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Production

BRANCHES OF COMMERCE

1.Commerce includes all the activities which contribute to the transfer of surplus goods from the original producer to the final consumer at the right time, at the right place, in the right quantity and at the right price.

2. To effect this transfer efficiently, both trade and aids to trade are required.

3 Trade means the actual buying and selling of goods with a view to making a profit. It involves satisfying directly or indirectly the wants of consumers by transporting the 'right' goods, both final and intermediate, from the producers to the consumers.

4. There are two main types of trade:

       (a)  Home trade is carried out among the people of the country itself. It may be wholesale or retail. A wholesaler buys from the producer and sells to the retailer who in turn resells to the final consumer.

       (b)  Foreign trade is trade between the people of one country and the rest of the world. It may be import trade or export trade, both of which are normally wholesale in nature.

5. Trade cannot be carried on without aids to trade. So, aids to trade are the various activities carried on helping carry out trade. The aids to trade include banking, transport, communications, warehousing, advertising and insurance.

6. Everyone, whether in the capacity of a final consumer or a producer such as a farmer, a manufacturer, a trader or even a doctor, requires the services of commerce, i.e. trade and aids to trade.

7. Commerce is needed in the production process, before and after the production of raw materials and finished goods.

RODUCTION

Production is the process by which raw materials are transformed into finished goods to satisfy the requirements of consumers or other organizations. In addition to being in the right form, the goods must be in the right place at the right time before the process of production is complete.

Branches or stages of Production:

Primary Production

This is the first stage of production and is called the extractive stage. In this stage, raw materials are extracted from the surface of the earth or from the sea. Workers are employed in mining, fishing, quarrying, forestry and farming. In this stage, the raw materials are unusable and must be sent to the manufacturing industries to be changed in to goods that can be used.

 Secondary Production

In this stage, the raw materials are transformed into semi-finished or finished products. The goods are made ready for sale to the final consumers in this stage. Textile industry, building and construction industry, chemical industry, etc, are examples of the manufacturing work carried out in this stage.

Tertiary Production

The transfer of goods from the factories to the final consumers is the work that is carried out in the tertiary stage. In this stage, there are many activities which are broadly divided in to two:

-          Commercial Services: This includes workers in communications, finance, insurance, wholesaling and retailing. These workers are involved in getting the goods to the final consumer.

-          Direct Services: People in this group work to provide a direct service rather than delivering goods to the consumers. Teachers, doctors, nurses, lawyers, civil servants, policemen, etc, are examples of people providing direct services.

Chain of Production:

            Primary, secondary and tertiary industries are the stages in the chain of production, which is the process by which raw materials reach the consumer as finished goods or services. Each stage of production, value is increased. For example, consider a chain of production for a wooden table. In the primary stage trees are cut down and sawn into planks. In this stage planks (raw materials) are very cheap. In the secondary stage, the wood is shaped into a table. In the production process of wooden table, manufacturer uses labour, machines, raw materials and other materials needed to finish the product. Overhead costs such as rent, fuel and power, insurance, telephone charges etc. are also incurred in the production process. Therefore, at the end of the secondary stage, the value of the table will be much higher compared to the primary stage.  When selling the tables to the wholesalers, manufacturer also adds a profit margin. In the tertiary stage, the wholesalers and retailers will add profit margin when selling the tables. Therefore, value increases at each stage of production until it reaches the final consumers.

The chain of production for a wooden table would be as follows:

Primary- a tree is cut down and sawn into planks.

Secondary- the wood is shaped into a table.

Tertiary- the table is transported and sold by a retailer.

Another way of classifying production is as follows:

• Direct Production: This is producing goods and services for the producer’s own use. For example, when a man grows food crops for his own use or a man builds his own house or makes his own furniture, it is called direct production.
• Indirect Production: This involves specialization in a type of work. For example, a man specializes in ensuring that the quality of a product is standardized. There is division of labour, which leads to specialization.

