TRADE

 The concept of demand supply, price, trade demand, supply curves

 Demand, supply and price
 The concept of money
 The role of banks and financial institutions
 Role of international trade and foreign exchange
 The role of the world bank, IMF and other development partners

Definition
 Trade - refers to buying and selling of goods and services for money.
 It involves transfer of ownership of goods or services from one person/entity to another in
exchange for moneys goods or services.
 A market – is a network that allows trade.

Types of Trade

1. Internal Trade (Home Trade)

 It is conducted within the political and geographical boundaries of a country.
 It can be at local level, regional level or national level.

Types of Internal Trade:

1. Wholesale trade
2. Retail trade

 Wholesale Trade: - It involves buying in large quantities from producers/manufacturers and

selling to retailers.
 Retail Trade: - It involves buying in smaller quantities from the wholesalers and selling in
very small quantities to the consumers for personal use.

2. External Trade/ International Trade

 This is trade between two countries.
 It involves physical transfer of goods from one country to another
 Purchase of goods from one country to another is called import.

Types of Foreign Trade

1. Imports – Purchasing of goods from one another country
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2. Exports – selling of goods to another country
3. Entrepot Trade/Re-Export: - takes place when goods are imported from one country and
then re-exported after processing.

Bilateral & Multilateral Trade-

1. Bilateral Trade - is the trade between two traders.
2. Multilateral Trade – is the trade between more than two traders.

Restrictions on International Trade

 The following steps are taken to control imports
1. Imposing heavy import duty – a government levies a tax called import duty on any goods
imported.
2. Fixing import quotas – a country may decide upon the maximum quantity of certain goods
to be imported in a given period.
3. Total ban - a government may ban import of particular type of goods.

Improving Exports
 This is done by providing incentives in the following ways.
1. Export compensation – an exporter from Kenya is entitled to claim a certain percentage of
the value of his exports from the government. This means that he can afford to charge less for
his goods to importers therefore making his products more attractive to them.
2. Customs drawbacks – if a manufacturer imports a raw material and pays customs duty on it,
such customs duty may be fully/partially refunded to him by government, if he exports
finished products.
3. Government agencies – governments have set up agencies to help their exporters find new
markets for their products. It arranges exhibitions to foreign countries, provides useful
information and education to local businessmen by organizing seminars and assist them by
providing, in certain cases, export credit guarantees.

Visible and invisible trade

 Visible trade - consists of import and export of goods & services
 Invisible trade – refers to the exchange of services between nations.

Advantages of International Trade

1. Optimal use of natural resources: - International trade helps each country to make optimum
use of its natural resources. Each country can concentrate on production of those goods for
which its resources are best suited. Wastage of resources is avoided.
2. Availability of all types of goods: - It enables a country to obtain goods which it cannot
produce or which it is not producing due to higher costs, by importing from other countries at
lower costs.
3. Specialization: - Foreign trade leads to specialization and encourages production of different
goods in different countries. Goods can be produced at a comparatively low cost due to
advantages of division of labour.
4. Advantages of large-scale production: - Due to international trade, goods are produced not
only for home consumption but for export to other countries also. Nations of the world can
dispose of goods which they have in surplus in the international markets. This leads to
production at large scale and the advantages of large scale production can be obtained by all
the countries of the world.
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5. Stability in prices: - International trade irons out wild fluctuations in prices. It equalizes the
prices of goods throughout the world (ignoring cost of transportation, etc.)
6. Exchange of technical know-how and establishment of new industries: - Underdeveloped
countries can establish and develop new industries with the machinery, equipment and
technical know-how imported from developed countries. This helps in the development of
these countries and the economy of the world at large.
7. Increase in efficiency: - Due to international competition, the producers in a country attempt
to produce better quality goods and at the minimum possible cost. This increases the
efficiency and benefits to the consumers all over the world.
8. Development of the means of transport and communication: - International trade requires
the best means of transport and communication. For the advantages of international trade,
development in the means of transport and communication is also made possible.
9. International co-operation and understanding: - The people of different countries come in
contact with each other. Commercial intercourse amongst nations of the world encourages
exchange of ideas and culture. It creates co-operation, understanding, cordial relations
amongst various nations.
10. Ability to face natural calamities: - Natural calamities such as drought, floods, famine,
earthquake etc., affect the production of a country adversely. Deficiency in the supply of
goods at the time of such natural calamities can be met by imports from other countries.
11. Other advantages: - International trade helps in many other ways such as benefits to
consumers, international peace and better standard of living.

