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TRADE

Introduction

Trade Trade the act or process of buying, selling, or exchanging commodities, at either wholesale or retail, within a country or between countries. It acts as the bridge between customers and manufactures. people and organization involved in trade are called traders. Trade may be either home or foreign trade.

According to A. N. Agrawala, “Trade refers to the sale, transfer or exchange of goods or services.”

Trade is a basic economic concept involving of 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.

Terms and Conditions of Trade

Types of Trade

  1. Home Trade
  2. Foreign Trade

1. Home Trade

Introduction

Home trade is the act of buying and selling of goods and services between the buyer and seller of the same country. It is also known as internal or domestic trade. In home trade, transactions are usually made in local currency. There are relatively less legal and administrative obligations to fulfill before conducting domestic trade. In home trade, payment is made in national currency. In home trade, the party involved in purchasing goods is called the buyer and the party involved in selling goods are called the seller.

Procedures of Home Trade

In the process of buying and selling, some documents are created and exchanged between the buyer and seller. These documents support the trade legally.

The following are the main documents used in home trade: -

  1. Enquiry Letter
  2. It is the first step in which the buyer writes and sends a letter of enquiry to the seller, asking about the quality, quantity, price and other conditions of trade. This is the letter which contains full questions in regard of goods and terms and conditions of trade.

  3. Reply Letter
  4. It is the second step of the home trade. After receiving the letter of enquiry from buyers, the seller sends a letter to the buyer which is called reply letter. It is also called quotation. In this letter, all the answers to the enquiry in regard of goods and terms and conditions of trade are given to the buyer.

  5. Order Letter
  6. After receiving quotation letter from different sellers, the buyer analyses them carefully and selects the most favorable one. Then the buyer sends purchase order through a letter which is called order letter. Since, it is the ordering for the purchase of goods, it should be written very carefully.

  7. Acknowledgement Letter
  8. After receiving an order of purchase of goods, the seller then writes a letter to inform the buyer about the receipt of the order and its acceptance. This letter also confirms the right delivery of goods on right time.

  9. Invoice
  10. After making the goods ready for delivery, a bill is prepared to give details about the unit price, total price, qualities, and quantities of goods being dispatched and other information like discount which is called invoice. So, an invoice is a bill of goods prepared by the seller and sent along with sold goods. It is generally prepared by four copies – 1 copy for the buyer, 2 copies for the transport company and 1 copy is kept by the seller himself.

  11. Receipt of goods
  12. Usually, in the home trade, the goods are carried through truck transportation. The seller gives the delivery of goods to the transport company and obtains a receipt from it as the evidence which is known as a receipt of goods. Hence, the receipt of goods is a document issued by the transport company stating that the goods have been received to carry them from the place of the seller to the place of the buyer.

  13. Quotation letter
  14. After receiving enquiry, seller sends the quotation letter answering all the queries of buyer. He will try to make it attractive so that buyer accepts it.

  15. Delivery of goods
  16. Now the goods are delivered to the transport company for being sent to buyer.

  17. Carriage of goods
  18. The shipping company carries the goods to the buyer’s place as per the instruction provided by the supplier.

2. Foreign Trade

Introduction

The trade which is carried on between two or more countries is called foreign trade. It is conducted between the individuals or organizations of two or more countries. It is the international trade in which the payment is made in foreign currencies. It is divisible into import trade and export trade. The purchase of goods from a foreign country is called importing and the sale of goods to a foreign country is called exporting. The foreign trade exists because all types of goods necessary for human beings cannot be produced by a single country due to the lack of raw materials, skilled manpower, capital and technology.

Documents used in Foreign Trade

  1. Enquiry letter
  2. It is the first step in which the importer writes and sends a letter of enquiry to the exporter, asking about the quality, quantity, price and other conditions of trade like credit facility, modes of payment, etc. This is the letter which contains full questions in regard of goods and terms and conditions of trade.

  3. Reply letter
  4. It is the second step of the trade. After receiving the letter of enquiry from importers, the exporters send a letter to the buyer which is called reply letter. It is also called Quotation Letter or Price List. In this letter, all the answers to the enquiry in regard of goods and terms and conditions of trade are given to the importer.

  5. Order letter
  6. After receiving quotation letter from different exporters, the importer analyzes them carefully and selects the most favorable one. Then, the importer sends purchase order through a letter which is called order letter. Since, it is the ordering for the purchase of goods, an importer should draft it very carefully by stating the quality and quantity of goods clearly and correctly.

  7. Acknowledgement letter
  8. After receiving the order of purchase of goods, the exporter then writes a letter to inform to the importer about the receipt of the order and its acceptance. This letter also confirms the right delivery of goods on right time.