DIVISION OF LABOUR

In an industry, there are many firms and each firm has many departments. In each department, there are many workers. Each worker has his own specialized job. This is the principle ofdivision of labour. For example, in the finance industry there are many banks. Each bank has many departments like the accounts department, the clearing department, the payments and receipt department, etc. Within each department there are many workers and each worker has his own job. In the receipts and payments department, some workers deal with cheques, while others deal with the computers and clerical work.

Division of labour at Individual Level

This is breaking down of a productive activity into tasks so that each person performs a task that he is most skilled in. For example, a person may be solely responsible for only cutting the fish in a fish-canning factory.

Division of Labour at Regional Level

This happens when a region in a country is involved in producing a product. This may be due to the availability of natural resources in that region. For example, Feevah, an island in the Maldives is specialized in farming because the soil is very favorable for cultivation.

Division of Labour at National Level

Sometimes a country may specialize in producing one line of goods. This is also due to the availability of resources or favorable climatic conditions in that country. For example, Malaysia specializes in producing rubber; Maldives specializes in fish, Zimmbabwe in sugar, and Botswana in coffee.

Advantages of Specialization

·         Individual workers can concentrate on the work that they are most suited for.

• Practice makes perfect. Workers doing the same work hundreds of times a day will become perfect in their work.
• Division of labour allows a great saving of tools and equipment.
• When there is division of labour, there are chances of new techniques and ideas being developed.
• Division of labour leads to an increase in the output per worker.
• Increase in output results in lower costs for the consumers.
• This also results in the need to exchange the surplus in one area with that of another area.
• Specialization leads to less breakages and damages resulting in less wastage.

Disadvantages of Specialization:

·         Each department depends on the other departments. If there is a break down in one department, then the whole industry may get affected.

• There are chances of boredom as the workers are doing the same work hundreds of times a day.
• As machinery becomes more elaborate it replaces labour causing unemployment.
• Division of labour normally leads to a decline in craftsmanship.
• As machinery takes over, the choice of goods available to consumers is reduced.

Explain the ways in which industry, commerce and direct services are inter-related and interdependent.

All human beings have unlimited wants. Human wants can be satisfied by production. Production takes place in industries. Industries produce goods and services to satisfy human wants. All goods and services produced should reach the final consumers. Here commerce assists a lot. Commerce includes trade and aids to trade. Commerce does see that all those goods and services being produced should reach the final consumers. In this regard, banking, insurance, communications, warehousing and transport assist the industries to reach the goods and services to the final consumers.

Direct services are those services which are performed directly to the people who receive them. This is concerned with the provision of personal services. Direct services are not concerned with the distribution of goods. They enable the private individuals to make use of health facilities (e.g., using doctors) and obtaining knowledge and skills (e.g., using teachers) as well as relying on the maintenance of law and order and other personal services (e.g., hair dressing, journalist). Direct services help the firms’ employees to be better educated and healthier and therefore they will be more productive.

Direct services like education, health services, professional services assist industries in such a way that both skilled and unskilled workers are available for those industries. Clerical staff offer their services for a smooth running of both trade and commercial activities. Thus, commerce, industries and direct services are interdependent to each other.

                   !!!!!!! CONSUMER PROTECTION !!!!!!!!

Reasons why consumers need protection

·                     Prices might be fixed artificially high either by one firm or by a group of firms acting together.

·                     Misleading price reductions might be offered.

·                     Customers might not receive the correct weight or quantity of goods.

·                     Advertisements might make false claims for goods.

·                     Inferior and even dangerous ingredients and components might be used in production to keep costs down.

METHODS OF SAFEGUARDING THE CONSUMERS

1. CONSUMER PROTECTION LAWS

a) Sale of Goods Act 1979:

The main provisions are:

·                     Goods must suit the purpose for which they are sold.

·                     Goods sold by description must fit the description.

·                     Goods sold by sample must correspond with the sample.

·                     Goods must be of merchantable quality.

