Trade in Economics; Meaning and Types of Trading

What is trade?

Trade in economics is defined as the activity that involves the buying and selling of goods and services with compensation which the seller receives from the buyer. In other words, it is the exchange of goods and services between two or more parties for money or a value of money.

When a producer manufactures goods, he moves them to the wholesalers, the retailers, and then to the final consumers. This indicates the channel of distribution.

Trading activities take place between producers of goods and services and consumers within an economy which describes internal trade. External trade on the other hand allows different countries to expand their markets for goods and services that would not have been available for a particular country. External trade makes it possible for the international market to have greater competition and more competitive prices thereby making cheaper goods available to the local consumer.

In the financial market, trade means the buying and selling of shares/securities in the stock exchange market.

The concept of trade is essential for the satisfaction of human wants and needs, not just for profit-making. It is a social activity important for the economy because society needs an uninterrupted supply of goods at an increasing rate to satisfy the endless wants of humans. Trading does not only involves physical or tangible goods but also provides services to the consumers.

Trade came into existence alongside the existence of human life on earth, therefore, it is responsible for raising the standard of living of people. That is both the producers and consumers experience a rise in the standard of living.

Trade synonym

The following words are synonymous with the concept of trade; commerce, buying and selling, dealing, traffic, trafficking, business, marketing, merchandising, bargaining, dealings, transactions, negotiations, proceedings, and exchange.

Types of trade

Home trade

This is also known as domestic or internal trade. It takes place within the country without going beyond the geographical and political boundaries of the country. This activity takes place either at the local level, regional level, or national level. In other words, it is a trading activity that takes place that involves the exchange of goods and services among the residents of a country. Exchange does not take place across international boundaries. Also, the country uses only one currency for exchange, there is no need for an exchange rate between currencies. Items that are being traded locally also include imported items. For example, trading activities within Nigeria without extending it to other countries.

Home trade comprises two subdivisions, that is wholesale and retail trades.

Wholesale Trade

Wholesale involves buying and selling of products in bulk from the producers and selling them to the retailers for them to resell to the final consumers. The wholesaler is the middleman or intermediary between the producer and the retailer. He does not sell in units to the final consumer. Wholesale also has to do with the availability of storage and warehousing facilities. This is when the wholesaler relieves the producer of overstock in the factory.

Wholesalers can be categorized into;

  • Merchant wholesalers
  • Agents, brokers, and commission merchants
  • Manufacturers’ sales branches and offices

Retail Trade

Retailing is the act of buying from the wholesaler in smaller amounts and reselling them in units to the final consumers. The consumers then buy these commodities in smaller units for personal use. Retailers are the final link in the channel of distribution who serve as the intermediaries between wholesalers and the final consumers. Retail is also subdivided into large-scale retail and small-scale retail. The primary purpose of retail is to make goods available to the final consumers.

As the definition of retail implies, a retailer buys goods from the wholesalers and breaks them into smaller units for the consumers to purchase. The retailer stocks varieties of products, selling different/all kinds of goods at the same time. It is retail trade that makes it possible for consumers to enjoy door-to-door services.

International Trade

Also known as External trade or Foreign trade, refers to the exchange of goods and services between two or more countries. This activity goes beyond the geographical and political boundaries of a country. It takes place across international boundaries. In carrying out trading activities across international boundaries, two or more currencies are involved.

External trading activities take place on the basis of the international division of labor. Different countries are specialists in the production of specific commodities. Differences in natural and environmental endowment (natural resources) usually form the basis of this specialization. This calls for international exchange. The differences in capital stock, production costs, and labor skills bring about the need to satisfy human wants through international trade. There is also a need to create a wider market for the goods a country produces.

An example of foreign trade is China exporting medical facilities to Nigeria.

The exchange of goods and services between countries is subdivided into three types of trade; export, import, and entrepot.