  9. Invoice
  10. After making the goods ready for delivery, a bill is prepared according to L.C. number to give details about the unit price, total price, qualities, and quantities of goods being dispatched and other information like discount which is called invoice. So, an invoice is a bill of goods prepared by an exporter and sent along with dispatched goods. It is generally prepared by four copies – 1 copy for an importer, 2 copies for the transport company and 1 copy is kept by the exporter himself.

  11. Bill of Lading
  12. The sixth document used in foreign trade is a bill of lading. In foreign trade, the exporter generally dispatches the goods to the importer through the ship with the help of a special document known as a bill of lading. The exporter obtains the bill of lading on placing the goods on board the ship from the shipping company. The bill of lading contains the full description of the type, quantity and condition of the goods placed on board the ship and the name of the place where the goods are to be carried.

  13. Quotation Letter
  14. It is a kind of letter written by exporter responding to all the queries of enquiry letter. The quotation should be reasonable so that importer accepts it.

Invoice

Introduction

Invoice is a bill or document issued by the seller or exporter to the buyer or importer mentioning the details of goods delivered. It is the statement of goods sold which is prepared by the seller or exporter stating the particulars of goods dispatched and net payable amount. It discloses the details of goods delivered like quantity of goods, types, rate, total price, other expenses, means of payment or transportation, detail of buyer & seller, discount, etc. It is prepared to inform buyer about the payable amount, provide evidence for the sale transaction, provide the basis to maintain accounts for the goods bought and sold, determine commission to consignee and to fix the selling price of the goods bought.

The invoice includes the following information:

  1. The name and address of both seller and buyer
  2. The date of dispatching the goods
  3. The invoice number and order number
  4. Description, quantity, rate and amount of goods supplied
  5. Trade discount allowed
  6. Expenses incurred by the seller on behalf of the buyer
  7. Authorized signature of the seller
  8. Terms and conditions and other particulars

Importance of Invoice

The invoice is the outcome of trading activity which is equally important in home trade, foreign trade and in a consignment. The preparation of invoice is compulsory for the purpose of providing evidence, information and record when a sale transaction takes places. The importance of invoice can be stated as follows:

The invoice includes the following importances:

  1. Invoice provides detail information about the price of goods such as unit rate, total amount, discount amount, etc.
  2. It also gives information about the other charges to be paid by the buyer or importer.
  3. It makes a basis for keeping a record of total purchase and sale of goods.
  4. It is a basis for reminding both buyer and seller about taking and making of payments of goods in time.
  5. It helps to confirm whether the goods received are as per the order placed or not.
  6. It provides the formal evidence of the sale transaction.
  7. It provides the basis for fixing the selling price of the goods.

Types of invoice

There are different types of invoice used in import and export trade. According to the expenses to be included in it, invoices are of five types. The following are the main types of invoices used in foreign trade:

  1. Loco invoice
  2. Loco means local. Loco invoice states the local or godown price of the exporter. It mentions only the cost of goods. It does not include any item of expense incurred in the carriage of goods from the place of the exporter to the place of the importer. All the expenses incurred in the carriage of goods are borne by the importer himself.

  3. F.O.B. invoice
  4. It is free on board invoice. It is also known as free delivery price up to board the ship. It is the invoice issued at that time when all the expenses up to the shipboard are borne by an exporter. The other expenses from shipboard to importer’s go-down are borne by exporter himself. It includes all the expenses incurred in the carriage of goods till they are loaded on board the ship. Thus, it includes packing charges, cartage and loading charges.

  5. C and F invoice
  6. It is cost and freight invoice. It is prepared by adding the freight of ship to the F.O.B. price. It is the invoice issued at that time when it is agreed to sell goods by bearing only the cost price and freight charges of goods. Only the insurance charge in the condition is free to the importer, which is borne by exporter himself.

  7. C.I.F. invoice
  8. It is the cost, insurance, and freight invoice. It is prepared by adding the marine insurance to the C and F price. It is the invoice issued at that time when it is agreed to sell goods by bearing all the other charges along with cost price of goods by the importer himself. No any charges are exempted to the importer.

  9. Franco invoice
  10. Franco means free. It is the free delivery price up to the godown of the importer. It is the invoice issued at that time when it is agreed to sell goods exempting all other charges effects up to the godown of an importer, except the price of goods. The importer should pay only the price of goods as per the agreement. All other charges are free.

WTO

Introduction

World Trade Organization is known as WTO, a specialized organization of United Nations. The foundation of WTO was developed in 8th GATT (General Agreement on Trade and Tariffs) in Uruguay in 1994. WTO is an international level organization established to manage, regulate and facilitate the global trade by maintaining trade discipline among member nations. It was established on 1st January 1995. It aims to develop trade rules, extend trade and solve trade problems among member countries. It works to maintain a fair and healthy competition among the member nations in their trade activities.

