It is vital for secondary level students to know about the importance of trade and commerce; and basic economic concepts i.e. foreign exchange, the balance of trade, the balance of payment before they advance to the next levels of their education. It is equally important for people generally to have a basic know-how about economic concepts like trade and commerce.
In this article, I will define and explain concepts related to trade and commerce:
What is trade?
The term trade refers to the selling and buying of goods and services. In other words, the term ‘trade’, refers to the exchange of goods and services. It is a common observation that teachers and students ignore the services aspect when they define the term ‘trade’. With this in mind, you also need to consider the component of services along with goods while talking about trade.
What are the different types of trade?
There are two main types of trade e.g. Internal trade and foreign trade.
Internal trade refers to the exchange of goods and services within the boundaries of a country. It is also called domestic trade.
Foreign trade refers to trade with other countries. It includes the import and export of goods and services. Foreign trade is also called international trade. A major part of international trade is carried out by the sea.
What is Commerce?
The term ‘commerce’ refers to such factors that facilitate trade. It can also be defined as a set of factors that make the trade happen such as transportation, publicity, Government policy, etc.
Transportation is central to trade as it helps in the transportation of finished goods to the market. Similarly, raw materials need to be transported from agricultural farms or mining areas to the industrial site. An efficient and well-developed transportation system accelerates the process of selling and buying goods whereas poor transport infrastructure hinders trade.
Publicity is also one of the factors central to the concept of trade. Companies advertise their goods via different media platforms i.e. TV channels, newspapers, the internet, etc. This publicity of goods helps people get to know about different goods they might need. Thus companies create demand for goods and supply them through different modes of transport.
Government policy regarding trade helps accelerate or hinder the trade of certain goods between countries. For example, you cannot trade arms and drugs except in such cases when you have special permission. Violation of this policy will land a person in jail. Pakistan and India do not trade to a considerable extent despite having huge bilateral trade potential as neighbors. This is because at the policy level governments of both countries do not encourage traders to trade with each other.
What does it mean by Foreign Exchange?
The term ‘foreign exchange’ refers to the foreign currency that a country earns through exports, etc. For example, Pakistan sells textiles goods to the USA. In exchange, it receives the American dollar. The dollar that Pakistan receives in exchange for the sale of textiles goods is foreign exchange.
What is the importance of Foreign Exchange?
Foreign Exchange occupies an important place in the economic development of any country. No country is self-sufficient in the production of goods and services to meet the different needs of its citizens. It needs to import many goods and services from other countries. This is how international trade takes place among different nations of the world. Not every currency is an international currency.
Similarly, one cannot trade in Pakistani or Indian currency with other countries. Traders trade in the dollar, euro, pound, and other international currencies. With increased exports (both in terms of currency value and quantity) a country will have increased foreign reserves. Contrary to that, the country will be in a better position to meet import needs with increased foreign reserves.
What is the balance of trade or balance of Payment?
The terms ‘balance of trade’ and ‘balance of payment’ refer to a condition in which the value of imports and exports is equal. In the balance of trade, we consider only the value of goods. But, in the balance of payment, we take into account the value of both goods and services.
Negative Balance of trade/payment
We call it a negative balance of trade/payment when the value of imports is more than the value of exports. In such a case a country has to pay more than what it earns through its exports. This is not a positive thing economically as it can lead to exhaustion of foreign reserves to a level when a country would have no foreign reserves to import anything. The economists also refer to a negative balance as a trade deficit.
Positive Balance of Trade/Payment
A positive balance of trade or payment refers to a condition in which the value of exports is more than the value of imports. In such a case a country will earn more than what it spends on imports. The foreign exchange earned through exports helps meet import needs thus preventing a country from taking loans and depending on other nations. You can refer to a positive balance of trade as a trade surplus.