Export 

When a country sells its products to another country, the activity is known as export. In other words, Export refers to goods and services a country sells to other countries. They can either be visible or invisible. Visible exports have to do with physical goods. Invisible exports on the other hand have to do with services a country sells to other countries such as transportation, banking, and insurance.

Import 

Export describes a trader in a country or a country purchasing goods from another country or other countries. Or from a trader located in another country. Import has to do with the goods and services the country purchases from another country. These imports also comprise visible and invisible imports.

Entrepot 

The term entrepot describes the activity of a country importing goods from one country and reexporting them to another country. Usually, when a country imports goods, it does some processing on those imported goods and reexports them. For example, if Indonesia purchases crude oil from Nigeria, processes it, and exports it to the USA, the activity describes entrepot. When a country imports raw materials or semi-finished products from one country, processes/convert them into finished products, and re-exports them to another country. This describes entrepot.

Stock trade

The phrase describes the buying and selling of the shares of a company with the aim of generating profit. These profits are usually short-term profits rather than long-term profits. Buying hares in a company implies that you have a percentage ownership of the company. The value of your investment changes in proportion to the changes (rise and fall) in the company’s share price.

To involve in trading stock, it is necessary to open a brokerage account through a stockbroker of a brokerage firm. This is meant to enable you to get a hold of your investment. A stockbroker trades stock on your behalf once you are ready for stock trading. This broker receives a commission called brokerage. Because of the involvement of this intermediary (stockbroker), traders have to ensure that their profits are sufficient in order to withstand these costs. A trade that is free of the commission also has hidden costs, this requires an extra effort by stock traders to outweigh those costs.

Stock trading falls within two categories; active trading and passive trading. Active trading involves a trader buying and selling stock based on the direction he is moving towards at the moment. An active trader aims at making multiple trades daily. Passive trade on the other hand has to do with the trader holding his stock for a while before taking further actions. A passive trader focuses more on the long-term trends and outcomes. Stock trade usually takes place in the stock market.

Forex trade

Forex trade is the process of meditating on the prices of a currency to potentially generate profits. Here traders trade currencies in pairs and by exchanging one currency for another, he is making speculations or whether the currency’s value will or fall over the other.

A forex trader is a currency trader who holds a position of a pair of currency. He is bound to generate a profit or incur a loss. The open position of the trader signifies that he exhibits some market exposure.

Forex trading is e-trading and transactions with this respect have to do with buying and selling two currencies simultaneously.

This currency pair or pair of currency comprises a base currency and a quote currency whereby one sells one to buy another. The pair is the amount the quote currency it costs to buy one of the base currencies. Making profit requires the ability to forecast the movement of the price of a currency pair.

Importance of trade

Specialization

It leads to specialization because different firms will give in their attention to their areas of production. Also, it facilitates the division of labor between different firms as well as geographical locations. This makes it possible to produce goods and services of better quality and standard. Productivity becomes more efficient as there is an efficient use and utilization of resources.

Improved standard of living

The concept of trade is essential for the satisfaction of human wants and needs. It is also essential for the generation of profit. While the buyers have their wants satisfied, sellers enjoy profits. This is why the act of buying and selling is a social activity important for the economy because society needs an uninterrupted supply of goods at an increasing rate to satisfy the endless wants of humans. Trading does not only involves physical or tangible goods but also provides services to the consumers. This helps in raising the standard of living of an economy.

Links producers and consumers

Trading provides a link between producers and consumers, this fosters a cordial relationship between them. This is because traders assemble different commodities from producers and sell them to consumers.

Economic and social development

Trade, both internal and external helps in speeding up economic growth and development as well as social development in an economy. An economy cannot grow without the existence of the exchange of goods and services.

Technical know-how and innovation

It helps producers in various countries to gain technical knowledge and new ideas on improving productivity. International trade most especially helps to build up skilled manpower. One is able to learn better ways of carrying out production activities as well as providing services.

Employment opportunities

Trading provides employment opportunities for people in an economy. It has contributed greatly to providing a source of livelihood for many thereby reducing the rate of unemployment. Farmers are able to sell their agricultural products in order to gain returns thereby gathering wealth.