Disadvantages of International Trade:

1. Impediment in the Development of Home Industries: - International trade has an adverse
effect on the development of home industries. It poses a threat to the survival of infant
industries at home. Due to foreign competition and unrestricted imports, the upcoming
industries in the country may collapse.
2. Economic Dependence: - The underdeveloped countries have to depend upon the developed
ones for their economic development. Such reliance often leads to economic exploitation. For
instance, most of the underdeveloped countries in Africa and Asia have been exploited by
European countries.
3. Political Dependence: - International trade often encourages subjugation and slavery. It
impairs economic independence which endangers political dependence. For example, the
Britishers came to India as traders and ultimately ruled over India for a very long time.
4. Mis-utilisation of Natural Resources: - Excessive exports may exhaust the natural resources
of a country in a shorter span of time than it would have been otherwise. This will cause
economic downfall of the country in the long run.
5. Import of Harmful Goods: - Import of spurious drugs, luxury articles, etc. adversely affects
the economy and well-being of the people.
6. Storage of Goods: - Sometimes the essential commodities required in a country and in short
supply are also exported to earn foreign exchange. This results in shortage of these goods at
home and causes inflation. For example, India has been exporting sugar to earn foreign trade
exchange; hence the exalting prices of sugar in the country.
7. Danger to International Peace: - International trade gives an opportunity to foreign agents
to settle down in the country which ultimately endangers its internal peace.
8. World Wars: - International trade breeds rivalries amongst nations due to competition in the
foreign markets. This may eventually lead to wars and disturb world peace.

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9. Hardships in times of War: - International trade promotes lopsided development of a
country as only those goods which have comparative cost advantage are produced in a
country. During wars or when good relations do not prevail between nations, many hardships
may follow.

Comparative Advantage & Absolute Advantage in International Trade

Absolute Advantage
 A country has an absolute advantage in the production of a good when it can produce it more
efficiently than other countries.
 Absolute advantage: - is the capability to produce more of a given product using less of a
given resources than other countries.
 It refers to the ability of a country to produce a good more efficiently than other countries.
 A country that has an absolute advantage can produce a good with: -
 Fewer materials
 Cheaper materials
 In less time
 With fewer workers
 With cheaper workers, etc.
 A country with an absolute advantage can sell the good for less than a country that does not
have the absolute advantage.

Comparative Advantage
 Comparative advantage - refers to the ability of a country to produce a particular good or
service at a lower marginal and opportunity cost over another.
 Specialization according to comparative advantage results in a more efficient allocation of
world resources.
 Larger outputs of both products become available to both nations.

Terminology
Foreign Exchange Reserve
 Foreign Exchange Reserve - can be defined as deposits of a foreign currency held by the
central bank of a country.

Importance of Foreign Exchange Reserve

1. It increases the confidence in the monetary and exchange rate policies of the government.
2. It enhances the capacity of the central bank of the country to intervene in the foreign
exchange market and control any adverse movement and stabilize the foreign exchange rates
to provide a more favorable economic environment for the progress of the country.
3. During time of any crisis foreign exchange reserves come to the rescue of any country so as
to absorb the distress related to such crisis.
4. It also adds to the comfort of market participants that domestic currency is backed by
external assets and hence it also helps the equity markets of the country, because due to
strong reserves many people from foreign countries are willing to invest in the country
having strong foreign exchange reserves.

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Consignment
 Consignment in international trade - is a variation of the open-account method of payment
in which payment is sent to the exporter only after the goods have been sold by the
foreign distributor to the end customer.
 An international consignment transaction is based on a contractual arrangement in which the
foreign distributor receives, manages, and sells the goods for the exporter, who retains title to
the goods until they are sold.
 Payment to the exporter is required only for those items sold.

