INTERNATIONAL TRADE

International/foreign trade refers to trade involving the exchange of goods and services between two or
more countries.

Bilateral -If the exchange is between two countries only.

Multilateral -if it is between more than two countries.

Advantages of International Trade

✓It enable the country to get access to wider range/variety of goods and services from other countries

✓It enable the country to get what it does not produce

✓It helps in promoting peace among the trading countries
✓It enable the country to specialize in its production activities where they feel they have an advantage

✓It earns the country revenue through taxes and licenses fees paid by the importers and exporters in
the country
✓It enable the country to dispose of its surplus goods and services thereby

avoiding wastage
✓It creates employment opportunities to the citizens of that country either directly or indirectly
✓It may lead to the development of the country through importation of capital goods in to the country

✓It encourages easy movement of factors of production across the borders of the countries involved
✓It enable countries to earn foreign exchange which it can use to pay for its imports
✓A country may be able to obtain goods and services cheaply than if they have been produced locally
✓During hard times or calamities such as wars, the country is able to get

assistance from the trading partners

✓It brings about competition between the imported and locally produced goods, leading to
improvement in their quality
✓It gives the country an opportunity to exploit fully its natural resources, due to increased market

Disadvantages of International trade

✓It may lead to collapse of the local industries, as people will tend to go for the imported goods. The
collapse may also lead to loss of employment
✓It may also lead to importation of harmful foods and services such as drugs and pornographic
materials

✓May lead to over depending on imported commodities especially the essential ones, making the
country to be a slave of the other countries, interfering with their sovereignty
✓It may make the country to suffered during emergencies if they mainly rely on the imported goods
✓May make the country to suffer from import inflation
✓May lead to acquisition of bad culture from other countries as a result of their interactions

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✓May lead to unfavorable balance of payment, if the import is higher than exports
Terms of Trade
This refers to the rate at which the country’s export exchanges with those from other country. That is:
Terms of trade = Price index of exports/Price index of imports
It determines the value of export in relations to import so that a country can know whether it’s trade
with the other country is favourable or unfavourable
Favourable terms of trade will make the country spent little on import and gain a lot of foreign exchange
from other countries
For example;
Then table below shows trade between Kenya and China in the year 2004 and 2005, with the Kenyan
government exporting and importing to and from china.

YEAR Average prices of exports Average prices of imports

2004 1000 4000

2005 1200 6500

Calculate the Terms Of Trade for Kenya

Solution

Export Price Index (EPI)= (Average prices of exports in the current year/Average prices of exports in the
base year )×100

=(1200/1000)×100=120%

Import Price Index (IPI)=(Average prices of imports in the current year/Average prices of imports in the
base year)×100

=(4000/6500)×100=162.5%

Terms Of Trade(TOD)=(120/162.5)×100=73.8%

This implies that Kenya is importing from China more than it is exporting, leading to unfavourable terms
of trade i.e. when the percentage is less than 100%, it implies unfavourable terms of trade.
The average prices is the various prices of the individual export or import items divide by their number
Factors that may lead to either favourable or unfavourable terms of trade
The country is experiencing a favourable terms of trade if:
✓The prices of imports decline and those of export remains the constant
✓The prices of imports declines while those of exports increase
✓The price of imports remains constant while those of exports increase
✓The prices of import and export increases but the rate of increase in export is higher
✓Both prices decrease but the decrease in import prices is higher

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The country will experience unfavourable terms of trade if;
✓Prices of import increases while those of exports decline
✓Prices of import remains constant while those of export declines
✓Prices of import increase as the export remains constant
✓Both prices increase, but for imports increases at a higher rate than export
✓Both prices decrease, but for export decreases at a higher rate than import

Reasons for differences in terms of trade between countries

The terms of trade may differ due to:

✓The nature of the commodity being exported. If a country exports raw materials, or unprocessed
agricultural products, its terms of trade will be unfavourable, as compared to a country that exports
manufactured goods
✓Nature of the commodity being imported. A country that imports manufactured goods is likely to have
unfavourable terms of trade as compared to that which imports raw materials or agricultural produce
✓Change in demand for a country’s export. An increase in demand for the country’s export at the world
market will make it have favourable terms of trade as compared to those with low demand at the world
market
✓Existing of world economic order favouring the products from more developed countries. This may
make the developing countries to have deteriorating terms of trade
✓Total quantity supplied. A country exporting what most countries are exporting will have their products
trading at a lower price, experiencing unfavourable terms of trade as compared to a country that export
what only few countries export
✓Trade restrictions by trading partners. A country with no trading restrictions is likely to import more
products, leading to unfavourable terms of trade, as compared to if it impose trade restrictions

Balance of trade
This is the difference between value of country’s visible exports and visible imports over a period of time.
If the value of visible/tangible export is higher than the value of visible/tangible imports, then the
country experiences favourable terms. If less than the invisible value, then the country is experiencing
unfavourable. The country is at equilibrium if the value of visible export and import is the same

Balance of payments
This is the difference in the sum of visible and invisible export and the visible and invisible imports. If
positive then it means the country is having favourable terms, while if negative, then it means
unfavourable It goes beyond the balance of trade in that it considers the following
✓The countries visible/tangible export and import of goods (visible trade)

✓The countries invisible/services exported and imported in the country (invisible trade)
✓The inflow and outflow of investment (capital goods)

Balance of Payment account

This is the summary showing all the transactions that have taken place between a particular country and
the rest of the world over a period of time.

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The transaction may arise from
a) The export of visible goods
b) The import of visible goods
c) The export of invisible goods/services
d) The import of invisible goods/services
e) Flow of capital in and out of the country
Components of balance of payments account

The balance of payment account is made up of the following

a) Balance of payment on current account
ii) Balance of payment on capital account
iii)Official settlement account/Cash account/foreign exchange transaction account
Balance of payment on current account
This is the account that is used to determine the difference between the value of the country’s visible
and invisible imports and exports.i.e
Balance of payment on current account = (visible export + invisible export) –(visible import + invisible
import)
In the account, the payments for the visible and invisible imports are debited while the receipts from
visible and invisible exports are credited i.e

DR CURRENT ACCOUNT YEAR XXXX. CR

Payment for imports Receipts from exports

(visible and invisible (visible and invisible)

The balance of payment on current account may be;

• In equilibrium i.e. if Dr = Cr
• Unfavourable i.e. if Dr > Cr (-ve)
• Favourable i.e. if Dr < Cr (+ve)

For example;
A given country had the following values of visible and invisible export and import during the year 2004
and 2005

TRADE 2004(Shs) 2005(Shs)

Visible exports 18926 29954

Visible imports 22780 32641

Invisible exports 6568 19297

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Invisible imports 5239 16129

Required
Prepare the country’s balance of payments on current account for the years 2004 and 2005 and
comment on each of them

DR CURRENT ACCOUNT YEAR 2004 CR

Visible imports 22780 Visible export. 18926

Invisible imports 5239 Invisible export 6568

Total 28019 Total 25494

Deficit 2525

The country experienced unfavourable balance of payment on current account in the year 2004, since
they imported more than they exported

DR CURRENT ACCOUNT YEAR 2005 CR

Visible imports 32641 Visible exports 29954

Invisible imports 16129 Invisible exports 19297

Total 48770 Total 49251

Excess 481

The country experienced favourable balance of payment on current account in the year 2005, since they
exported more than they imported
Balance of payments on capital account
This account shows the summary of the difference between the receipt and payments on the
investment (capital). Receipts are income from investments in foreign countries while payments are
income on local investments by foreigners paid out of the country.
The capital inflow includes investments, loans and grants from foreign donors, while capital outflow
includes dividends paid to the foreign investors, loan repayments, donations and grants to other
countries.
In the account the payments are debited, while the receipts are credited. That is;

DR CAPITAL ACCOUNT CR

Payments Receipts

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The account may be;
• In equilibrium i.e. if Dr = Cr
• Unfavourable i.e. if Dr > Cr (-ve)
• Favourable i.e. if Dr < Cr (+ve)
The combined difference on the receipts and payments on both the current and capital accounts is
known as the overall balance of payments.
Overall Balance of payment

Is the difference between receipts and payments on both current and capital accounts

Example

Visible trade sh. Sh.

