SREE KRISHNA COLLEGE

OF EDUCATION
Mahalakshmi Nagar, Batawadi, Tumkur
First year, Second semester B.Ed.

COMMERCE
METHOD -1

Subject:
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1.
2. INTRODUCION :

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.

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3. TRADE MEANING :

Trade refers to buying and selling of wads and services for

money or money's worth It involves transfer or exchange of
goods and services for money or money's worth/'_ The
manufacturers or producer produces the goods, then moves on
to the wholesaler, then to retailer and finally to the ultimate
consumer.
Trace is essential tor satisfaction or human wants, Trade
is conducted not only for the sake of earning profit; It Also
provides service to the consumers Trade is an important social
activity because the society needs uninterrupted supply of
goods forever increasing ant ever changing but never ending
human wants_ Trade has taken birth with the trepanning of
human life and shall continue as long as human late exists on
the earn_ It ententes the standard of living to consumers. Thus
we can say that trade is e very important social activity,'.

4. Different Types of Trade

Trace can De divided into following two types, viz.,

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 1 Internal or Home or Domestic trade.
2. External or Foreign or International trade.

 Internal Trade :

Internal trade is *ISO 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 turners sub-divided into two groups,
viz_,
 Wholesale Trade : It involves buying in large
quantities from producers as 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 e
intermediary between producers ant retailers.
 Retail Trade : It involves buying in smaller lots
from the wholesalers end selling in very small
quantities to the consumers tor persona use The
retailer is the last link in the chain distribution He
establishes a link between wholesalers and
consumers. There are different types of retailers
small as well large. Small scale retailer includes
hawkers, pedlars, general shops, etc.

 External Trade:

External trade also called as Foreign treacle It refers to

Ouyang and selling between two or more countries. For
instance, [t who is a trader from Mumbai, sells his goods to
Mr_Y another trader from New York then this is an example
offering trade.
External trade can be further sub-divided into three
groups, viz.,

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 I . Export Trade : h/hen e trader farm home country
sells his goods to a trader located in another country. it is
called export trade For a trader from India sells his goods to a
trader locate in China.

2_ Import Trade: When a trader in home country obtains

or purchase goods from a tracer located in another country, it
is called import trade. For e.g. a tread from India purchased
goods from a trader located in Chine

3_ Entrepot Trade: When goods are imported tram one

county and then re exported after doing some processing, it is
called entrepot trade In Brier it can be also called as re-export
of processed imported goody For an Indian trader (from
India) purchase some raw material or soared parts frame
Japanese trader (from Javen), then assembles it is convert
into finished goods and then re-export to an emencan tracer
(in LI_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 pillar 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

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 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 governments.

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
costumers.

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 (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

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 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.

COMMERCE AND TRADE :

Industry and commerce are the two primary types of

business activities. The goal of commerce is to make it
easier for people to exchange products and services in the
economy. It is divided into two categories: trade and trade
auxiliaries. Many people mistakenly believe that trade and
commerce are the same things and that they may be used
interchangeably. However, both phrases are distinct from
one another and have distinct meanings. Simply put, trade
is the buying and selling of commodities and services in
exchange for money or its equivalent. Commerce
encompasses a broader range of activities than trade, which
includes not just the exchange of commodities and services
but also all acts necessary to complete that transaction.

MAJOR DIFFERENCE BETWEEN TRADE AND COMMERCE :

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 The major differences between trade and commerce are
given below:

 Trade:

 Trade is a basic economic process that involves the

buying and sale of various commodities and
services by two or more persons interested in the
transaction.

 Trade has a significantly smaller scope than a

business; it largely deals with the selling and
purchase of things and encompasses very little else.

 Trade is frequently undertaken to suit the

requirements of both the seller and the buyer, and
it is more of social activity.

 As trade meets the needs of both the seller and the

consumer, it has a greater social aspect tied to it.
 In most cases, trade is a one-time transaction
between two parties that may or may not occur
again.