Cost, Insurance and Freight (CIF) and Free On Board (FOB)

 Both contracts specify origin and destination information that is used to determine where
liability officially begins and ends
 They outline the responsibilities of buyers to sellers as well as sellers to buyers.

Cost, Insurance and Freight -CIF agreements

 Insurance and other costs are assumed by the seller, with liability and costs associated with
successful transit paid by the seller up until the goods are received by the buyer.
 The responsibilities of the seller include
1. Transporting the goods to the nearest port
2. Loading them on a vessel
3. Paying for the insurance and freight.

Free On Board (FOB)

FOB contracts - relieve the seller of responsibility once the goods are shipped.
 The buyer then assumes all liability immediately after the goods have been loaded.

Free Alongside Ship

TRADE CYCLE/BUSINESS CYCLE

 A trade cycle - refers to fluctuations in economic activities i.e. in employment, output and
income, prices, profits etc.
 Trade cycle is also referred to as business cycle.
 These are cyclical fluctuations of an economy
 In a trade cycle, a period of prosperity is followed by a period of depression. Hence trade
cycle is a wave like movement.

Phases of Trade Cycle

 It has four phases:
1. Recovery
2. Boom
3. Recession
4. Depression.

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 The upward phase of a trade cycle or prosperity is divided into two stages
 Recovery
 Boom
 The downward phase of a trade cycle is divided into two stages
 Recession
 Depression.

 The figure below shows the phases of trade cycle

1. Recovery:
 Entrepreneurs increase the level of investment which in turn increases employment and
income.
2. Boom:
 The rate of investment increases still further.
 The level of production increases and the boom gathers momentum.
 During a period of boom, the economy surpasses the level of full employment and enters a
stage of over full employment.
3. Recession:
 The orders for raw materials are reduced on the onset of a recession.
 The rate of investment in producers’ goods industries declines.
4. Depression:
 The main feature of a depression is a general fall in economic activity.
 Production, employment and income decline.

DEMAND
 Demand - is the quantity of the commodity that a consumer is willing to buy for a given
price.
 Demand - refers to how much (quantity) of a product or service is desired by buyers.

Law of Demand
 It is referred to as contraction of demand
 The law of demand states that, if all other factors remain constant, the higher the price of a
good, the less people will demand that good.
 The higher the price, the lower the quantity demanded.

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Demand Curve
 The chart below shows that the curve is a downward slope.

 A, B and C are points on the demand curve.

 Each point on the curve reflects a direct correlation between quantity demanded (Q) and
price (P).
 So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on.
 The demand relationship curve illustrates the negative relationship between price and
quantity demanded.
 The higher the price of a good the lower the quantity demanded (A), and the lower the price,
the more the good will be in demand (C).

Demand Schedule
 Demand schedule - is a list of different prices of a commodity and corresponding demand at
these prices
Price (Kshs) Demand (Units)
50 10
45 20
40 30
35 40
30 50
25 60
20 70

Assumptions of the demand law

1. The income of the consumers is assumed to remain constant. – if the income of the
consumers increases at the same time as the price of the commodity, there will be no change
and therefore the law of demand will not apply.
2. The tastes and preference of individuals – there should be no change in the taste and
preferences of the individuals because if taste and preference of any consumer changes at the
same time as the price of the commodity, the law of demand will not apply.
3. Prices of substitute commodities remain constant-there should be no change in the prices of
substitute commodities. If the prices of any substitute commodities changes, the law of
demand will not apply.

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4. No Further expected changes in price-if any other change is expected in the price of any
commodity, the law of demand will not apply. This is because people will not buy
immediately there is a small decrease in price. They will wait until the prices drops to the
lowest levels possible before they buy.
5. New inventions – new and good intentions. If new goods are invented, in that case, in spite
of a fall in the price of that commodity, demand will not increase.