Receipts 10282

Payments 17491

Net visible trade balance(unfavorable) -7209

Invisible trade

Receipts 12465

Payments 1637

Net invisible trade (favourable ) 10828

Balance of payment on current account 3619

(favourable)

Capital items

Receipts 19436

Payments 25150

Balance of payment on capital account -5714

(unfavorable)

Overall balance of payment (unfavorable ) -2095

The official settlement account

This account records the financial dealings with other countries through the IMF. It is also called the
foreign exchange transaction account, and is always expected to balance which a times may not be the
case. That is;

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✓In case of surplus in the balance of payment, the central bank of that country creates a reserve with
the IMF and transfer the surplus to the reserves account.
✓In case of a deficit in the balance of payment, the central banks collect the reserves from the IMF to
correct the deficit, and incase it did not have the reserves, the IMF advances it/give loan
Balance of payment disequilibrium
This occurs when there is either deficit or surplus in the balance of payments accounts. If there is surplus,
then the country would like to maintain it because it is favourable, while if deficit, the country would like
to correct it.
Causes of balance of payment disequilibrium
It may be caused by the following;
✓Fall in volume of exports, as this will reduce the earnings from exports leading to a deficit.

✓Deteriorating in the countries terms of trade. That is when the country’s exports decreases in relation
to the volume of imports, then her payments will be higher than what it receives.
✓Increasing in the volume of import, especially if the export is not increasing at the same rate, then it
will import more than it exports, leading to a disequilibrium
✓Restriction by trading partners. That is if the trading partners decides to restrict what they can import
from the country to a volume lower than what the country import from them, it will lead to
disequilibrium
✓Less capital inflow as compared to the out flow, as this may lead to a deficit in the capital account,
which may in turn leads to disequilibrium.
✓Over valuation of the domestic currency. This will make the country’s export to very expensive as
compared to their import, making it to lose market at the world market
✓Devaluation of the currency by the trading partner. This makes the value of their imports to be lower,
enticing the country to import more from them than they can export to them.
Correcting the balance of payment disequilibrium
The measures that may be taken to correct this may include;
❖Devaluation of the country’s currency to encourage more exports than imports, discouraging the
importers from importing more into the country.
❖Encouraging foreign investment in the country, so that it may increase the level of economic activities
in the country, producing what can be consumed and even exported to control imports
❖Restricting the capital outflow from the country by decreasing the percentage of the profits that the
foreigner can repatriate back to their country to reduce the outflow
❖Decreasing the volume of imports. This will save the country from making more payments than it
receives. It can be done in the following ways;
i) Imposing or increasing the import duty on the imported goods to make them more expensive as
compared to locally produced goods and lose demand locally

ii) Imposing quotas/total ban on imports to reduce the amount of goods that can be imported in the
country
iii)Foreign exchange control. This allows the government to restrict the amount of foreign currencies
allocated for the imports, to reduce the import rate

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iv)Administrative bottlenecks. The government can put a very long and cumbersome procedures of
importing goods into the country to discourage some people from importing goods and control the
amount of imports
❖Increasing the volume of exports. This enable the country to receive more than it gives to the trading
partners, making it to have a favourable balance of payment disequilibrium. This can be done through;
i) Export compensation scheme, which allows the exporter to claim a certain percentage of the value of
goods exported from the government. This will make them to charge their export at a lower price,
increasing their demand internationally
ii) Diversifying foreign markets, to enable not to concentrate only on one market that may not favour
them and also increase the size of the market for their exports
iii)Offering customs drawbacks. This where the government decides to refund in full or in part, the value
of the custom duties that has been charged on raw materials imported into the country to manufacture
goods for export
iv)Lobbying for the removal of the trade restriction, by negotiating with their trading partners to either
reduce or remove the barrier put on their exports
Terms of sales in international trade

