Chapter 2: Trade – Comprehensive Study Notes
1. Introduction and Conceptual Foundation
DefinitionTrade is the process of buying and selling goods and services. Its fundamental
features involve the exchange of goods and services for money or money’s worth and the
transfer of ownership of those goods and services from one person or entity to another with the
objective of earning [Link] Purposes of Trade
● Economic Driver: Acts as the primary outcome and facilitator of proper economic
functioning within a country.
● Connecting Link: Serves as the vital bridge between the producers of goods and the
final consumers.
● Ownership Transfer: Enables the legal and physical transfer of possession from seller
to buyer.
● Profit Reward: Provides a reward to the businessman for assuming risks and
performing distribution activities.
2. Classification of Trade: The Structural Overview
Trade is classified based on geographical boundaries into two primary branches:
● Internal Trade (Home Trade): Buying and selling within the geographical boundaries of
a single country using local currency.
● Wholesale Trade: Purchasing in bulk from producers for resale to retailers.
● Retail Trade: Selling in small quantities to final consumers.
● International Trade (Foreign Trade): Trade between two or more countries involving
different currencies and international laws.
● Import Trade: Purchasing goods and services from a foreign country.
● Export Trade: Selling goods and services to a foreign buyer.
● Entrepot Trade: Importing goods from one country to re-export them to another (often
after processing).
3. Internal Trade: Wholesale Operations
A Wholesaler is a functional intermediary who acts as a link between the manufacturer and
the retailer. According to Philip Kotler, wholesaling includes all activities involved in selling
goods to those who buy for resale or business [Link] of Wholesaler
1. Bulk Transactions: Purchases goods from producers in large quantities.
2. Risk Assumption: Bears significant risk in the distribution process, including price
fluctuations and storage losses.
3. Specialization: Typically deals in one or a few specialized types of goods.
4. Capital Intensity: Requires a large amount of capital to maintain extensive stock and
provide financial support.
5. Market Price Stability: Maintains stability by balancing the supply and demand factors
in the market.
6. Information Conduit: Provides direct market feedback and updated information to
manufacturers regarding consumer tastes and [Link] Service Role of
Wholesalers| Services to Manufacturers | Services to Retailers || ------ | ------ || Large
Purchases: Relieves manufacturers of the burden of selling in small lots. | Stock of
Goods: Maintains large stocks so retailers can purchase as and when needed. ||
Storage Facilities: Provides own warehousing to fill the time gap between production
and consumption. | Regular Supply: Assures retailers of a continuous supply of goods
to meet consumer demand. || Financial Assistance: Often pays in advance, assisting
the manufacturer’s working capital. | Financial Support: Provides credit facilities and
discounts to retailers, increasing their efficiency. || Market Information: Updates
manufacturers on market conditions, demand, and consumer preferences. | Market
Information: Informs retailers about new products, variants, and promotional schemes.
|| Risk Bearing: Assumes the risks associated with financing and storing large
quantities of goods. | Sales Promotion: Conducts advertising and sales promotion that
assists retailers in increasing sales. |
4. Internal Trade: Retail Operations
Retail Trade is the business activity associated with selling goods in small quantities to the
ultimate consumer for personal, non-business use. The Retailer is the final link in the chain of
[Link] of Retailers
● Operates primarily in local markets near residential areas.
● Deals in a wide variety of goods in small quantities to satisfy diverse needs.
● Requires limited capital investment compared to wholesale operations.
● Establishes direct personal relationships and confidence with the final consumers.
● Undertakes less risk and operates on a lower profit margin per unit than
[Link] to Wholesalers
● Connecting Link: Serves as the essential bridge between the wholesaler and the final
consumer.
● Help in Distribution: Facilitates the quick distribution of goods, which is vital for
perishable items like dairy and fruits.
● Marketing Support: Conducts local-level marketing and handles transportation when
the wholesaler cannot.
● Information Provider: Provides vital data on changing consumer preferences, likes,
and dislikes to the wholesaler.
● Demand Creation: Attracts attention to new arrivals through window displays and
personal [Link] to Consumers
● Regular Supply: Stores sufficient quantities to ensure goods are available to
consumers whenever needed.
● Local Convenience: Situated near residential areas, offering easy access and flexible
shopping timings.
● Home Delivery: Provides the service of delivering goods to the customer's doorstep,
often for free.
● Variety of Goods: Stocks various brands and designs, offering consumers a wide
selection for proper choice.
● Credit Facilities: Grants credit to regular customers, allowing them to purchase during
financial shortages.
● After-Sales Service: Offers maintenance and repair services for durable goods like
mobiles and refrigerators.
5. Detailed Classification of Retailers
Itinerant Retailers
Retailers who do not have a fixed place of business and move from one location to another.
1. Hawkers: Move from place to place with handcarts, announcing names and prices of
goods like seasonal vegetables or cheap household articles.
2. Peddlers: The oldest form of retail; they carry daily-use goods on their heads in baskets
or containers and deal on a cash basis.
3. Street Traders: Set up temporary stalls on busy footpaths near crowded places like
railway stations or schools.
4. Cheap Jacks: Operate independent shops with temporary setups; they change
locations based on the consumer response they receive.
5. Market Traders: Open temporary shops on fixed days in various villages or towns, also
known as a weekly market .
Fixed Shop Retailers
Small Scale Fixed Retailers
● General Stores: Located in residential areas; stock day-to-day needs like food grains,
soaps, and stationery.