Factors of Change in Demand

1. Change in fashion and tastes – if there is a change in fashion and taste of any commodity,
then demand will increase even though there is no change in price. If the commodity goes out
of fashion, then demand will fall even if there is no change in price.
2. Change in income – if the income of a consumer increases, his purchasing power increases
and therefore demand will increase. If the income of a consumer decreases, purchasing
power will decrease and demand will therefore decrease.
3. Change in price of substitutes commodities – demand for any commodity may change due
to change in price of any substitute commodity. For example, if price of coffee rises, demand
for tea may increase.
4. Change in population – if there is an increase in population, demand will be high and when
there is a decrease in population demand will be low.
5. Change in wealth – if wealth distribution is inequitable, few people will have purchasing
power and demand will fall. If wealth is evenly distributed, many people will have
purchasing power and therefore demand will rise.
6. Economic conditions – when there is economic prosperity in the country, demand will be
greater and during depression demand will be lower.

Abnormal demand
 This is caused by
1. Speculative buying
2. Inferior quality goods

Elasticity of Demand
 Elasticity - refers to the degree of responsiveness in demand in relation to changes in price.

 Price Elasticity of Demand - is a measure of the change in the quantity demanded or

purchased of a product in relation to its price change.

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

 Elasticity of demand (ED) = Change in demand =

Change in price

Where
Change in demand = final demand – initial demand
Change in price = final price – initial price

 Elasticity of demand is always negative.

 This is because there is an inverse relationship between price and demand.

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 Elastic and Inelastic Demand Curves
 If a curve is more elastic, then small changes in price will cause large changes in quantity
 A flatter curve means that the good or service in question is quite elastic.

 A steeper curve means that the good or service in question is inelastic.

Factors of Elasticity of Demand

 Demand for necessities of life – for necessities of life, demand is less elastic. This is
because the commodities will still be purchases whatever the price may be e.g. maize flour,
sugar, and salt which must be purchased so long as people need to eat.
 Demand for luxuries – the demand for luxuries is more elastic because a little change in
price level, leads to a more disproportionate change in demand. It may lead to a fall in
demand as they are unnecessary and cost a lot of money, e.g. music systems and cameras.
 Demand for substitute goods – commodities which have substitutes, are more elastic in
demand e.g. when the price of coffee rises, demand for coffee will decrease as, more people
are likely to buy tea.
 Demand for goods having several uses – commodities which have different applications
have more elastic demand. This is because, if the commodity becomes expensive, its use can
be prioritized for more urgent needs, which decreases its demand, e.g. use of fuel can be
curbed by organizing a movement schedule for vehicles instead of workers using them at
their free will.
 Demand for goods whose use can be postponed – demand for goods whose use can be
postponed is more elastic e.g. cement. If cement becomes too expensive, some people may
postpone construction of houses until the price of cement goes down.
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 Price level – some commodities are bought even if their price level is very high e.g. buses,
lorries, etc. their demand is less elastic.

SUPPLY
 Supply – is the quantity of any commodity, which is taken to the market at a specific price
and specific time period.
 Supply - represents how much the market can offer.

The Law of Supply

 This means that the higher the price, the higher the quantity supplied.
 Producers supply more at a higher price because selling a higher quantity at a higher price
increases revenue.

 A, B and C are points on the supply curve.

 Each point on the curve reflects a direct correlation between quantity supplied (Q) and price
(P).
 At point B, the quantity supplied will be Q2 and the price will be P2, and so on.

Elastic and Inelastic Supply Curves

 A flatter curve means that the good or service in question is quite elastic.

 A steeper curve means that the good or service in question is inelastic.

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Supply and Demand Relationship
 The relationship between demand and supply underlie the forces behind the allocation of
resources.

Equilibrium
 When supply and demand are equal (i.e. when the supply function and demand function
intersect) the economy is said to be at equilibrium.
 At this point, the allocation of goods is at its most efficient because the amount of goods
being supplied is exactly the same as the amount of goods being demanded.
 Everyone is satisfied with the current economic condition.

At the given price

1. Suppliers are selling all the goods that they have produced
2. Consumers are getting all the goods that they are demanding.