 A transaction does not require the involvement of a

third party; it takes place directly between a buyer
and a seller.

 Both the demand and supply sides of the trade are

represented, with both parties knowing what is
required and what is to be delivered.

 Trade is frequently a one-time event; it may or may

not happen on a regular basis between parties.

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  More capital is required for the trade.

 As the merchandise that is eligible for sale must be

maintained ready, as well as the cash that must be
kept ready for payment, trade necessitates greater
capital.

 Trade represents demand and supply; all parties

involved are aware of the market and, as a result,
what has to be supplied.

 Commerce :

 All actions that aid in the promotion of the exchange

of products and services between the manufacturer
and the final customers are referred to as
commerce.

 Contrary to popular belief, commerce is a broader

definition that includes both trade and the various
revenue-generating activities that accompany a
transaction.

 Commerce, on the other hand, is more cost-effective

owing to the engagement of several parties whose
primary goal is to generate income.

 Commerce is more cost-effective; the major goal is to

generate revenue.

 The transactions in commerce are predictable and

repeatable.

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  To finish the process, Commerce needs the help of
numerous agencies; it serves as a connection
between producers and customers.

 Only the demand side of the business is known, i.e.,

what is desired in the market and how to make it
available through various routes of distribution.

 Commerce, on the other hand, is a normal event

that occurs on a regular basis.

 The capital needs for commerce are lower.

 The amount of capital required in trade is lower

since there are several parties engaged, each of
whom must manage their own resources without
imposing a burden on the other.

 Commerce, on the other hand, exclusively deals

with the demand side; here, the main focus is
meeting the market's needs through various means.

 As a result, trade may be defined as a branch of

commerce that focuses solely on the exchange of
goods and services, whereas commerce is a broad
word that incorporates all key activities that enable
the exchange and produce money for all parties
involved.

TRADE AND TERM (TOT):

Terms of trade (TOT) represent the ratio between a
country's export prices and its import prices. How many units of

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exports are required to purchase a single unit of imports? The
ratio is calculated by dividing the price of the exports by the price
of the imports and multiplying the result by 100.X
When more capital is leaving the country then is entering into the
country then the country’s TOT is less than 100%. When the TOT
is greater than 100%, the country is accumulating more capital
from exports than it is spending on imports.

Factors Affecting Terms of Trade:

A TOT is dependent to some extent on exchange and inflation

rates and prices. A variety of other factors influence the TOT as
well, and some are unique to specific sectors and industries.
Scarcity—the number of goods available for trade—is one such
factor. The more goods a vendor has available for sale, the more
goods it will likely sell, and the more goods that vendor can buy
using capital obtained from sales.X
The size and quality of goods also affect TOT. Larger and higher-
quality goods will likely cost more. If goods sell for a higher
price, a seller will have additional capital to purchase more
goods.
Fluctuating Terms of Trade:

A country can purchase more imported goods for every unit of

export that it sells when its TOT improves. An increase in the
TOT can thus be beneficial because the country needs fewer
exports to buy a given number of imports.
It might also have a positive impact on domestic cost-push
inflation when the TOT increases because the increase is
indicative of falling import prices to export prices. The country’s
export volumes could fall to the detriment of the balance of
payments (BOP), however.X
The country must export a greater number of units to purchase
the same number of imports when its TOT deteriorates. The
Perish-Singer hypothesis states that some emerging markets and
developing countries have experienced declining TOTs because of

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a generalized decline in the price of commodities relative to the
price of manufactured goods.

Terms of Trade Formula:

 Now that we have a basic understanding let’s

take a look at how it is calculated.

 Terms of Trade Formula = (Index of Export Prices

Index of Import Prices) x 100.

 The basic formula for TOT calculations is

 Basic terms of trade: (The price of exports the

price of imports) x 100.

 Let us understand this with an example.

 Country A can export 700 tons of corn to Country

B = $700 export price

 Country A needs to import 200 tons of wheat

from Country B= $200 import price

(700200=3.5) x 100 = 350.

