Trade is an integral part of commerce. It refers to the sale, transfer or exchange of goods.
It means the exchange of goods for cash or for credit or for services. It doesn’t transfer only goods but also the ownership of goods to the purchasers by issuing cash or credit memo or bills.
As such it creates possession utility. It may be either a barter exchange or a monetary exchange. Barter system means exchanging goods or services directly.
Trade, therefore, refers to buying goods from the producers and selling the same to the consumers. The person who is engaged in trade is called traders.
The traders by taking the task of distribution in their hands allow the producers to concentrate exclusively on manufacturing activities.
Trade includes the work of all those people who specialize in the work of distributing goods among those who need the goods.
In short, trade means to purchase and sale of goods and services with a profit motive. It involves the exchange of goods and services between buyers and sellers.
Trade activities must be performed to earn a profit. It means activities having service motives and emotions are not trade activity.
Classification of Trade:
Trade may be classified either on the basis of the volume of business or on a geographical basis. There are two types of Trade:
- Internal Trade.
- External or Foreign Trade.
On the basis of geographical area, trade may be classified as internal trade and external trade.
1. Internal Or Home Trade:
When goods are purchased or sold within a country, it is known as internal trade or home trade.
Internal trade is also known as domestic trade or home trade or inland trade.
It simply implies sale, transfer or exchange of goods or services with profit motive within the geographical area of a country.
The purchaser and seller of the commodity belonging to the same country and the payment are made in the currency of the country, to which buyers and sellers belong.
Transfer of goods from one place to another helps to bring uniformity and stability of prices.
The growth of home trade basically depends on the development of an internal transport system- Roads, railways, airways, inland waterways, etc.
The volume and the value of trade also depend on the size of the population, the volume of population, development of banking and other support facilities.
According to the size and volume of the home trade, internal trade may be classified into two categories:
A) Wholesale trade.
B) Retail trade.
A) Wholesale trade: The trade involves buying goods in large quantities from producers and selling them in small quantities to retailers.
The wholesalers take the responsibility of procuring and storing large quantities of goods for supply to the retailers as and when required by them.
As such, wholesalers act as an improvement link between the manufacturer and the consumers through retailers.
The wholesale provide information to the producers regarding the choice, interest, and taste of consumers so that the producers can produce the products as per the requirements of consumers.
The wholesalers purchase goods at retailer price with a percentage of discount or commission.
Retailer price means the price at which it will be sold to the retailers.
The difference between retailer price and the maximum retail price is the income for retailers and the discount is allowed by the producers on retailer price is the income of the wholesaler.
The wholesalers are criticized for hoarding books, creating artificial scarcity, indulging in black-marketing and other malpractices.
B) Retail Trade: It means to sell goods in small quantities directly to ultimate consumers. Retailers purchase goods from a wholesaler in small lots or quantities and sell the same to consumers in pieces or numbers.
The retailers are the connecting link between wholesalers and consumers and render valuable services to both.
The retail trade is situated among the consumers. It arranges different goods from different places and makes it available to members of the society residing in its locality.
These traders inform the producers through wholesalers about the attitudes, likes and dislikes, preferences, traditions, and habits of consumers.
At the same time, the retail traders educate the consumers about the utility and working of new products.
2. External or Foreign Trade:
It means to trade with foreign countries. It implies buying and selling of goods beyond the national boundary of a country.
The theory of comparative cost or comparative advantages give rise to trade between two different countries.
Every country tries to produce only those products which it can produce at a cost which is less than the import prices.
The country will purchase all those goods from other countries which it cannot produce at less than the import prices.
Foreign trade is generally carried on a wholesale basis. The movement of goods takes place usually by sea wherever possible.
In the adjoining area, rail and road transport may be used. Air transport is used for goods of small size and high value.
The external trade or foreign trade depends on government policies of trading countries and usually requires a number of formalities to be completed.
Foreign trade helps in the development of closer inter-relationship between different countries.
Every country can obtain the goods which it cannot produce profitably at home. It also provides a wide market for the sale of surplus production of a country.
Foreign Trade is of three types:
A) Import Trade: It refers to the purchase of goods from a foreign country.
A country imports those goods which are not produced in that country at all or in sufficient quantity to meet the requirements of the nation.
Furthermore, the country may produce goods but at a higher cost than the import prices.
Purchasing goods by an Indian trader from a trader of the U.S.A., Russia, etc. is an example of import trade.
B) Export trade: It refers to sell or send goods to firms located outside the country.
Selling goods by Indian firms to other firms located in the USA, Russia, Japan, etc. is export trade.
C) Entrepot Trade: When goods are imported from one country with an objective or intention of exporting the same goods to some other countries, is called Entrepot trade.
For example, importing goods from Germany or Japan by Indian firms to re-export the same to Nepal or Bhutan, which do not have seaports.
Different Auxiliaries to trade:
Activities which are meant for assisting business are known as auxiliaries to trade.
These activities are generally referred to as service also because these activities are in the nature of facilitating the activities relating to industry and trade.
Public relations, transport, distribution, banking, packaging, insurance, etc. are regarded as auxiliaries to trade i.e. activities playing a supportive role.