 Equilibrium occurs at the intersection of the demand and supply curve, which indicates no
allocative inefficiency.
 At this point, the price of the goods will be P* and the quantity will be Q*. These figures are
referred to as equilibrium price and quantity.
 In the real market place equilibrium can only ever be reached in theory, so the prices of
goods and services are constantly changing in relation to fluctuations in demand and supply.

Disequilibrium
 Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*.

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Excess Supply
 If the price is set too high, excess supply will be created within the economy and there will
be allocative inefficiency.

 At price P1 the quantity of goods that the producers wish to supply is indicated by Q2.
 At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much
less than Q2.
 Because Q2 is greater than Q1, too much is being produced and too little is being consumed.
 The suppliers are trying to produce more goods, which they hope to sell to increase profits,
but those consuming the goods will find the product less attractive and purchase less because
the price is too high.

Excess Demand
 Excess demand is created when price is set below the equilibrium price.
 Because the price is so low, too many consumers want the good while producers are not
making enough of it.

 In this situation, at price P1, the quantity of goods demanded by consumers at this price is
Q2.
 Conversely, the quantity of goods that producers are willing to produce at this price is Q1.
 Thus, there are too few goods being produced to satisfy the wants (demand) of the
consumers.

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 However, as consumers have to compete with one other to buy the good at this price, the
demand will push the price up, making suppliers want to supply more and bringing the price
closer to its equilibrium.

Assumptions of Law of Supply (Factors of Change in Supply)

1. Cost of production
 When the cost of production of any commodity rises, supply falls, because less people would
be willing to buy, and vice versa.
2. Climatic situation
 At given times climate favor production of certain commodities and supply rises e.g.
agricultural produce during rainy seasons, blankets and warm jackets during cold weather.
3. Improved methods of production
 If new and less expensive methods of production are invented, supply rises, otherwise old
and less efficient methods lead to less output and fall in supply.
4. Development of infrastructure
 If methods of transport and communications are adequate and well developed, it becomes
possible to move commodities from one place to another and therefore increase in supply.
5. Peace and security
 When there is peace and security, production is encouraged and therefore supply is bound to
rise, unlike when there lacks peace and security which discourages production and therefore
supply falls.
6. Government policies
 When government imposes restrictions on movement of certain commodities e.g. cereals, the
supply falls.
7. Rate of taxation
 If the rate of taxation is increased, the cost of production increases, and supply falls and vice
versa.

Factors of Elasticity of Supply

1. Nature of commodity
 Those commodities which are durable and can be kept for a long time, have a more elastic
supply e.g. shoes and clothes.
 Perishable goods like meat, milk and fruits have a less elastic supply since they cannot be
stored.
2. Cost of production
 If the cost of production is high, commodities will have less elastic supply.
 Those commodities, which have a low cost of production have a more elastic supply
3. Time
 Those commodities which are produced in a short period of time have a more elastic supply
 Those commodities which take a longer time to produce have a less elastic supply.
4. Methods of production
 Those commodities that have a simpler method of production have a more elastic supply.
 If the method of production is complicated, the goods have a less elastic supply.
5. Law of returns
 If returns on investment are high, many people will venture into a business and the supply of
commodities will be more elastic
 If returns on investment are low, few people will venture into the market therefore the supply
will be less elastic
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 PRICING
 Pricing - is the process whereby a business sets the price at which it will sell its products and
services.

Factors to Consider When Determining Price-Costing

1. Costs-
 Account for sick days, holidays, hours working on the business, hours with no work, etc.
 Hidden costs should also be factored. E.g. insurance, invoices that never get paid for one
reason or another, and - taxes.
2. Profit - consider how much money you are trying to make above breaking even. This is
business after all.
3. Market Demand - If what you do is in high demand, then you should be aiming to make your
services more expensive.
4. Industry Standards – try to know what others are charging
5. Skill level – rate yourself commensurate with your skill.
6. Experience – with more experience your have better skills. Experience should affect how
much you charge.
7. Your Business Strategy
Figure out how you are pitching yourself and use that to help determine if you are cheap and
cheerful, high end or somewhere in between.
8. Your Service
What you provide for your clients will also make a big difference to your price tag. Adjusting
your pricing to the type and level of service you provide is a must.
9. Who is Your Client
Your price will often vary for different clients. This happens for a few reasons.
Some clients require more effort, some are riskier, some are repeat clients, some have jobs you
are dying to do, some you wouldn't want to go near with a stick. You should vary your price to
account for these sorts of factors.