In the event of any of these conditions not being fulfilled, buyers are normally entitled to choose whether the retailer refunds the money, replaces the goods or repairs them.

b) Trade Description Act 1968:

This Act lays down penalties for traders who deceive the public by making false claims for their goods and inaccurate price comparisons. It is an offense to claim that an article is worth £10 and is sold for £7, when it is worth less than £10. Likewise, a seller should not claim that his articles are unbreakable or waterproof unless they are. This Act is enforced by trading standards officers.

c) Fair Trading Act 1973:

This Act is controlled by a Director General who is assisted by the Consumer Protection Advisory Committee. There are some recommendations:

·         Retailers are not allowed to quote manufacturers’ recommended prices.

·         Shopkeepers are forbidden to have notices such as, “No Cash Refunded” as it will mislead a consumer as to his rights.

·         Traders who are selling goods must not pretend to sell them as private citizens.

·         The Act sets codes of practice for traders to follow so that customers are satisfied.

d) Consumer Protection Act 1987:

Sometimes consumers are endangered by goods they buy. This Act imposes a duty on manufacturers to supply safe products. Failure to do so may render a firm to pay unlimited compensation. For example, a gas burner must have a guard, which prevents clothing from touching the flame.

e) Food and Drugs Act 1955:

This Act controls the contents of food products and their labeling. It is enforced by the local environmental health department. It is also concerned with the ingredients in food items. For example:

·         Jam must contain a minimum proportion of the named fruit.

·         Meat pies must contain 25% of meat.

·         At least 50% by weight of sausages must be meat.

2. CONSUMER PROTECTION AGENCIES (ORGANIZATIONS)

a) National Consumer Council:

The NCC, which was established in 1975 by the Government, has members from trade unions, parliament, industry and independent consumer organizations. Their role is to make the consumers’ view known to the government. The NCC has made strong representations to the government about bus services, optical services and shop opening hours.

b) Citizens Advice Bureau:

Their role is to act as a mediator between consumers and traders in areas where there are no consumer protection agencies.

c) The British Standards Institution:

It lays down standards for a manufacturer to follow. The BSI cannot enforce its recommendations, as it is an independent organization. The kite mark of the BSI is regarded as a sign of quality by consumers, due to extensive tests by BSI inspectors.

d) The Media:

The press, television and radio are very important in dealing with individual complaints. Some newspapers run their own consumer protection agencies. They make a consumer aware of his rights.

e) The Consumers’ Association:

The Consumers’ Association is an independent and non-profit making organization. It publishes a monthly magazine “Which?”. In its report, “Which?”, the list of good and bad points of a product are published. This enables a consumer to choose the best product from a range of products. The association also advises its consumers on consumer problems. The association also publishes “Gardening from Which?” and “Holiday Which?”, which deal with pregnancy restaurants, health, divorce and taxes.

f) Codes of practice,

Industries establish voluntary code of practice for the guidance of their members and the protection of consumer. The advertising standard authority is an example. Though the consumers are protected by trade description Act, the advertising standard authority maintains code of practice. It is described as example the Retail Trading Standard Association, The British Electro Technical Approval Board.

3. OTHER MEANS OF SAFEGUARDING CONSUMERS

Self Protection

Consumer awareness while they consume goods or services

The customers should be able to check all the when goods or services supplied to them.

Most retailers are prepared to correct genuine mistakes

Further, where genuinely faulty goods are concerned the retailer will probably have little trouble in obtaining the refund from manufacturer. 

Customer Credit

Credit is an arrangement by which a buyer can take possession of something now and pay for it later or over time.

Reasons for giving Credit1. To gain competitive edge.
2. To earn additional money.
3. To sell a very expensive items.
4. When the product sales is on decline.

Short Term CreditThe amount of credit is low.
Credit is to be paid within one year.

Informal CreditCredit is given without any written agreement.
Does not involve collateral security.
Small amounts are involved.
Repayment is to be made within one year.
Normally offered by the retailer to their trustworthy customer.