Functions of WTO

The major functions of WTO are as follows:

SAFTA

Introduction

SAFTA means South Asian Free Trade Area. It is a new business strategy developed during 10th SAARC Summit held in Kathmandu. SAFTA is a mutual agreement made by SAARC countries to promote the mutual trade and enhance economic cooperation by ensuring the free flow of goods and services among member countries. It came into effect on 1st July 2006 which replaced the earlier SAPTA. It is established to promote regional trade among the SAARC countries which include Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri-Lanka. The main objective of SAFTA is to promote fair competition in trade in SAARC countries to ensure their equitable benefits for economic development.

Functions of SAFTA

The major functions of SAFTA are as follows:

SWIFT

Introduction

Society for Worldwide Interbank Financial Telecommunication (SWIFT) is a communication mechanism that allows the exchange of millions of standardized financial messages between financial institutions throughout the world. It provides a platform for banks, corporations and other financial institutions to exchange messages, enabling them to work in co-operation. It is extremely reliable and secured and has provided the best option to make payment to any person or organization through banks.

Means of Payment

Means of payment are the instruments used for making payment of the value of goods purchased under trade. These means are used to remit money from one place to another for settling accounts and for making cash purchases. The following are some of the important means of payment which can be used to remit money either through bank or post office:

  1. Cheque
  2. A cheque is a written order issued by a depositor directing a specified banker to pay on demand a certain sum of money to a certain person or to the bearer of the instrument. In order to pay the amount of goods, the buyer draws a cheque on his local banker and sends it to his seller by post. For additional safety, the cheque may be crossed.

  3. Bank draft
  4. It is the means of payment used in foreign trade. For this, one has to go to the bank and deposit the money equal to the amount of payment to be made to the party and should also pay the service charge. Bank issues a draft which can be sent through register letter. The party who receives the draft produces it to the bank according to the instruction and takes payment.

  5. Telegraphic Transfer (T.T)
  6. The telegraphic transfer is the quickest means for remitting a large sum of money in and outside the country. The T.T. is an order issued by a bank directing its branch in another place through telegraph to pay a certain sum of money to a certain person. It is used both in home trade and foreign trade. It is costlier than bank draft.

  7. Letter of Credit
  8. It is also one of the very common means of payment used in foreign trade. It is also done through the bank. It is a letter issued by a bank giving a guarantee on behalf of local trade making payment to the foreign parties. It is a guarantee of payment issued by the bank. So, it solves the guarantee and currency problems of the importer.

  9. Money order
  10. The money order is a means of remitting money through the post. It is suitable to remit a relatively small sum of money to a distant place quickly. It is an order issued by a post office of one place usually through telegraph directing the post office of another place to pay a certain person. Money order is cheapest than telegraphic transfer.

  11. Automated Teller Machine (ATM) card
  12. ATM is a computerized device which provides the financial services to the customers without the involvement of human clerk. A bank installs ATM in different public spaces like department stores, hospitals, universities, hotels, airports, railway stations, petrol/ gas stations etc. The account holder uses the debit card to draw money through ATM from his bank balance. The ATM card contains a unique card number and security information. The security refers to the Personal Identification Number (PIN) of the customer.

  13. Electronic transfer
  14. Electronic transfer refers to the computer-based system used to perform financial transactions electronically. It is used by a cardholder to pay the amount of goods and services, withdraw cash through ATM from different places, transfer fund from one bank account of the cardholder and transfer fund to the account of the third party. In order to remit any foreign currency from one country to another through the bank, the support of SWIFT (Society for Worldwide Interbank Financial Telecommunication) is essential. SWIFT is an international institution which makes the networking of member banks in different countries.

  15. Hundi
  16. Hundi is believed to have arisen in the financing long distance trade around the emerging capital trade center. Hundi is an informal value transfer system between huge networks of money brokers. Transferring money through hundi is an informal system in which no legal documents are exchanged between hundi brokers. The transactions are totally based on the honesty of the hundi brokers. Hundi is an attractive instrument of means of payment because it provides fast and convenient transfer of funds from one place to another place. It is an economical way of remitting money as the commission to be charged is much lower than the commission charged by the banks.

Abbreviations
ATM ➡Automated Teller Machine
SWIFT ➡Society for Worldwide Interbank Financial Telecommunication
PIN ➡Personal Identification Number
LC ➡Letter of Credit
WTO ➡World Trade Organization
SAPTA ➡SAARC Preferential Trade Arrangement
GATT ➡General Agreements on Tariffs and Trade
CIF ➡Cost, Insurance, Freight
FOB ➡Free on Board
C&F ➡Cost and Freight
BIPPA ➡Bilateral Investment Promotion and Protection Agreement
FDI ➡Foreign Direct Investment

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This content is contributed by:

Ajmat Ansari