Q. Describe the Importance of International Trade.
International trade is important because it is the trades of goods and services internationally. Other countries have things that we do not have and through international ttrade we are able to get them here.
The points below highlight the importance of international trade:-
1) Earn foreign exchange:
International trade exports its goods and services all over the world. This helps to earn valuable foreign exchange. This foreign exchange is used to pay for imports. Foreign exchange helps to make the trade more profitable and to strengthen the economy of its country.
2) Optimum utilization of resources :
International trade makes optimum utilisation of resources. This is because it produces goods on a very large scale for the international market. International trade utilizes resources from all over the world. It uses the finance and technology of rich countries and the raw materials and labour of the poor countries.
3) Achieve its objectives:
International trade achieves its objectives easily and quickly. The main objective of an international trade is to earn high profits. This objective is achieved easily. This it because it uses the best technology. It has the best employees and managers. It produces high-quality goods. It sells these goods all over the world. All this results in high profits for the international trade.
4) To spread trade risks:
International trade spreads its trade risk. This is because it does trade all over the world. So, a loss in one country can be balanced by a profit in another country. The surplus goods in one country can be exported to another country. The surplus resources can also be transferred to other countries. All this helps to minimize the trade risks.
5) Improve organization’s efficiency:
International trade has very high organisation efficiency. This is because without efficiency, they will not be able to face the competition in the international market. So, they use all the modern management techniques to improve their efficiency. They hire the most qualified and experienced employees and managers. These people are trained regularly. They are highly motivated with very high salaries and other benefits such as international transfers, promotions, etc. All this results in high organisational efficiency, i.e. low costs and high returns.
6) Get benefits from Government:
International trade brings a lot of foreign exchange for the country. Therefore, it gets many benefits, facilities and concessions from the government. It gets many financial and tax benefits from the government.
7) Expand and diversify:
International trade can expand and diversify its activities. This is because it earns very high profits. It also gets financial help from the government.
8) Increase competitive capacity:
International trade produces high-quality goods at low cost. It spends a lot of money on advertising all over the world. It uses superior technology, management techniques, marketing techniques, etc. All this makes it more competitive. So, it can fight competition from foreign companies.
Q. What are the credit facilities generally offered to the Exporters by the banks?
A) Pre Shipment Financing
Cash credit against Hypothecation of Exportable goods
Cash Credit Against Pledge
Cash Credit Against Trust Receipt
Back to Back Letter of Credit
B) Post Shipment Financing
Negotiation of Export Bills
Document against acceptance
Advance against Collection
C) Export Development Fund
Q. What are the credit facilities offered to the importers by the banks?
A) PAD (Payment against document)
B) LIM (Loan against Merchandise)
C) TR (Trust Receipt)
Balance of Trade (BOT)
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. Thus it is the relationship between a nation's imports and exports.
The Balance of Trade contains only the visible items while the Balance of Payments include both visible and invisible items.
A positive balance is known as a trade surplus if it consists of exporting more than is imported; a negative balance is referred to as a trade deficit or, informally, a trade gap.
Factors that can affect Balance of Trade
The cost of production (land, labor, capital, taxes, incentives, etc.) in the exporting economy vis-à-vis those in the importing economy;
The cost and availability of raw materials, intermediate goods and other inputs;
Exchange rate movements;
Multilateral, bilateral and unilateral taxes or restrictions on trade;
Non-tariff barriers such as environmental, health or safety standards;
The availability of adequate foreign exchange with which to pay for imports; and
Prices of goods manufactured at home (influenced by the responsiveness of supply)
Balance of Payment (BOP)
Balance of payments (BOP) accounts are an accounting record of all monetary transactions between a country and the rest of the world.
These transactions include payments and receipts for the country's exports and imports of goods, services, financial capital, and financial transfers.
The BOP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned.
Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items.
Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.
When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counter-balanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.
Foreign Exchange Risk
Foreign Exchange risk arises when a bank holds assets or liabilities in foreign currencies and impacts the earnings and capital of bank due to the fluctuations in the exchange rates. No one can predict what the exchange rate will be in the next period, it can move in either upward or downward direction regardless of what the estimates and predictions were. This uncertain movement poses a threat to the earnings and capital of bank, if such a movement is in undesired and unanticipated direction. Foreign Exchange Risk can be either Transactional or it can be Translational. When the exchange rate changes unfavorably it give rise to Transactional Risk, as the name implies because of transactions in Foreign Currencies, can be hedged using different techniques. Other one Translational Risk is an accounting risk arising because of the translation of the assets held in foreign currency or abroad.
Foreign Exchange Risk in Commercial Banks
Commercial banks, actively deal in foreign currencies holding assets and liabilities in foreign denominated currencies, are continuously exposed to Foreign Exchange Risk. Foreign Exchange Risk of a commercial bank comes from its very trade and non-trade services.
Foreign Exchange Trading Activities include:
1. The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions.
2. The purchase and sale of foreign currencies to allow customers (or the financial institution itself) to take positions in foreign real and financial investments.
3. The Purchase and sale of foreign currencies for hedging purposes to offset customer (or FI itself) exposure in any given currency.
4. To purchase and sale of foreign currencies for speculative purposes base on forecasting or expecting future movements in Foreign Exchange rates. The above mentioned Trade Activities do not expose a commercial bank to foreign exchange risk as a result of all of the above. The commercial bank is exposed to foreign exchange risk only upto the extent to which it has not hedged or covered its position. Wherever there is any uncertainty that the future exchange rates will affect the value of financial instruments, there lies the foreign exchange risk of a commercial bank. Foreign Exchange risk does not lie where the future exchange rate is predefined by using different instruments and tools by the bank. The above mentioned trade activities are the typical trade activities of a commercial bank and all of these activities do not involve risk exposure of the bank. The first 1 & 2 activities are done by the commercial bank on behalf of its customers and the foreign exchange risk is transferred to the customers as the bank takes Agency Role in this case. Third activity of bank involves hedging and there is no risk in this as well as the bank has hedged its risk by pre-determining the exchange rate with other financial institutions using different financial instruments. The fourth one involves the risk which may result in the gain or loss due to unexpected outcome. Ready, spot, forward & swap are the principal FX related contracts whereas banking products and services in foreign exchange give rise to non-traded foreign currency exposure.
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