Comparison between domestic and foreign trade
Comparison between domestic and foreign trade
are several differences between domestic and foreign trade. Domestic trade refers to purchasing and selling of commodities within geographical limits of your country. Foreign trade refers to the purchase and sale of goods beyond your country’s geographical limits. Domestic trade involves only one country while foreign trade involves more than one country. When engaging in foreign trade, you have to use foreign currency which is contrary to what you expect with domestic trade.
Moreover, domestic trade involves lesser risks compared with foreign trade. Some of the risks to expect with foreign trade include transit risk, currency fluctuations risks and the fluctuations in demand. Domestic trade involves lesser formalities and procedures while to conduct foreign trade, you will have to go through many formalities and long procedures.
Governments do not restrict domestic trade except for some goods. However, the government has to strictly monitor external trade and before external transactions, you will require a government approval. And even though licensing isn’t compulsory in domestic trade, you will need it to conduct foreign trade.
How foreign exchange affects trade
When individuals in one country are demanding for goods from firms within another country, they have to enter into another market first. This market is the foreign exchange market, and involves buying and selling of currencies. A quick example, if you are working as a merchandise buyer for a retail electronics firm and you want to buy some CD players to sell to your customers later, you won’t just send a check to the foreign company in your local currency. Most foreign currencies like trading in their local currency. Therefore, you will need to convert your currency to the foreign currency and then use it to purchase the CD players.
Just like supply and demand of commodities affect their price, constant shifts in demand and supply of foreign currency leads to changing of prices of foreign currencies. Due to this, the price of foreign money changes as its demand changes. The price of foreign currency is known as foreign exchange rate. It refers to how much money you will have to pay for the foreign currency. Floating foreign exchange changes on a daily basis depending on international demand and supply of currency.
There are numerous factors that can affect the demand of foreign currency. If the other country is offering quality products at a lower price, consumers from your country will increase demand for imports. If domestic inflation rates are higher or incomes rise beyond those in the other nations, the demand for imports will also rise. In the capital markets, if the other nation’s interest rates – return on investment – are above the domestic interest rate, there are individuals who will choose to invest in the other nation’s securities. As a result, the demand for the currency will increase. The increase in demand will push the price of that currency even higher leading to an increase in value.
The bottom line
To engage in foreign trade, you will have to engage in foreign exchange first. Always remember that the value of any foreign currency will change depending on the supply and demand of that foreign currency. When your country’s currency is strong, imports will seem less expensive therefore leading to high demand of imported products and the currency. However, if the demand for goods from another country is high, their currency will be expensive.
Moreover, domestic trade involves lesser risks compared with foreign trade. Some of the risks to expect with foreign trade include transit risk, currency fluctuations risks and the fluctuations in demand. Domestic trade involves lesser formalities and procedures while to conduct foreign trade, you will have to go through many formalities and long procedures.
Governments do not restrict domestic trade except for some goods. However, the government has to strictly monitor external trade and before external transactions, you will require a government approval. And even though licensing isn’t compulsory in domestic trade, you will need it to conduct foreign trade.
How foreign exchange affects trade
When individuals in one country are demanding for goods from firms within another country, they have to enter into another market first. This market is the foreign exchange market, and involves buying and selling of currencies. A quick example, if you are working as a merchandise buyer for a retail electronics firm and you want to buy some CD players to sell to your customers later, you won’t just send a check to the foreign company in your local currency. Most foreign currencies like trading in their local currency. Therefore, you will need to convert your currency to the foreign currency and then use it to purchase the CD players.
Just like supply and demand of commodities affect their price, constant shifts in demand and supply of foreign currency leads to changing of prices of foreign currencies. Due to this, the price of foreign money changes as its demand changes. The price of foreign currency is known as foreign exchange rate. It refers to how much money you will have to pay for the foreign currency. Floating foreign exchange changes on a daily basis depending on international demand and supply of currency.
There are numerous factors that can affect the demand of foreign currency. If the other country is offering quality products at a lower price, consumers from your country will increase demand for imports. If domestic inflation rates are higher or incomes rise beyond those in the other nations, the demand for imports will also rise. In the capital markets, if the other nation’s interest rates – return on investment – are above the domestic interest rate, there are individuals who will choose to invest in the other nation’s securities. As a result, the demand for the currency will increase. The increase in demand will push the price of that currency even higher leading to an increase in value.
The bottom line
To engage in foreign trade, you will have to engage in foreign exchange first. Always remember that the value of any foreign currency will change depending on the supply and demand of that foreign currency. When your country’s currency is strong, imports will seem less expensive therefore leading to high demand of imported products and the currency. However, if the demand for goods from another country is high, their currency will be expensive.