Here the cost trading which includes the cost of the product, cost of transporting, loading, shipping,
insurance, warehousing and unloading may be expensive. This makes some of the cost to be borne by
the exporter, as some being borne by the importer. The price of the goods quoted therefore at the
exporters premises should clearly explain the part of the cost that he/she is going to bear and the ones
that the importer will bear before receiving his/her goods. This is what is referred to as the terms of sale

Terms of sales therefore refers to the price quotation that state the expenses that are paid for by the
exporter and those paid for by the importer.
Some of the common terms include;
(i) Loco price/ex-warehouse/ex-works. This states that the price of the goods quoted are as they are at
the manufacturers premises. The rest of the expenses of moving the good up to the importers premises
will be met by the importer
(ii)F.O.R (Free on Rail). This states that the price quoted includes the expenses of transporting the goods
from the seller’s premises to the nearest railway station. Other railways charges are met by the importer
(iii)D.D (Delivered Docks)/Free Docks. This states that the price quoted covers the expenses for moving
the goods from the exporter’s premises to the dock. The importer meets all the expenses including the
dock charges
(iv)F.A.S (Free Along Ship). States that the price quoted includes the expenses from the exporter’s
premises to the dock, including the loading expenses. Any other expenses are met by the importer
(v)F.O.B (Free on Board). States that the price quoted includes the cost of moving the goods up to the
ship, including loading expenses. The buyer meets the rest of the expenses
(vi)C&F (cost & freight). The price quoted includes the F.O.B as well as the shipping expenses. The
importer meets the insurance charges
(vii)C.I.F (Cost Insurance & freight). The price includes the C&F, including the insurance expenses
(viii) Landed. The price includes all the expenses up to the port of destination as well as unloading

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charges
(ix)In Bond. The price quoted includes the expenses incurred until the goods reaches the bonded
warehouse
(x) Franco (Free of Expenses). The price quoted includes all the expenses up to the importer’s premises.
The importer does not incur any other expenses other than the quoted price

(xi)O.N.O (Or Nearest Offer). This implies that the exporter is willing to accept the quoted price or any
other nearest to the quoted one
Documents used in International trade

i) Enquiry/Inquiry. A letter sent by an importer to the exporter asking about the supply of the goods and
the terms of sale.
ii) Order of Indent. This asks the supplier to supply goods. It may specify the goods to be supplied and
suggest the preferred mode of transport for them. An indent may be open or closed
Open Indent. Here the importer does not specify the supplier and the goods to be bought and
therefore the exporter or export agent is free to choose the supplier
Closed Indent. Here the importer specifies the supplier and the goods to be bought

iii) Letter of Credit. A document issued by the importers bank to the exporter’s bank to assure the
exporter of the payment for the goods ordered. The exporter can then be paid by his bank on the basis
of this letter.
iv)Import Licence. A document issued by the country to allow the importer to buy goods from abroad.

v) Bill of Lading. A document of title to goods being exported issued by the shipping company to the
importer who should use it to have goods released at the port of entry.
vi)Freight Note. A document prepared by the shipping company to show the transportation charges for
goods.
vii)Certificate of insurance. A document issued by the insurance company or agent, undertaking to
cover the risk against the loss or damage to goods being exported.
viii)Certificate of Origin. A document that shows the country from which the goods are being imported
have originated from.
ix)Commercial Invoice. A document issued by the exporter to demand for the payment for the sold on
credit to the importer.
It shows the following;
❖The name and address of the exporter
❖The name and the address of the importer
❖The price charged

❖The terms of sale

❖The description of the consignment
❖The name of the ship transporting the consignment

x) Consular Invoice. A document that shows that the prices of the goods that have been charged is fair
as certified by the consul with the embassy of the exporting country.

