Foreign Trade II: Concepts of International Trade SS1 Commerce Lesson Note

CONCEPTS OF INTERNATIONAL TRADE

1. Terms of Trade: This means the prices at which the country’s exports exchange for 

The price index of export        × 100

The price index of import

If the prices at which a country’s exports exchange for her imports are greater, it is said that the country has favourable terms of trade if that of imports are greater than exports. 

It is an unfavourable term of trade.

Visible exports are mainly commodities and they appear in a country’s balance of trade. Invisible exports are services that are seen but are calculated in terms of money e.g. insurance, civil aviation, shipping, tourist services etc. They appear in the balance of payments of a country.

Visible imports include commodities that are easily seen that a country buys from other countries. They feature in a country’s balance of trade. Invisible imports are services rendered to other countries that are calculated in terms of money and appear in balances of payments.

BALANCE OF PAYMENT DEFICITS

This refers to a situation whereby a country’s receipts are less than that of its payments over a given period and this means that the economy is not self-sufficient.

CAUSES OF UNFAVORABLE BALANCE OF PAYMENT

1. Fall in a country’s exports.
2. Low technology or use of crude implements.
3. Low production.
4. Bad weather that results in low harvest.
5. High taste for foreign-made goods and services.

MEASURE TO CORRECT BALANCE OF PAYMENT DEFICIT

1. Devaluation of local currency that will reduce the value of a country’s exports and make imports expensive.
2. Exports of imports.
3. Reduction of imports.
4. Increase in local production to boost exports.
5. Sales of a country’s foreign investment.
6. Grants and aid from richer countries.
7. Borrowing from financial institutions e.g. I.M.F {international monetary fund} and world bank.