Credit CardsA plastic card with a magnetic tape or with a micro chip on it issued by commercial banks to their credit worthy customers on request.
These can be used for making payment at selected retailers or for drawing cash from selected ATMs up to a certain limit.Features:1. Plastic Card.
2. Magnetic tape.
3. Name of card holder.
4. Card number.

5. Validity date.

Advantages:Advantages to Card Holder:
1. Increases purchasing power.
2. Minimum cash handling.
3. Obtain cash at ATM.
4. Can be cancelled when stolen.
5. Postponement of payment.

Advantages to Bank:
1. Interest from card holder.
2. Commission from retailer.
Advantages to Retailers:
1. More sales.
2. Competitive edge.
3. Minimum cash handling.

Disadvantages:Disadvantages to Card Holders:
1. Limited acceptability.
2. Interest is charged.
3. Irrational buying.
4. Everyone can not have this facility.
5. Can be misused.

Disadvantage to Bank:
1. Recovery of money from defaulters.
Disadvantages to Retailer:
1. Commission and rental to be paid to the bank.
2. Problem of limited cash.

Over DraftA short term facility offered by the bank to the its customers where the borrower can over draft (withdraw money more than their balance) their accounts maintained with the banks.
Available only for current accounts.
Used by businesses to manage cash flow problems.

Long Term CreditAmount of Credit is large.
Repayment goes beyond one year.
Repayment is made in instalments.

A written agreement is signed.
Collateral security are involved.

LeasingA rental agreement which involves a series of fixed payment (annuity) which is extended to several period.Lessor: One who owns the asset and lets other (lessee) use it.Lessee: One who gets procession of the asset for its use.

Hire PurchaseA leasing agreement in which the lessor lets the lessee use an asset for a certain time period (less that the life
of the asset) upon a certain instalment (rental) with an option to purchase the asset by paying the amount or
return the good to lessor, after the lease period.
Suitable for asset with good resale value.
The lessor will own the asset till the last instalment has been paid and the total value of the asset is recovered.

Sale and Lease backLessee originally owns the asset.
The asset is sold to the lessor on the bases of market price and lessee gets the full amount in lump sum.
Title will be in the name of lessor.
Possession will remain with lessee.
Lessee is liable to pay instalments to the lessor as per agreement.
Lessee cannot sell the asset till the instalment are paid and asset comes under his ownership.
If lessee faults in making payments lessor has the right the repossess the asset.Extended Credit/Deferred payment-It is suitable for items with low resale value.
In this case customer will become owner after signing the agreement and making payment of front and fee.
-Customer can sell the asset any time.
Loans are secured by a collateral security.
If customer defaults making payment the financer has the right to sue him.

Advantages and Disadvantages of Customer CreditAdvantages Disadvantages
To the Economy
1. Encourages the sale of expensive goods.                  1. Can cause general increase in price level.
                                                                                    1. Increases turnover and thus profit.                          

                                                                                    1. If seller finances the instalment-buying then                                                                                                 capital requirement is increased.
2. Enables stocks to be cleared. So less risk of stock
going out-of-date.
                                                                                    2. If buyer defaults in making payment then seller has
                                                                                    to re possess the goods which may be damaged.
3. Can earn interest if he is also financing.                     3. Administrative expense to record instalments.
                                                                                    1. Raises the standard of living. Has to pay extra interest.
2. It is a way of forced saving.                                      2. Encourages people to spend rashly

INTERNATIONAL TRADE

SIMILARITIES BETWEEN HOME TRADE AND FOREIGN TRADE:

• Objective: Businessmen involved in home trade and foreign trade buy and sell goods for the same objective. That is to make a profit.
• Dependence: Both, home trade and foreign trade depend very much on aids to trade. That is there is much dependence on transport, insurance, finance, warehousing, etc,
• Specialization: Both, home trade and foreign trade depend very much on specialization, whether it is national, regional or personal.

DIFFERENCES BETWEEN HOME TRADE AND FOREIGN TRADE:

·         Meaning: Home trade is buying and selling goods within the country, while foreign trade means buying and selling goods between countries.