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xi)Proforma Invoice. A document sent by the exporter to the importer if he/she is not willing to sell
goods on credit. It may be used to serve the following purposes;

➢Serve as a formal quotation

➢Serve as a polite request for payment before the goods are released for the customer
➢To enable the importer to initiated the clearing of the custom duty early enough to avoid delays
➢Used to by the importer to obtain permission from the Central Bank to import goods

xii)Airway Bill. Issued by the airline company to show the charges for the goods being transported
xiii)Letter of Hypothecation. A letter written by the exporter to his/her bank authorizing it to resell the
goods being exported. This occurs if the bank fails to get payment on the bill of exchange drawn on the
importer that it has discounted for the exporter. Should there be a deficit after the resale, the exporter
pays the deficit
ix)Weight note. A documents that shows the weight and other measurements of the goods being
delivered at the dock
x)Shipping advice note. A document issued by the exporter to his/her shipping agent containing
instruction for shipping goods.
International Financial Institutions

Some of the institutions that play a role in international monetary system include;
i. International Monetary Fund (I.M.F)
ii. African Development Bank (A.D.B)
iii. African Development Fund (A.D.F)
iv. International Bank For Reconstruction and Development (World Bank)
i. International Monetary Fund (I.M.F)

This bank operates like the central bank of the central banks of the member countries. Its objective
includes the following;
• Ensuring that the member country maintains a stable foreign exchange rates for their currencies. This
it does by advising the country to raise or increase the supply of their currency to devalue them or
increase their value internationally
• Provide financial support to the member country to alleviate poverty and boost their income.
• Relieving heavily indebted countries of debt repayment so that it can use that fund to raise the living
standards of its people.
• Providing funds to the member countries to finance the deficits in their balance of payment.
• Provide forum through which the member country can consult and cooperate on matters concerning
trade among them
• Maintaining currency reserves of the different countries, enabling member countries to buy foreign
exchange to be used to import goods and services.
ii. African Development Bank (A.D.B)
This bank was formed to promote the economic and social progress of its regional member countries in

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Africa. It main source of finance is the members’ contributions and the interest charged on the money
they lend members.
Its functions include;

• Providing loans for economic and social development to member countries

• Provide technical advice in planning and implementation of the development plans
• Assist member country to appropriately exploit it resources
• To encourage co-operation among African countries in order to bring economic growth
• To co-operate with various economic institutions in order to bring about development especially in
Africa countries
iii.African Development Fund (A.D.F)

This was formed to provide long term financial assistance to the low income countries that cannot
obtain loan from other financial institutions at the prevailing terms and condition. Their loans may
recover a longer repayment periods with no interest except the commitment fees and service charge
which is minimal. They fund activities, which includes;
✓Education and research activities
✓Offer technical advice to the member countries
iv.International Bank For Reconstruction and Development (World Bank)
The World Bank was formed to carry out the following functions;
✓Giving loans to countries at very low interest rates to finance economic development activities.
✓Provision of grants to finance the provision of social amenities and basic infrastructural development
in developing countries.
✓Fighting against corruption and poor governance which may lead to misuse of public funds in different
countries.
✓Advancing money to countries to finance balance of payment deficit.
✓Giving advice on economic challenges that countries may face.
✓Availing technical assistance and personnel to help countries run their economic programmes
Economic Integration

This occurs where two or more countries enter into a mutual agreement to cooperate with each other
for their own economic benefit. They may do this by allowing free trade or relaxing their existing trade
barriers for the member countries.
Economic integration may occur in the following forms;
A. Free Trade Area
This is a case where the member countries agree to abolish or minimize tariffs and other trade
restrictions but the individual countries are free to impose restrictions on non-member countries. They
includes; Preferential Trade Area (P.T.A), European Free Trade Area (E.F.T.A), Latin America Free Trade
Area (L.A.F.T.A), etc.
B. Custom union
This is where the members of the free trade area may agree not only to abolish or minimize their tariffs,
but also establish a common tariff for the exchange of goods and services with the non member
countries.

