IGCSE / O’LEVEL

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INTERNATIONAL TRADE
Foreign/International Trade
International trade is the exchange of capital, goods, and
services across international borders

Types of International/Foreign Trade

Export Trade Import Trade Enterport Trade

Sales of goods and services to Purchases of goods and services Importing with the purpose
another country from another country of re-exporting
Foreign exchange enters the Foreign exchange leaves the No effect on foreign
country country exchange

Visible and Invisible Trade

Visible Trade Invisible Trade
Sales of goods to another country is called Sales of services to another country is called
visible invisible export
export
Purchases of goods from another country is Purchases of services from another country is
called visible import called invisible import

Why Foreign Trade has increased?

1. Gap between the rich and poor countries has increased.
2. Role of IMF (International Monetary Fund), SDR (Special Drawing
Rights) decreases the risk of foreign exchange fluctuations.
3. WTO (World Trade Organization).
4. Improvement in technology has led to increased production.
5. Globalization.
6. Improved standards of living.

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 7. Efforts of governments to improve trades.
8. Role of trading blocs e.g ASEAN.

Problems in Foreign Trade

1. Different languages and culture.
2. Additional cost of transportation.
3. Additional cost of packing and insurance.
4. Excessive documentation.
5. Government rules in importing country.
6. Import and export duty.
7. Different units of measurement.
8. Trade barriers like trade embargo and strict quota.
9. Payment can be delayed.
10. More risks involved.
11. Exchange rate fluctuations
Risks in Foreign Trade
Economic risks
1. Risk of insolvency of the buyer,
2. Risk of protracted default - the failure of the buyer to pay the amount
due within six months after the due date
3. Risk of non-acceptance
4. Surrendering economic sovereignty
5. Risk of Exchange rate

Political risks
1. Risk of cancellation or non-renewal of export or import licenses
2. War risks
3. Risk of expropriation or confiscation of the importer's company
4. Risk of the imposition of an import ban after the shipment of the goods
5. Transfer risk - imposition of exchange controls by the importer's
country or foreign currency shortages
6. Surrendering political sovereignty
7. Influence of political parties in importer's company

Advantages of Foreign Trade

1. A greater variety of goods and services become available.
2. Local shortages can be complemented.
3. Government earns revenue (by import/export duties).

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 4. More foreign exchange reserves (in case of export).
5. A country can specialize in producing certain goods and services.
6. Links between countries develops.
7. More employment is created (All three sectors in case of export and
tertiary sector in case of import).
8. Increases competition and thus quality of local production.

Disadvantages of Foreign Trade

1. Loss of employment in Primary and Secondary sector in case of import.
2. Loss to the local producers.
3. Loss of foreign exchange (in case of import).
4. Importing country can become dependent.
5. Dumping can occur (selling products at a loss).
6. Harmful goods can enter the country.
7. Increase in price level.
8. Exploitation of importing country.
9. Depreciation of currency of importing country.
Steps to be taken in Exporting
1. Market
researc
h for:
i. Size of market.
ii. Competitions.
iii. Economy of importing country.
iv. Government policies..
v. Public Demand.
2. Signing contract with buyer.
3. Getting order from importer.
4. Preparing the consignment.
5. Mode of transportation.
6. Reshipments inspections.
7. Dispatch of cargo.
8. Getting payment.

Documents in Foreign Trade

Indent
Issued by: Importer

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 Issued to: Exporter/Agent

Purpose: It is an order for goods. It gives full particulars and

conditions as regards price, packing and shipment etc.

Shipping Note
Issued by: Exporter

Issued to: Port Authority

Purpose: To request port authority to load the goods to be exported,

specifying the quantity of goods and vessel on which goods are to be
boarded. Sent together with goods and sometimes before goods are
send so that space is reserved for them.

Bill of Lading (BOL) or (B/L)

Issued by: Master of ship in triplet.

Issued to: Exporter, Importer, Shipmaster.

Purpose: Acknowledging that specified goods have been received on board as cargo for conveyance to a
named place for delivery to the consignee who is usually identified Importance.

1. Document of title .
2. Contract of carriage.
3. Receipt of goods.
4. Importer cannot release the cargo from its port unless he has the bill.
5. Exporter can get bank loan against the dispatched cargo
upon presentation of documents including bill of lading.
6. Required by custom authority for appraisement of cargo and for
verifying quantities.
7. It is also a document of transfer, being freely transferable
but not a negotiable instrument.
Information:

1. Name of exporter.
2. Name of importer.
3. Name of agent.
4. Full details of goods.
5. Place of departure and place of arrival of goods.
6. Name of ship carrying goods.

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Consignment Note
Issued by: Trucking company (Goods forwarder).

Information: Quantity and description of goods

being dispatched. Purpose: Evidence of contract.

Airway bill
Issued by: Airway company.

Purpose: Same as consignment note, in case of air transportation.

Bill of Exchange
• It is unconditional
order in writing,
addressed by one
person to another,
signed by the
person giving it,
requiring the person
to whom it is
addressed to pay on
demand or future
time, a sum of
certain money.
• By this purchases
promises to settle a
debt on a specific
date.
• Can be discounted by the bank.

Negotiating and discounting bill of exchange

• If the exporter has bill of exchange of future maturity date, then
exporter can ask his bank to release payment against the bill of
exchange signed by the importer and other shipping documents.
• Bank will discount the bill at the prevailing rate and give the
exporter money less than the face value of the bill.
• On maturity of bill of exchange, the exporter has to pay in full to the bank.

