Foreign Trade and Foreign Exchange

Foreign Trade

Foreign Trade Definition: Trade among nation is known as foreign trade on international trade. It includes export import and re-export of entre-port trade. Foreign Trade and Foreign Exchange both have two different meanings. Foreign trade means trade with foreign countries. It is the external trade of a country Foreign trade is an old as the civilization itself. Today foreign trade is highly organized due to improvements in the means of communication and transportation.         

Objective and importance of Foreign Trade:

The prime object of Foreign Trade is to raise the standard of living of the people. Undoubtedly, in the absence of international trade. It would not have been possible to develop our country and for the people to live happily, to satisfy more varied tastes and wants to enjoy a higher standard of living to the extent we find today. Moreover, all countries cannot produce all thing equally well or cheaply due to unequal distribution of natural resources among them and lack of proper substitution of their available factors of production. So, each country maintains and develops trade relation with other countries because it gains by doing so. Import of certain commodities by the country may be convenient and cheaper. In exchange for imports, the country has to export certain commodities, which it can produce with its resources but which are not produced in some other countries. Thus, foreign trade is a source of considerable gain for a country.

Advantages of Foreign Trade

i) Availability of large amount of goods: Foreign trade enables a country
to enjoy large variety of goods which cannot be produced at home.
ii) Export of surplus production: Foreign trade offers an opportunity to a
country to export its surplus production to foreign countries.
iii) Division of labor and specialization: Countries differ in climate and geographical formation. Hence, different place are suitable for commodities. International exchange of commodities helps specialization.
iv) Higher standard of living The exchange of goods countries of the world leads to higher standard of life for the inhabitants of all countries.
v) Security from famine : Foreign trade ensure adequate supply of those
commodities which are in short supply within the country due to famine
flood, earth-quake of such other calamities.
vi) Cultural exchange: Foreign trade which enables the two countries
develops cultural exchanges between of among nations of countries.

Difficulties in Foreign Trade

The various difficulties which are faced by a trader engaged in foreign trade are as follows:
(i) Distance : Distance between countries stands in the way to establish close trade contract between the parties. Trades rarely meet one another and personal contact is really possible.
(ii) Difficulty in Transportation and communication : Correspondence with foreign trade takes a long time. Receiving the goods for a larger time also involves a large expenses which increase the cost of goods for customers.
(iii) Risk in transit : There is a greater risk in transmit for the goals in the case of foreign trade than in the case of home trade.
(iv) Lack of information It is often difficult to obtain information regarding the financial position and business standing of the foreign merchants.
(v) Special feature of foreign market: Every foreign market has certain characteristic of its own. The contact and adaptation with foreign market
sometimes become difficult.
(vi) Custom duties: These days practically every country levies custom duties of its import and export. These duties are considerable barriers in foreign trade.
(vi) Remittance of price: Use of different currencies makes it’s difficult to obtain payment of the price of goods sold.

Foreign trade transaction Types:

(i) Direct Business : The importer may send his order for the supply of goods directly to a foreign producer.
(ii) Consignment business: In a consignment transaction manufacturer
send goods to foreign agent with instructions to sell the goods at the best available price.
(iii) Indenting Firms: These are firms of importing and exporting agent at every important port town.
(iv) Merchant shippers: Merchant shippers are the businessmen who buy goods on thus own account and sell those in the foreign countries on profit.

Foreign Exchange

Foreign Exchange Definition : Foreign Exchange refers to the process or mechanism by which the currency of own country is converted into the currency of another country. It is the means and method by which rights to wealth in a country’s currency are converted into right to wealth in mothers country’s currency.
Dr. Paul Eingig defines Foreign Exchange as the system or process of converting one national currency into another and of transferring the ownership of money from one country to another.
In terms of foreign Exchange Regulation Act, 1947, Section-2, “Foreign Exchange Means foreign Currency and includes any instrument drawn, accepted, made or issued in any foreign currency, all deposit, credits and balances payable in any foreign currency and any draft, T.C. Letter of Credit and Bill of Exchange expressed of drawn Bangladesh currency but payable in any foreign currency”. 

Meaning of Foreign Exchange

Foreign Exchange has three principle meanings:
(i) The entire system under which the settlements of international obligations are conducted.
(ii) The Medium used and
(iii) The monetary Unit or the rate at which such media are quoted.

Importance of Foreign Exchange:

The used for Foreign Exchange arises from the international trade. No country Is economically independent. Manufacturing country depend for there raw materials on country where they are abundantly produced and this is true depend upon the manufacturing country for manufacturing goods. This interchange of goods is at the basis of international indebtedness . Every purchase of goods made by trade credit a debt which demands settlement. The Settlement of the international debts must be effected in a away that is satisfactory to both the creditor and the debtor. If all the country of the world were to employ the same kind of currency, no difficulty would arise in the settlement of international debts. But each country has its own currency different from that of another and each country wants to be paid for it’s debts in it’s own currency unit and hence arise the problem of foreign exchange.
Foreign exchange is the system by which the money of one country can be
exchange for the money of another. Foreign exchange seeks to determine the principles, on which the different nations settle their debts to each other. Bankers and others make a business of exchanging the moneys of different countries for the benefit of those who have to make payments abroad, or who receive foreign money in payment.