·         Distance: The distance involved in foreign trade is much greater than the distance involved in home trade. This means that air or sea transport must be arranged in foreign trade, whereas road and rail transport can be used in home trade.

·         Trade Barriers: In foreign trade, there are trade barriers like customs duties, quotas and embargoes, levied on imports and some exports. There are no such trade barriers in home trade.

·         Types: Home trade includes wholesaling and retailing, whereas foreign trade includes importing, exporting and entrepot trade.

·         Languages: In home trade, there would be no difficulty regarding language, as the same language is spoken. But in foreign trade, translators would be required as each country speaks a different language.

·         Currencies: In home trade, the problem of exchange rate would not arise, as the same currency is used for payments. But in foreign trade, each country uses a different currency. So, the problem of exchange rate would arise.

·         Technical Requirements: In home trade, the same technical specifications for goods are required. But in foreign trade, each country has a different technical specification. So, manufacturers would have to produce goods according to different technical specifications.

·         Methods of Payment: In home trade cheques are the most favored means of payment. In foreign trade, bills of exchange, letters of credit and cable transfers are the most suitable means of payment.

·         Cultural Differences and Requirements:In home trade, there is not much need for market research as there are no differences in taste and fashion. But in foreign trade, each country has a different culture, taste and fashion. So, first market research must be carried out and then goods exported accordingly.

IMPORTANCE OF INTERNATIONAL TRADE

·         Some raw materials do not occur naturally in the country must be imported.

• It is cheaper to import some goods than to produce them. For example, bananas in UK.
• Selling goods and services abroad provides the country with foreign currency.
• By selling abroad the country gains the benefits of wider markets.
• International trade creates employment opportunities in the country
• Consumers in the country will have a wider variety of goods from all over the world.
• It increases country’s income, which results in a higher standard of living.
• It helps to maintain friendly foreign relationships with other countries.
• Income can be earned by exporting the excess goods and services.

THE INTERDEPENDENCE OF COUNTRIES WITHIN A GLOBAL MARKET

No country in the world is self sustained. By nature, every country has some resources in its limit and some resources are unlimited by nature. Economics clearly has defined that resources are scarce in nature; so, countries must be interdependent if it wants to satisfy the wants and economical needs to the growing population.

            No countries can be interdependent in today’s market. The best examples could stand with reference to today’s market is, satellite services. E.g. Coca Cola, cars, electronic goods etc.

            Today every country wants to consume goods and services at the cheapest price and at the best advanced technology. To produce these goods and services in its own country with the available resources, it may not be possible to achieve the task due to lack of resources, lack of capital and lack of technological advancement. All these factors have led to interdependence of countries within a global market.

           

VISIBLE TRADE AND INVISIBLE TRADE

International trade

Visible trade                                                     Visible trade

(Trade in goods only)                                    (Trade in services only)

Visible                          Visible              Invisible                     Invisible

Exports                        imports            Exports                       imports 

1. Foreign trade involves the export and import of both goods (called visible trade) and services (called invisible trade).

2.    Visible trade involves trading in goods, such as wheat, and it can be divided into:

(a)  Visible exports which involves the sending of goods (raw materials, semi manufactured goods, machinery or other manufactured goods) from the home country for sale abroad by the exporter.

(b)  Visible imports which involves the buying of goods (raw materials, semi manufactured goods, machinery or other manufactured goods) from abroad into the home country.

3.    Invisible trade involves trading in services, something which cannot be seen such as tourism, education services, insurance services, transport services and the like. It can be divided into:

(a)  Invisible exports which occurs when nationals of other countries use the services offered by companies or individuals of the home country. Singapore exports shipping services when foreigners send goods in ships owned by Singapore nationals.

(b)  Invisible imports which occurs when nationals of the home country use the services provided by foreign individuals or companies owned by foreigners.

Singapore imports education services when Singapore students goes overseas to the UK to study at the British universities.