Satisfaction of human wants

Consumers, both local and foreign have easy access to the products they need or want. Without exchange, this will be almost impossible and this will pose so many economic challenges. This raises the standard of living of individuals and the economy at large. Cordial relationships emerge from this.

Investments

Through this, many people are willing to invest in factors of production and producing firms as well as entrepreneurship. This reduces unemployment and facilitates economic development.

International trade

International trade is the trade that takes place between two or more countries, that is an exchange of goods and services across international boundaries. This takes place to expose consumers to those goods and services that are not available in their countries or expensive in the country.

International trade makes the market become more competitive thereby resulting in cheaper products available to the local consumer. It gives countries room to expand their markets and grant them access to goods that are not available within. When a local consumer walks into a supermarket and purchases a cream cheese, he is also experiencing the impact of international trade.

Bilateral and multilateral international trades

The term bilateral trade signifies the exchange of goods and services between two countries only. Multilateral trade on the other hand signifies the exchange of goods and services between more than two countries.

Imports, exports, and Entrepot

Exports

Exports are those goods and services a country sells to other countries. They can either be visible or invisible. Visible exports have to do with physical goods. Invisible exports on the other hand have to do with services a country sells to other countries such as transportation, banking, and insurance.

Imports 

Imports describe those goods and services the country purchases from another country. These imports also comprise visible and invisible imports.

Entrepot 

The term entrepot describes the activity of a country importing goods from one country and reexporting them to another country. Usually, when a country imports goods, it does some processing on those imported goods and reexports them. For example, if Indonesia purchases crude oil from Nigeria, processes it, and exports it to the USA, the activity describes entrepot. When a country imports raw materials or semi-finished products from one country, processes/convert them into finished products, and re-exports them to another country. This describes entrepot.

Absolute and comparative cost advantage

The political economists first recognized the importance of international trade. These economists include Adam Smith and David Ricardo. Some economists still argue that international trade can actually be bad for smaller countries, placing them at a greater disadvantage on the world stage.

Absolute advantage

Absolute advantage describes when an individual, company, region, or country is able to produce a greater quantity of a good or service with the same quantity of inputs per time. Or their ability to the same quantity of a good or service per time with a lesser quantity of factor inputs, than another entity producing the same good or service. An entity possessing an absolute cost advantage is able to produce a good or service at a lower absolute cost using a smaller amount of factor inputs or another process that is more efficient than another entity producing the same good or service.

Absolute cost advantage is usually the basis for large profits generated from trade between producers of different products possessing different absolute advantages.

This theory was propounded by Adam Smith.

Comparative Advantage

The comparative cost advantage describes the ability of a country to produce a specific good or service at a lower opportunity cost than its partners in trade. This cost advantage enables a company to sell goods and services at lower prices than its counterparts and still realize stronger sales margins. A popular English political economist, David Ricardo propounded this theory in 1817.

This theory introduces opportunity cost as a factor or basis for analyzing the choice between different production options. It implies that countries will engage in exchange with another, exporting the goods which they have a relative advantage in.

Benefits of international trade

Increased revenues

International trade enables one to increase the number of potential clients. This implies that each country one adds to his list has a tendency of paving a straight path for business growth and increase in revenue. The more you have a cordial business relationship internationally, the more chances you have for your business to grow and expand.

Better risk management

Because international trade helps to diversify the market, it reduces the risks of a business declining in an economy. When a businessman focuses on the domestic market alone, he may face an increased risk of a downward trend in the economy. Some of these risk factors include political factors and environmental events. When you are less dependent on a single market, this can help you to reduce the potential risks that accompany your core market.

Foreign exchange earnings

When you add external trade to your portfolio, you are bound to benefit from fluctuation in the value of currencies. For example, when the dollar goes down, you will be able to export more to the United States because foreign customers are also benefiting from the favorable exchange rate.