Methods of Pricing Products

 These includes: -
1. Peak Pricing
2. Dynamic pricing
3. Predatory pricing
4. Limit Pricing

Peak Pricing
 Peak Pricing – is a form of congestion pricing where customers pay an additional fee during
periods of high demand.
 Most utility companies charge higher rates during times of the year when demand is the
highest.

Dynamic Pricing
 Dynamic pricing is also referred to as
 Surge pricing
 Demand pricing
 Time-based pricing.
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 Businesses set flexible prices for products or service based on current market demands.
 Businesses are able to change prices taking into account
i. Competitor pricing
ii. supply and demand,
iii. Other external factors in the market.

Predatory Pricing
 Predatory pricing - is also known as undercutting).
 It is a risky and dubious pricing strategy where a product or service is set at a very low price,
intending to drive competitors out of the market, or create barriers to entry for potential new
competitors.
 Predatory pricing - is a deliberate strategy of driving competitors out of the market by
setting very low prices.
 Once existing firms have been driven out and entry of new firms deterred it can raise price.

Limit Pricing
 Limit pricing - is pricing by the incumbent firm(s) to deter entry or the expansion of fringe
firms.
 The limit price is below the short run profit maximising price but above the competitive level
 Limit pricing means a short run departure from profit maximisation.
 If successful, businesses can maintain their market power and make higher profits in the long
term.
MONEY
 Money - is anything which is acceptable as a medium of exchange
 It acts as a measure of value and store of value.
 It is a means of settling debts

Characteristics of Money
1. Money has to be acceptable by the society as a medium of exchange.
2. Money is portable and convenient to carry
3. Money should be divisible to meet all kinds of needs and without loss of value
4. Homogeneity – money should have the same value regardless of the material it is made from
e.g. the twenty shilling note and a twenty shilling coin
5. Durability – money should be durable. Materials used should not perish in a short period and
should withstand rough and continuous handling.
6. Money should be scarce. Wants should be more than money so that people should struggle to
get money
7. Money should be stable in value to win people’s confidence
8. Money should be easy to recognize its proper money or not-size, texture, line
9. It should be malleable i.e. cheap to manufacture

Functions of Money in Economy

1. Medium of exchange - used to make transactions
2. Measures value-prices of goods are indicated in terms of money
3. Money is a store of value – commodities, which cannot be kept for a long time can be stored
in terms of money.
4. Money is a standard of deferred payment – used to make future transactions i.e. credit
transactions
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5. Unit of account
6. Money is used in transfer of immovable properties e.g. houses, land

Market Structures
 A market –is a place where buyers and sellers meet for exchange of goods and services.
 Monopoly - is a condition where there is a single seller and many buyers at the market
place.
 In a monopoly market, the seller decides the price of the product or service and can change it
on his own.
 Monopsony - A market form where there are many sellers but a single buyer is called
monopsony.
 In such a setup, since there is a single buyer against many sellers; the buyer can exert his
control on the sellers. The buyer in such a form has an upper edge over the sellers.

Types of Markets
1. Physical Markets
 This is a set up where buyers can physically meet the sellers and purchase the desired
merchandise from them in exchange of money.
 It includes: - Shopping malls, department stores, retail stores.
2. Non Physical Markets/Virtual markets –
 Buyers purchase goods and services through internet.
 Examples - ebay, olx, etc.
3. Auction Market - the seller sells his goods to one who is the highest bidder.
4. Market for Intermediate Goods - Such markets sell raw materials (goods) required for the
final production of other goods.
5. Black Market - is a setup where illegal goods like drugs and weapons are sold.
6. Knowledge Market - is a setup which deals in the exchange of information and knowledge
based products.
7. Financial Market - Market dealing with the exchange of liquid assets (money) is called a
financial market.

