Trade: Meaning, Types and Working

The word ‘Trade’ is a commonly used term in business, finance and the economy. Anything that involves exchange of ownership in terms of goods or services is deemed as a ‘trade’. In this blog, we will explore the meaning of trade, along with the types of trade and how a trade works.

What is trade?

Trade is an exchange of goods and services between two or more parties. In simpler terms, trade is an act of buying or selling goods and services that takes place between two parties, i.e. buyers and sellers, for cash or kind. For a transaction to be qualified as a trade, it must have consent and be done without any force or coercion.

A trade can occur between different entities. Following are the entities that are most commonly indulged in a trade –

• People
• Countries
• Companies
• Other forms of businesses like sole-proprietorship, partnership, etc.
• Other entities, like clubs, trusts, etc.

In trade, there has to be a supplier who supplies or offers the goods or services and the buyer who buys the goods or services provided by the supplier. For example, if an individual is selling a pen, they would be the supplier, and if you bought a pen from a supplier for a certain sum, you would be a buyer. As every trade involves a cost, the transfer of ownership requires a transaction to be deemed a trade.

The meaning of trade varies depending on the context in which it is used. For example, trading means buying and selling securities in the securities market. Whereas in the forex market, trading means buying and selling currency. Similarly, in international trade, there is a concept of free trade. This means limitation-free trading between countries without any barriers.

To summarise the concept of trade, here are the essentials for a transaction to be considered as a trade –

• A trade is the voluntary exchange of goods or services between interested parties.
• In a trade, buyers buy goods or services from sellers in exchange for money or kind.

Types of trade

Trade is bifurcated into – 

Now let’s understand each of these trades in detail.

1. Domestic trade

Domestic trade means trading within the borders of a country. Under this type of trade, the buyer and seller are located within the same country. Domestic trade includes local, regional, zonal and national trading. It is further subdivided into two categories which are as follows –

• Wholesale trade

Wholesale trade is the buying and selling of a commodity in bulk or huge quantity. In simpler terms, a wholesale trader directly buys the commodity in bulk from manufacturers or producers of goods. 

• Retail trade

Retail trade could imply selling a few units of goods to consumers. It usually involves selling the goods to end users, called consumers. Retailers, thus, act as a link between wholesalers and consumers.

2. International trade

International trade involves the exchange of goods between two or more countries. For instance, if India sells its products to another country, it would be called international trade. Similarly, if India buys from another country, it would also fall under international or foreign trade.

Now that you know what international trade is, let’s look at its types – 

• Import

When a country or business buys goods from another country or business located in a foreign country, it is called import trade. For example, India imports crude oil, precious stones and metals, fertilisers etc., from various countries.

• Export

The opposite of import is export. Under export trade, goods are produced in one country and sold in another. For example, a business located in India produces goods and then ships them to the USA for sale.

• Entrepot 

Entrepot includes both import and export. Under this trade, a business first imports raw materials or semi-finished goods. Then, the business assembles or produces a new product using the imports. The finished goods are then exported to another country.

For example, if a business imports semiconductors from another country, uses them to manufacture mobile phones and then exports them to another country, it would be called entrepot trade. The perfect example of this trade is Iphone manufacturing in India.

How does trade work?

A trade occurs when a seller gets a buyer for their goods or services. The exchange of goods or services takes place between the interested parties, where a buyer can fulfil their needs or wants by buying the goods or services, while sellers can profit from their sales. 

A trade can be as small as an exchange of a pen or involve multi-million contracts. Besides benefitting the buyer and seller, trade benefits the economy and helps a country grow. 

Advantages of trade

Some of the primary advantages of the trade include the following –

• For buyers/consumers: Buyers get access to goods and services that they need to fulfil their needs or wants. The prices can be low if the competition is high. This, in turn, benefits the buyers. 
• For sellers/businesses: Sellers can sell their products to generate a profit that will act as their income but also helps them grow their business.  

• For the nation/economy: Countries can earn foreign income by exporting goods that are produced (domestically) to maintain their status-quo in the global economy. On the other hand, by importing goods, countries can make low-cost products available to its citizens that are scarcely available domestically. Thus, economies engaged in free trade can benefit from the law of comparative advantage and trade in suitable goods.

Did you know tourism and trade are unconventionally related? And the most commonly asked question is  – why is tourism considered a trade? Well, the answer is simple. Tourists bring in currency inflow, directly impacting foreign exchanges and reserves. Besides, the tourism industry also generates employment.

Criticisms of trade

While trade is beneficial, it has some repercussions, too. Have a look –

• In the case of certain industries, the companies can bypass government regulations and generate immense wealth.
• By importing low-quality products, even though a company can make low-cost alternatives available for consumers, it can seriously damage the domestic players, which can affect the economy.
• Restricting free trade also results in unemployment as job opportunities are lost.
• Heavy reliance on free trade can make the nation dependent on another country, which may be counterproductive.
• An unrestricted trade policy gives consumers what they need and can help boost demand. Industries try to cash in on this demand and enter markets. As more businesses crop up, it can lead to the creation of employment opportunities.

Role of WTO in promoting global trade

The World Trade Organisation (WTO) was solely created with the objective of promoting international trade. It is an intergovernmental organisation that supervises international trade between participating countries. 

The WTO helps in dispute resolution between countries with respect to trading practices. As such, WTO helps promote free trade with a fair dispute settlement, allowing member countries to indulge in minimally restrictive trade.

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