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Customs
Customs is an authority or agency in a country responsible for collecting and
safeguarding customs duties and for controlling the flow of goods (like animals)
and hazardous items in and out of a country.

Functions of Customs
1. Prevention of smuggling.
2. Collection of revenue (duties).
3. Appraisement of cargo.
4. Maintenance of statistical data required for construction balance of trade.
5. Enforcement of quotas.
6. Control of bonded warehouses (where dutiable goods are kept until duty on
them is paid).

Types of Duties Levied

1. Export duty levied on locally produced goods for export.
2. Import duty levied on goods imported.
3. Excise duty imposed on locally produced goods for home consumption.

Basis of Calculation of the Duties

1. Ad valorem duty: A certain percentage of price is added.
2. Specific duty: A fixed sum of dutiable good is taxed.

Free trade zone

• It is an area, normally close to port, where prevailing taxes on
international trade are not applicable.
• This zone is used for:
1. Blending.
2. Packing.
3. Sub-Assembly.
4. And for re-exporting without payment of duties.
Balance of Payments
• It is the summary of a country’s total payments and receipts with the
rests of the world.
• It includes all items of visible trade, visible trade and capital movement.
• If total payments exceed total receipt then it is called balance of

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 payment deficit, which is undesirable.

• If total receipts exceed total payments then it is called balance of

payment surplus, which is desirable

BOP: Current Account

Balance of Trade
• Difference between the visible exports and visible imports is called
balance of trade.
• If visible exports exceed visible imports than it is favourable and
if visible imports exceed visible exports than it is unfavourable.

Invisible trade

 The balance of invisible trade measures the net flow of funds

resulting from the trade of services. This balance of invisible trade
will include all of the following inflows or outflows of funds:
o flows resulting from financial services e.g. banking ,
insurance , brokerage firms
o flows from shipping and aviation services
o expenditure by foreign government on embassies and military bases
o flows from tourist services
o gifts of money from overseas residents to domestic residents
o net property income from or paid abroad
o payments of interest on official debt.

BOP: Capital Account

The capital account records inflows and outflows of foreign exchange that result
from capital flows

Capital Account Transactions

 Repaying of debt to foreign commercial banks, foreign

governments and multinational agencies such as the IMF.

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  Borrowing from foreign governments and foreign commercial banks
 flows of aid into the country from overseas agencies
 flows of foreign direct investment such as investment by multinational corporations
 Resident capital outflow or capital flight as a country's citizens send
money out of the country into foreign banks
 Purchase foreign property or financial assets.

Financing

 Use up reserves of foreign currencies held at the Central Bank.

 Borrow from foreign central or commercial banks
 Borrow from organisations such as the International Monetary Fund
 Reschedule its debt or having its debt reduced

Why deficit in Balance of Payments and Balance of Trade is undesirable

1. Loss of foreign exchange.

2. Depreciation of currency.
3. Imports will become expensive and it can create inflation.

How to protect from imports-to make balance of payment surplus?

• Tariffs or duties – imposing import duties on goods to make them
more expensive than home produced goods.
• Quotas – imposing limits on the amount of imports allowed into a
country in a given year.
• Embargoes/Import ban – total exclusion of certain types of
goods. This is often applied to harmful goods e.g. firearms.
• Exchange control – limiting the amount of currency that can leave the country.

• Increased documentation and bureaucracy at point of entry –

making importing more difficult by increasing the rules and
regulations for imports.
• Giving subsidies to local producers.
• Exchange control.
Foreign Exchange Market

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 The foreign exchange market is where currency trading takes place. It is where
banks and other official institutions facilitate the buying and selling of foreign
currencies.

Exchange rates

The price of one country's currency expressed in another country's currency. In

other words, the rate at which one currency can be exchanged for another.

Factors determining exchange rates

1) Trade (exports/imports)
2) Interest Rates
3) Inflation
4) Currency Speculation

Currency fluctuation

A currency has value, or worth, in relation to other currencies, and those values
change constantly.

Exchange gain/ (loss)

A gain (loss) on the exchange of one currency for another due to appreciation
(depreciation) in the home currency (for receivables).

Government & Commerce

Government
Government is the body within any organization that has the authority to make and
the power to enforce laws, regulations, or rules.

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The need for government Intervention
1. To provide public services
Mean services provided by government to its citizens, either directly
(through the public sector) or indirectly. Eg- defence, law enforcement,
electricity, water supply, police services, infrastructure ect.

2. Subsidized Services
Services which could be marketed in the ordinary way would be too
expensive for a large proportion of the population. E.g. Health, Education

3. Prevention of abuse
Government takes action to govern the economic and commercial life of the
country, mainly to prevent exploitation of one group by the other.

4. Assistance to Industry
The government provides grants to some industries in order to protect and
charge tax and tariffs to some industries to avoid harm to the society.

5. To achieve government aim

Every government has its own economic as well as political objectives.

Government Income /Revenue

Government income includes gross proceeds from income taxes on companies and individuals

1. Excise duties,
2. Customs duties,
3. Other taxes
4. Sales of goods and services,
5. Dividends and interest.
Direct tax/ Income tax

An income tax is a tax levied on the financial income of people, corporations, or

other legal entities.

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 Indirect tax

1.Sales tax,
2.Value added tax
(VAT), 3.Goods
and services tax
(GST))
4. Excise duty

Government Expenditure

7. Government consumption on goods and services

8. To provide public services
9. To providing social security – Defense Forces
10. Providing free education
11. Free medical services
12. Running day to day administration of the country

Government Services to Commerce

1. Information Services
2. Co-ordinating Bodies
3. Financial Assistance

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