BANKING
 Bank - is a financial institution that accepts deposits from the public and creates credit
 It is a financial establishment that: -
i. Invests money deposited by customers
ii. Pays it out when required
iii. Makes loans at interests
iv. Exchanges currency.

Functions of a Banking Institution

1. Accept deposits either in current or fixed savings accounts
2. Safeguard the money deposited
3. Makes it available to its owners when needed
4. Advances loans to clients
5. Transfer of money, such as on standing orders
6. Sell shares on behalf of companies
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Types of Banks
1. Central bank
2. Commercial banks
3. Merchant banks
4. Savings banks
5. Cooperative banks
6. Development banks

Central Bank of Kenya (CBK)

 It is a government institution established to control, guide and assist the commercial banking
services to the government.

Roles of the Central Bank of Kenya in economy (Functions)

1. Banking money for other bank and the government
2. Lending money to the commercial banks and the government.
3. Issuing of currency - regulates the issue of notes and coins
4. Ensuring stability of the currency
5. Ensuring balanced economy development
6. Protection of domestic industries against foreign dominance
7. Regulation of investment activities.
8. Administering external reserves
9. Controls foreign exchange and handles external financial relations.
10. Managing the national reputation-advises the government towards accumulated borrowings.
11. It acts as an agent to the government - implements the monetary policy of the government.
12. Supervising the banking industry in general.

Role of CBK as a banker to the government

1. Receive deposits on behave of the government
2. Lending money to the government
3. Borrowing money on behalf of the government
4. Advising the government of finance policies
5. Selling government bonds
6. Collecting revenue for the government.

Bank rates - It is the rate of interest charged by a central bank on any short-term loans it may
advance.
Credit control- this is ensuring the right quantity of money is in circulation.

Commercial Banks
Roles of Commercial Banks (Functions)
 They give the following services to customers
1. Receiving of deposits
2. Lending money
3. Store of custodian/valuable items for customers
4. Transfer of money

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 5. Act as a referee
6. Act as trustee
7. Offer advisory services
8. Agent of stock exchange
9. Banks offer foreign exchange services
10. They assist traders dealing in international trade

Non - Bank Financial Intermediaries

 Institutions involved in collection of savings e.g. the post banks caters for small savers with
low income who don’t have access to commercial banks.
 Non - Bank Financial institutions include:-
 Building Societies
 Hire purchase finance company

The IMF and the World Bank

 They were founded by the delegates of 44 nations in July 1944
 The Bank and the IMF are twin intergovernmental pillars supporting the structure of the
world's economic and financial order.

World Bank
 The Bank is primarily a development institution
 The World Bank is referred to as the International Bank for Reconstruction and
Development (IBRD)

Role of the World Bank

 Its primary responsibility is financing economic development of the member states.
 The Bank's first loans were extended during the late 1940s to finance the reconstruction of
the war-ravaged economies of Western Europe.
 The Bank turned assists the developing countries (world’s poorer nations) by giving the
loans.
 The World Bank has one central purpose: to promote economic and social progress in
developing countries by helping to raise productivity so that their people may live a better
and fuller life.

International Monitory Fund (IMF)

 The IMF is a cooperative institution that seeks to maintain an orderly system of payments
and receipts between nations.
 The IMF attracts to its membership nations that are prepared, in a spirit of enlightened self-
interest, to relinquish some measure of national sovereignty by abjuring practices injurious
to the economic well-being of their fellow member nations.
 It requires members:-
 To allow their currency to be exchanged for foreign currencies freely and without
restriction,
 To keep the IMF informed of changes they contemplate in financial and monetary
policies that will affect fellow members' economies, and,
 To modify policies on the advice of the IMF to accommodate the needs of the entire
membership.
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The Role of IMF
 IMF administers a pool of money from which members can borrow when they are in trouble.
 It is overseer of its members' monetary and exchange rate policies.
 It is committed to the orderly and stable growth of the world economy

Revision Questions
1. Distinguish between absolute and comparative advantage of international trade
2. Explain the meaning of foreign exchange reserves of a country
3. Explain two roles played by such reserves in a country
4. Define the following terms with respect to import-export of goods
i. Consignment
ii. CIF

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