● Second-hand Goods Shops: Deal in used items like books, furniture, or cars at cheap
prices; goods often lack quality or durability.
● Authorized Dealers: Sell products of a specific manufacturer only (e.g., automobiles,
T.V. sets) and receive commissions.
● Specialty Shops: Specialize in a particular line of goods, such as toys, leather goods,
or [Link] Scale Fixed Retailers
● Departmental Stores: A large retail shop with separate sections under one roof and
ownership.
● Features: Central Location, Shopping Convenience, Wide Variety of Goods, Centralized
Management.
● Supermarkets: Large retailing organizations selling food and grocery items on a
"Self-Service" basis.
● Features: Self-Service Style, Reasonable Prices, Attractive Packing, Impulsive Buying.
● Chain Stores: Networks of similar shops owned by a single organization and controlled
by a head office.
● Features: Low and Uniform Price, Uniformity in Layout, Limited Range of Goods, Cash
Sales.
● One Price Shops: Shops where all variety of goods (regardless of size) are sold at a
single, fixed, low price.
● Malls: Large enclosed shopping complexes containing various stores, restaurants, and
entertainment venues.
6. International Trade: Definitions and Procedures
● Export Trade: The sale of goods and services to a foreign country.
● Import Trade: The purchase of goods and services from a foreign country.
● Entrepot Trade: Importing goods with the specific intent of re-exporting them (e.g.,
importing raw materials from South Africa and exporting processed goods to
Japan).Export Trade Procedure Stage 1: Preliminary
1. Registration with authorities (DGFT for IE Code, Income Tax for PAN, GST, and EPC).
2. Appointment of agents or sales representatives in foreign countries to book [Link]
2: Pre-shipment
3. Receipt and verification of the order from the buyer.
4. Receipt of a Letter of Credit from the importer’s bank to clear foreign exchange
restrictions.
5. Obtaining pre-shipment finance from a bank for working capital.
6. Production and packaging of goods to protect quality during transit.
7. Securing ECGC Cover to protect against credit risk (covers up to 90% of the loss).
8. Fulfilling GST formalities and obtaining Marine Insurance under CIF contracts.
9. Appointing C&F Agents for custom house and forwarding [Link] 3:
Shipment
10. Processing shipping bills at the customs house.
11. Obtaining a "Carting Order" from Port Trust Authority.
12. Examination of goods by Customs Examiner and obtaining a "Let Export" order.
13. Loading goods and obtaining a Mate’s Receipt , which is then exchanged for a Bill of
Lading .Stage 4: Post-shipment
14. Sending Shipment Advice to the importer with a commercial invoice and packaging list.
15. Presentation of documents to the bank for negotiation and realization of proceeds.
16. Realization of export incentives (duty drawbacks and GST refunds).
17. Follow-up to find buyer reactions toward the [Link] Trade Procedure Stage 1:
Preliminary
18. Registration (DGFT for IE Code, PAN, and GST).
19. Negotiation with overseas suppliers regarding price, delivery, and [Link] 2:
Pre-Import
20. Obtaining a Quota Certificate from government authorities if restrictions apply.
21. Securing Foreign Exchange Clearance from the RBI through the importer's bank.
22. Placement of an Indent (order) with overseas suppliers after clearing FX formalities.
23. Opening a Letter of Credit (LC) in favor of the exporter.
24. Appointing C&F agents for custom documentation.
25. Receipt of Shipment Advice from the [Link] 3: Import
26. Receipt of documents (Bill of Lading, Invoice, etc.) via the bank.
27. Preparation of the Bill of Entry by C&F agents for custom clearance.
28. Obtaining a Delivery Order from the shipping company after paying freight.
29. Custom clearance of documents to certify the [Link] 4: Post-Import
30. Payment of Port Trust Dues.
31. Payment of Custom Duty to authorities.
32. Payment of Insurance Premium (under FOB contracts) and Freight.
33. Final payment to the exporter and follow-up for any discrepancies.
7. Comparative Analysis
Wholesaler vs. Retailer| Point of Difference | Wholesaler | Retailer || ------ | ------ | ------ ||
Capital | Requires very large capital resources. | Requires comparatively limited capital. || Link |
Connects the manufacturer and the retailer. | Connects the wholesaler and the consumer. ||
Scale | Operates on a large scale (bulk purchases). | Operates on a small scale (small lots). |
Itinerant vs. Fixed Shop Retailers| Point of Difference | Itinerant Retailers | Fixed Shop
Retailers || ------ | ------ | ------ || Place of Business | No fixed place; move from place to place. |
Have a fixed, permanent location. || Stock of Goods | Maintain a very limited stock. | Maintain a
large and varied stock of goods. |
Internal Trade vs. Foreign Trade| Point of Difference | Internal Trade | Foreign Trade || ------ |
------ | ------ || Geographical Scope | Within the national boundaries of one country. | Between
two or more different countries. || Currency | Uses the local currency of the home country. |
Involves different international currencies. |
8. Key Terminology Glossary
● Entrepot Trade: The practice of importing goods from one country to re-export them to
another, typically through duty-free ports.
● Mercantile Agents: Intermediaries like brokers or estate agents who bridge the gap
between buyers and sellers in extended markets.
● Form Utility: The value created by Industry through the conversion of raw materials
into finished, usable products.
● Peddlers: Traditional itinerant retailers who carry daily-use goods in baskets or
containers on their heads.
● Letter of Credit (LC): A guarantee given by the importer's bank to the exporter
ensuring payment; it is considered the safest payment method in foreign trade.