4. The money which a country earns from her exports, both visible and invisible, will be used to pay for her imports both visible and invisible.

BALANCE OF TRADE AND BALANCE OF PAYMENTS

1. The Balance of Payments figures for a country show the amount of currency being received from other countries and that being paid to other countries because of many different types of transactions over a given period, usually a year.

The Balance of Payments can be broadly divided into two main sections:

(a) The Current Account consists of:

(i) the Balance of Trade (difference between visible exports and visible imports)

(ii) the Balance of Services or Invisible Balance (difference between invisible exports and invisible imports)

(iii) transfers items

(b) The Capital Account consists of:

(i) the capital items (inflows or outflows)

(ii) official financing (adding to or drawing from foreign reserves)

2. The difference in value between visible exports and visible imports is called Balance of Trade. If the visible export value exceeds the visible import value, the Balance of Trade is said to be favorable or in surplus. If the visible import value exceeds the visible export value, then the Balance of Trade is said to be unfavorable or in deficit.

3. A country's Balance of Trade can be assessed from annual statistical records obtained from customs declaration forms for imports and exports. The Balance of Trade is very important because:

(a) All imports should be paid for with the proceeds received from the sale of exports.

(b) Thus, in the long run, a country cannot import more than it exports.

(c) If the Balance of Trade has been unfavorable for many successive years, then the government must take steps to discourage imports and encourage exports.

4. A country also exports and imports services: shipping, educational, tourist, etc. Singapore exports shipping services when a foreigner travels in a Singaporean ship. The total value of services exported within a year forms the invisible exports, whilst that of services imported forms the invisible imports.

5. 'Transfer items' refers to interest, profits and dividends sent abroad because of foreigners investing in the home country. It also includes the repatriation of interest, profits and dividends from abroad to the home country because of its nationals investing abroad.

6. 'Capital items' refers to the amount of money which have flowed into or out of a country.

(a) Examples of capital outflows are as follows:

(j) Nationals invest in businesses abroad, buy properties or shares abroad.

(ii) The government in the home country gives monetary aid to other countries.

(iii) Nationals in the home country lend to nationals or organizations or governments of other countries.

(b) Examples of capital inflows are as follows:

(i) Nationals sell off their properties, businesses and shares abroad and bring the money home.

(ii) The government in the home country receives monetary aid from overseas.

(iii) Nationals or government in the home country borrow from abroad.

7. It is very unlikely that total receipts will exactly be equal to total payments over a year.

(a) If total payments exceed total receipts, we have a Balance of Payments deficit.

(b) If total receipts exceed total payments, there is a surplus in the Balance of Payments.

8. A country's balance of payments is of utmost importance.

(a) If the country continues over a period of years to experience a Balance of Payments deficit, it will eventually not have enough foreign exchange to pay its creditors.

(b) No country wishes this to happen for it will cause economic ruin in the long run.

9. If a country does not have sufficient foreign currency to pay its creditors abroad, it can temporarily borrow money from the International Monetary Fund (IMF) which is specially set up to help countries having Balance of Payments problems. However, this would mean that foreigners can now control the economic policies of the government of such a country.

10. The calculation of Balance of Trade and Balance of Payments be follows:

Illustration

Country A

Balance of Payments for the Year 1998

Value of goods exported                   $4,000 million

Value of goods imported                             $4.800 million

Balance of Trade 1998                          -$800 million

Value of services exported                $8,000 million

Value of services imported               $7.000 million

Invisible balance                                  +$1,000 million

Net transfers                                                      - $ 50 million

Balance on Current Account                  +$150 million

Capital items                                                     +$200 million

Total currency flow (net)      +$350 million

(a) The figure shows that the Balance of Trade for Country A in 1998 is unfavorable or adverse because the cost of goods imported is higher than those exported by $800 million.

(b) In the same period, however, Country A has a net positive balance of $1,000 million from her invisible trade. Money earned from her export of services abroad exceeded her import of services from abroad.