With prices remaining constant at $1 per unit

across both countries and for both products, the value
for Country A’s terms of trade is 350/1, or 350.

Implications:

1.  If the value of terms of trade is less

than 100%, it is considered an unfavourable
situation. When the value gets lower than 100 %, it
could signify that the country is earning less money

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 in exports and spending more on imports. It may
seem like an alarming situation as it may indicate
that the country is spending more money than it is
making in exports-imports.

2. A positive TOT shows the value over

100%, reflecting that the country is earning more in
exports than it is spending on imports.

3. The calculations of this ratio are not

very simplistic, like 1:1 as multiple export and
import figures are involved. Not to mention, the
changes in the ratio could flow from many different
reasons throwing a misleading picture. Many
studies have been conducted repeatedly to
understand the complex relationship between price
volatility and this ratio.

4. Many socio-political causes in relations

to economic can bring about a change in the ratio.
For instance, import prices fall on account of over
availability of the stock due to a self-sufficiency bill
passed in the parliament.

5. So, while export prices remain the

same, import prices drop. This can drastically push
the ratio up even though there has not necessarily
been an improvement in the exports. For this
reason, different types of terms of trade are used for
a holistic view of a country’s economic standing.

Types of Terms of Trade:

 You are free to use this image on your website,

templates.

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1 – Net Barter
It is calculated as the percentage ratio of the export
unit value indexes to the import unit value indexes,
measured relative to the base year 2000.

Also, referred to as commodity terms of trade, it was

coined to better understand the overall view of the
changes in a country’s trading.

2 – Gross Barter

It is a ratio of total physical quantities of imports to

the total physical quantities of a given country’s exports. It
is measured by

TG = (QM/QX) × 100 where TG is Gross Barter TOT,

 QM is Aggregate Quantity of Imports and

 QX is the Aggregate Quantity of Exports.

A higher  TG can indicate that the country can import

more units from abroad for the given units of exports. In our
example from earlier, we easily see that Country A has a
higher TG, relative to Country B as it can import more units.

3 – Income TOT

It is the purchasing power, in terms of (described as)

the price of imports, calculated as Pm, of the value (price
times quantity) of a country’s exports: ITT = PxQx/Pm.

ITT can increase through an increase in export prices,

a rise in the number of exports, and a decrease in imports’
prices. Overall, it is used as one of the measurements of the
capacity to import.

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 4 – Single Factorial TOT

It is found by multiplying the net barter with the

productivity index in the domestic export sector. This is
essentially the net barter terms of trade corrected for
changes in the productivity of export goods.

5 – Double Factorial TOT

This expresses the change in the productivity of both

the domestic export industry and the export industries of
the foreign countries selected.

It is found by TD = TC (ZX/ZM)

where

1. TD is the Double Factorial TOT,

2. TC is the Commodity TOT,
3. ZX is the productivity index in the domestic
export sector,
4. ZM is the productivity index in the foreign
countries’ export sector, or it is an import productivity
index.

6 – Real Cost TOT

It is the theory that states that an increase in export

production drives resources away from other sectors of the
economy to the export sector.

For example, if farm workers are being used to produce

wheat to export to other countries, resources like the labor,
extraction, processing, shipping personnel etc. are being
pulled from the production to suffice wheat production.
Those workers could also theoretically be used for
community farming or processing other grains needed for
domestic consumption.

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 The amount of resources allocated elsewhere or
“utility” cost (also described as “sacrifices”) per unit of
resources employed in the production of export goods is
considered to be the real cost terms of trade. Therefore, it
accounts for the opportunity cost of exporting a good into
the overall picture of exports production.
It is calculated by Tr = Ts. Rx

Where,

 TR = Real Cost TOT

 RX = index of the amount of disutility
suffered per unit of the resources utilized in the
production of exports goods.