A country at large is able to generate more revenue with an increase in exports. These revenues can then be used for the purpose of investment and the provision of social/public goods.

Employment opportunities

The active population can engage in international trade either directly or indirectly thereby having a source of livelihood. Farmers will be able to export more of their agricultural products.

Enhanced reputation

Having a business relationship can boost a country’s reputation. When a country is successful, it has a great influence on other neighboring countries. Producing companies in such a country will be able to enhance their profile through this. Credibility increases both at home and abroad.

Specialization

International trade provides room for more specialization. This is because different firms will give in their attention to their areas of production. Also, it facilitates the division of labor between different firms as well as geographical locations. This makes it possible to produce goods and services of better quality and standard. Productivity becomes more efficient as there is an efficient use and utilization of resources. It gives more room for more creativity and innovation. Receiving feedback from foreign customers can help a company within a country to develop its product better.

Increased foreign investments

Through international trade, factors of production become more mobile thereby attracting foreign investors into a country. This helps greatly in improving the economy of a nation.

Problems of international trade

Distance

Distance poses challenges to trading beyond national boundaries. It makes it difficult to establish close contact between traders. Personal contact becomes scarcely possible as it becomes difficult for buyers and sellers to physically meet. Distance affects transportation costs as well as the length of time for goods to arrive at their destination. Also, the longer the distance is, the higher the risk of transit.

Language barriers

The differences in languages among countries can pose challenges to effective communication. When countries carry out advertisements and prepare price lists and catalogs in foreign languages, understanding will become very difficult.

When a trader wants to sell abroad, he will need to be conversant with the foreign language or employ someone who understands that language.

Lack of information about foreign businessmen

When there is no direct relationship between buyers and sellers, it will become very difficult to obtain reliable information with regard to the financial position and the business stature of the foreign traders. It is very necessary to take steps towards verifying if foreign buyers are credit-worthy. If one does not verify this sensitive information, the credit risk increases.

Import and export restrictions

Trade restrictions such as quotas, tariffs, and the imposition of embargos as well as stringent laws on immigration can pose challenges on trading out of the country. Also, factor mobility across international boundaries becomes difficult. However, this challenge can decrease with the adoption of multilateral trade agreements and the development of economic communities.

Currency difference

Every country has its own national currency thereby making each have its own distinct monetary units. To tackle this challenge, the international market uses foreign exchange rates. A challenge relating to the foreign exchange rate is fluctuations in the foreign exchange rates thereby increasing the risk. Remitting money for payments in external trade involves a lot of time and expenses. The wide time gap between the dispatch of goods and the receipt of payment increases the risk of bad debts.

Frequent changes in the market

It is difficult to act fast before changes occur in the forces of demand and supply abroad. There may be frequent changes in prices in the international market, that is, the prices are highly unpredictable. Usually, these changes occur as a result of changes in consumer behavior, tastes, and preferences, and the changes in import duties and freight rates. Another frequent change is the fluctuation in the exchange rates.

In conclusion, trade exists to satisfy human wants. Both the domestic and external trades contribute greatly to economic growth and development as well as satisfying human wants thereby improving the standard of living in an economy.

Trade as adjective means for those who specialize in a particular business. For example when we say ‘trade journal’, we are describing what the journal is all about. As a verb, it means that one is making an exchange of goods and services. As a noun, it is the act of buying and selling goods and services in exchange for money.

Frequently asked questions

What are the two types of trade?

There are two major types of trade, home trade, and international trade. Home trade is also known as domestic or internal trade which involves exchange among residents of a country without crossing international boundaries. International trade is the exchange that takes place between two or more countries, that is trade across international boundaries. International trade involves imports, exports, and entrepot.

What is this word trade?

The word trade describes the exchange or the buying and selling of goods and services in exchange for money.

What is trade example?

An example of trade is when you go to the market and see people buying and selling, they are carrying out trade. Also, when you pay a taxi man to transport you from one place to another, you have engaged in trade.

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