(c) The overall amount of net transfers of interest, profits and dividends abroad is $50 million.

(d) Country A has a favorable balance on Current Account of $150 million in 1998.

(e) In 1998, Country A has an overall net inflow of capital of $200 million.

(f) In 1998, Country A has a surplus of $350 million on her Balance of Payments. This means that Country A receives $350 million more than what she paid out to the rest of the world in the same period.

(g) Since the Balance of Payments is positive in 1998, this means the central bank of Country A can build up her reserves of foreign currency. This reserve can be used to pay for future deficits or to repay funds previously borrowed from the IMF.

TRADING BLOCS

1. Association of South East Asian Nations (ASEAN)

The Association of South East Asian Nations (ASEAN), organized in 1967, comprises Brunei, Cambodia Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. It promotes cooperation in many areas, including industry and trade. Member countries are protected in terms of tariff and non-tariff barriers. Yet they hold promise for market and investment opportunities because of their large market size (500 million people). On January 1, 1993, ASEAN officially formed the ASEAN Free Trade Area (AFTA). AFTA’s goal is to cut tariffs on all intrazonal trade to a maximum of 5 percent by January 1, 2008.

2. The E.U, and EMU

1. The E.U was created aiming at free trade between the member states.

2. Free trade means that there are no barriers in terms of duties, quotas, etc.

3. Free trade requires free movement of labour(no visas), capital (businessmen are treated equally regardless nationality), and goods and services (same product specifications with no barriers to entry).

4. The single market was declared so that the member states will enjoy one big domestic market (France and the U.K, for instance, will be the same as Male’ and Addu, as no tariffs, no quotas).

5. The single market requires single currency. Because exchange rate fluctuations might make it difficult for free trade to take place. The currency used in Male’ and Addu is the Rufiyaa, so that the currency used in the U.K and France,for example, should be the same.

6. The starting step was with the ERM, to minimize the problem of exchange rate fluctuations, but the U.K withdrew itself from that system in 16 September 1992, after two years of membership.

7. Till today, the U.K is not a member state in the Euro.

8. Now we cannot find French franc or German mark, as they are all replaced by the Euro.

9. The Euro has 12-member states so far (as at 30^th January 2003).

10. The main advantage of the Euro is the certainty assured in transactions across the member states in terms of exchange rate. But the ERM, which led to Euro later, makes it difficult for countries to control their economies.

11. Euro makes it easy for businesses all over the member states to trade between them. It is difficult for the U.K businesses now as the pound is struggling with new powerful comer, the Euro.

12. However, the U.K goods do have the free access into the E.U as it is a member in the single market.

13. The single market, common specification and the Euro represent challenges, in terms of competition, to big businesses, and, in fact, a big threat to the smaller ones.

14. Businesses outside the E.U must use the Euro in exchange. They must follow the product specifications approved by the E.U as well. Matching the E.U specifications increases cost because it requires full revise for the business techniques.

•  

AIMS OF TRADING BLOCKS:

·         To eliminate customs duties and quotas on the import and export of goods between member states.

• To establish common customs tariff and a common commercial policy towards non-member countries.
• To allow the free movement of persons and capital between member states.
• To establish common policies for agriculture and transport.
• To prohibit harmful business practices which restrict competition within the Common Market.

ADVANTAGES OF FREE TRADE:

• There are no tariffs and quotas among member countries.
• There is free movement of goods and services among member countries.
• There is free movement of people among member countries.
• Workers can be hired from any member country without any restrictions.
• There is free movement of money and capital.
• There is better relationship among member countries.

DISADVANTAGES OF FREE TRADE:

·         Home industries get affected.

• Infant industries get affected.
• Loss of revenue for the Government when foreign currency goes out.
• It sometimes causes unemployment.
• It causes imbalance of power among member countries.
• There is sometimes a drain of wealth.