Also explained as when the single factorial terms of

trade are multiplied by an index of the relative average
utility per unit of imported commodities.

7 – Utility TOT

This measures the changes in the disutility of

producing a unit of exports. It also measures the changes in
the satisfactions arising imports and the indigenous
products wasted to produce those exports. It is essentially
the changes in the real cost tot in terms of the utilities
wasted.

It is found by multiplying the real cost terms of trade

with an index of the relative average utility of imports and
domestic commodities wasted.

Most influential factors affecting Foreign Trade are as

follows:

Because international trade can significantly affect a

country’s economy, it is important to identify and monitor
the factors that influence it.

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 1) Impact of Inflation:

If a country’s inflation rate increases relative to the

countries with which it trades, its current account will be
expected to decrease, other things being equal. Consumers
and corporations in that country will most likely purchases
more goods overseas (due to high local inflations), while the
country’s exports to other countries will decline.

2) Impact of National Income:

If a country’s income level (national income) increases

by a higher percentage than those of other countries, its
current account is expected to decrease, other things being
equal. As the real income level (adjusted for inflation) rises,
so does consumption of goods. A percentage of that increase
in consumption will most likely reflect an increased demand
for foreign goods.

3) Impact of Government Policies:

A country’s government can have a major effect on its

balance of trade due to its policies on subsidizing exporters,
restrictions on imports, or lack of enforcement on piracy.

4) Subsidies for Exporters:

Some governments offer subsidies to their domestic

firms, so that those firms can produce products at a lower
cost than their global competitors. Thus, the demand for the
exports produced by those firms is higher as a result of
subsidies.

Many firms in China commonly receive free loans or

free land from the government. These firms incur a lower
cost of operations and are able to price their products lower
as a result, which enables them to capture a larger share of
the global market.

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 5) Restrictions on Imports:

If a country’s government imposes a tax on imported

goods (often referred to as a tariff), the prices of foreign
goods to consumers are effectively increased. Tariffs
imposed by the U.S. government are on average lower than
those imposed by other governments. Some industries,
however, are more highly protected by tariffs than others.
American apparel products and farm products have
historically received more protection against foreign
competition through high tariffs on related imports.

In addition to tariffs, a government can reduce its

country’s imports by enforcing a quota, or a maximum limit
that can be imported. Quotas have been commonly applied
to a variety of goods imported by the United States and
other countries.

6) Lack of Restrictions on Piracy:

In some cases, a government can affect international

trade flows by its lack of restrictions on piracy. In China,
piracy is very common; individuals (called pirates)
manufacture CDs and DVDs that look almost exactly like
the original product produced in the United States and
other countries. They sell the CDs and DVDs on the street
at a price that is lower than the original product. They even
sell the CDs and DVDs to retail stores. It has been
estimated that U.S. producers of film, music, and software
lose $2 billion in sales per year due to piracy in China.

As a result of piracy, China’s demand for imports is

lower. Piracy is one reason why the United States has a
large balance-of-trade deficit with China. However, even if
piracy were eliminated, the U.S. trade deficit with China
would still be large.

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 7) Impact of Exchange Rates:

Each country’s currency is valued in terms of other

currencies through the use of exchange rates, so that
currencies can be exchanged to facilitate international
transactions.

CONCLUSION :
Economic theory indicates that international trade
raises the standard of living. A comparison between the
performance of open and closed economies confirms that
the benefits of trade in practice are significant.

BIBLIOGRAPHY :

 https://www.google.com/amp/s/
indiafreenotes.com/trade-introduction-meaning-
and-types/amp/
 https://www.google.com/search?
q=factors+affecting+the+internal+and+external+tr
ade&bih=630&bi&sclient=mobile-gws-wiz-serp
 https://www.yourarticlelibrary.com/foreign-
trade/7-most-influential-factors-affecting-foreign-
trade/5938
 https://www.economicsdiscussion.net/trade/
various-terms-of-trade-economics/26218
 https://tfig.unece.org/details.html

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