options and quality to the custumers.

(iii) Trade develops sympathies

Trade develops sympathies and creates common interests between trading country. It also exchange the ideas traditions, customs. This promotes international understanding and peace among the people. if war starts it can be remove by people love and understanding.

 (iv) Advantages of large-scale production

When the trade started it does not only use home country but also export to other countries. This leads to larger production of the product and advantages of large production can be a benefit to all the countries.

(v) Increase in efficiency

Trade helps to country to increase their productivity because trade brings high productivity machine and best technology to the host country. This increases the efficiency and benefits to the consumers all over the world.

DISADVANTAGES OF TRADE

(i) Economic Dependence on Developed Economies

The developing economies have to depends on the developed economies because developed economies provide funds, technologies machines etc. to developing nations for trades, most of the undeveloped economy in Asia and Africa are directly depend on European countries.

(ii) Political Dependence

Most of the time trade encourages slavery. Trade affects the political decisions of the country because they become a big pillar of country of their financial support. So, it starts occupying the country’s decisions. Basically it happens in backward economies.

(iii) Creates Monopoly

When big companies come in developing nations they invest money and manpower in huge quantity. So, it affects local business and creates a monopoly in the industry. Example When Amazon came to India it has effect a lot of local business.

(iv) Fear of loosing jobs

Loosing jobs is also a big fear for local skilled and educated employees.because when a big company leaves the country it fired employees in huge quantity. which creates crisis in economy.