(a) Distinguish between domestic trade and external trade. (b) Distinguish between terms of trade and balance of trade (c) Outline four causes of balance of...

Answer Details

(a) Domestic trade versus external trade. Domestic (internal) trade is the buying and selling of goods and services within the boundaries of a single country, using one common currency and one set of laws. External (international/foreign) trade is trade between different countries, involving different currencies, customs duties, exchange-rate problems and different commercial laws. External trade is further divided into import, export and entrepot trade.

(b) Terms of trade versus balance of trade. Terms of trade measure the rate at which a country's exports exchange for its imports, expressed as an index: \( \text{Terms of trade} = \dfrac{\text{index of export prices}}{\text{index of import prices}} \times 100 \). It shows whether export earning power is improving. Balance of trade is the difference in value between a country's visible exports and visible imports of goods over a period; a surplus (favourable) means visible exports exceed visible imports, a deficit means the reverse.

(c) Four causes of a balance of payments deficit.

• Excess of imports over exports: spending more on foreign goods and services than is earned from selling abroad.
• Fall in world prices of a country's exports (unfavourable terms of trade), reducing export earnings.
• Heavy external debt servicing: large outflows of interest and principal to foreign creditors.
• Capital flight and large invisible payments such as freight, insurance and profit repatriation by foreign firms.
• Over-dependence on a single export commodity, so a fall in its demand or price causes a deficit.

Examination reminder: do not confuse balance of trade (visibles only) with balance of payments (all transactions, visible and invisible, plus capital).