IMPORTANCE OF FREEPORTS IN INTERNATIONLA TRADE

FREEPORTS:

Definition 1:

A port where no customs duties are levied on goods coming into or leaving it. E.g. Singapore

Definition 2:

An international port or an area within an international port at which, crew, passengers, baggage, cargo, mail and stores may be disembarked or unloaded, may remain and may be transshipped, without being subjected to any customs charges or duties. (Examination is possible for instance to meet security or narcotics control requirements.)

IMPORTANCE

1.            Free ports encourage a fair international trade practices.

2.           Free ports encourage free movement of goods within a trade region.

3.           Good economic relationship can be developed and maintained among countries.

RESTRICTIONS ON INTERNATIONAL TRADE:

Tariffs: These are import duties, such as the customs and excise duties of the United Kingdom. These have the effect of raising the price of the imported goods and therefore making them less competitive when compared to home products.

Subsidies: These are given to home producers, which makes their goods cheaper and therefore more competitive when compared with the prices of overseas products.

Quotas: These are physical restrictions on the amount of goods that can be imported into a country over a period. For example, the United Kingdom has set a limit on the number of Japanese cars that can be imported into the United Kingdom.

Embargoes: These are bans on importing certain items from overseas.

Reasons for restricting trade:

·         To raise revenue from tariffs.

• To protect existing industries from overseas competition.
• To protect infant industries which are not yet strong enough to compete with established overseas firms.
• To restrict dumping of foreign goods.

DIFFICULTIES FACED BY EXPORTERS:

• Distance: The distance involved in transporting goods from one country to another country is greater than in domestic trade. Air transport and sea transport must be arranged. Overseas representatives also may have to be appointed. There are charter agents available at the Baltic Exchange who find ships for goods and goods for ships.

Language Differences: Every country speaks a different language. Communications with overseas traders must be carefully translated. Publicity material and instructions must be prepared in many languages. Hence translators must be found. Exporters can contact the Central Office of Information where information of translators is available.

• Cultural Differences and Local Requirements: Every country follows a different culture and requires various goods. Market research must be carried out. This is quite difficult and expensive. The services of the Department of Trade and Industry can be sought in this case.
• Technical Differences: Different governments may have different technical specifications for goods sold in their country. An exporter of electrical goods, dealing with several countries must produce the goods according to the required specification of each country.
• Trade Barriers: Tariffs and quotas are a considerable obstacle to trade. Tariffs are taxes levied on imports and quotas are a limit imposed on imported goods. These increase the price of goods that are imported. These barriers can be overcome by exporting to countries where the tariffs are low and where there are no quotas.
• Customs Regulations: All goods exported and imported must go through customs regulations. This creates more work for the exporter.
• Documentation: Documents used in international trade are more complex than those used in domestic trade. Handing over the work to a freight forwarder can solve these problems.
• Payment: This is a big problem faced by exporters. Every country uses a different currency. So, currency must be exchanged in the foreign exchange market. The problem of the changing exchange rate comes into existence. Exporters can make future dealings to overcome this problem.
• Insurance: The risks involved in foreign trade are more than the risks in domestic trade. So, insurance must be taken out. The Department of Trade and Industry and Lloyds of London can overcome these problems.
• Risk of Non-Payment: The importer may not pay the exporter for the following reasons:

o   because he does not want to pay.

o   because he becomes insolvent.

o   because payment is prevented by the importer’s government.

o   because of war.

o   because the import license has been cancelled by the government.

            This causes a big problem for the exporter and can be solved by taking out a Comprehensive policy at the Export Credit Guarantee Department.

CUSTOMS AUTHORITIES:

Functions:

• Statistics: They collect a wide range of statistical data showing the pattern of trade and the movement of goods.
• Control: They supervise the movement of goods in and out of the country ensuring that prohibited goods are not imported or exported.
• Revenue: The customs authorities collect the duty payable on imports.
• Enforcement of Quotas: The customs authorities ensure that the goods imported are according to the limit imposed by the government.
• Bonded Warehouses: The customs authorities control these warehouses by supervising the withdrawal of goods.
• Public Health: They have certain functions about the control of infectious diseases.   

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