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They include; Economic Community of West Africa States (E.C.O.W.A.S), East Africa Custom Union
(E.A.C.U), Central Africa Custom and Economic Union (C.A.C.E.U)
C. Common Market
This is where the member countries allow for free movement of factors of production across the
borders. People are free to move and establish their business in any member country. They include; East
Africa Common Market (E.A.C.M), European Economic Community (E.E.C), Central American Common
Market (C.A.C.M), Common Market for Eastern and Southern Africa (COMESA)
D. Economic Union
This is where the members of the common market agree for put in place a common currency and a
common central bank for the member countries. They even develop common infrastructures which
includes railways, communication networks, common tariffs, etc

Importance of economic integration

Economic integration will ensure the following benefits for the member countries;
➢Availability of wider market for the goods and services produced by the member countries. This
enables them to produce to their full capacity
➢It enables the country to specialize in the goods they produce best, making them to effectively utilize
their resources
➢It leads to promotion of peace and understanding among the member countries through interaction
➢It leads to high quality of goods and services being produced in the country due to the competition
they face
➢It allow members to get access to wider variety of goods and services which satisfy different consumer
needs
➢It leads to creation of employment for individuals living within the region, as they can work in any of
the member country
➢It increase the economic bargaining power in trading activities by the countries forming a trading bloc
➢Improvement of the infrastructure in the region due to increased economic activities.
➢It brings about co-ordination when developing industries, as the members will assign the industries to
each other to create balance development and avoid unnecessary duplication
Free Trade Area
This is a situation where there is unrestricted exchange of goods and services between the countries. It
has benefits/advantages similar to those of economic integration.
Disadvantages of free trade area
Some of the problems it is likely to bring include;
❖It may lead to importation of inferior goods and services to the country, as the member country may
not be able to produce high quality as compared to other non-member countries
❖It may discourage the growth of the infant industries due to competition from well developed
industries in other countries
❖It may lead to reduced government revenue because no tariff may be charged on the goods and
services
❖A country may be tempted to adopt technology not suitable for its level of development.

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❖If not controlled, it may lead to unfavourable balance of payment, where a country imports more than
it export
❖It may lead to importation of harmful goods and services, that may affect the members health such as
illegal drugs
❖It may lead to lack of employment opportunities especially where more qualified people have moved
from their country to secure job opportunities in the country
❖It may expose the country to negative cultural practices in other countries, interfering with their
morals. For example the exposure to the pornographic materials.
❖Compromising political ideologies especially where member countries with different ideologies wants
to fit in to the bloc
❖It may lead to over exploitation of non-renewable economic resources such as minerals
Trade Restrictions
These are deliberate measures by the government to limit the imports and exports of a country. They
are also known as protectionism and includes the following;

• Tariffs- which include taxes levied on both import and export. It can be used to increase or decrease
the level of both import and export
• Quotas- which is the restriction on the quantity of goods to be either imported or exported. It can be
increased or decreased to increase or decrease the level of import or export respectively.
• Total ban (zero quota)- where the government issues a direction illegalizing either the import or
export of the products
• Administrative Bottlenecks- Complicated import procedure in order to discourage some importers
from importing

. Foreign exchange control - Foreign exchange requirements for both the exporters and importers are
provided and managed by the government through the central bank . The gort can make foreign
exchange more difficult in order to restrict international trade

. Moral persuation- the government appeals to importers or exporters to willfully restrict the
importation of certain commodity or commodities
• Subsidies on locally produced goods to discourage imports
• Legislation against importation of certain goods
• Setting the standards of products to be imported
Reasons for trade restrictions

➢To prevent the inflow of harmful goods into the country, that may be harmful to the lives of the
citizens
➢To protect the local infant industries that may not be able to compete favourably with well established
industry
➢To give a country a chance to exploit its natural resources in producing their goods
➢To protect strategic industry, since their collapse may make the country to suffer
➢To minimize dependency of the country to other countries for their stability
➢To create employment opportunity to its people by establishing the industries to produce the goods

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and services
➢To prevent dumping of goods in the country by the developed partners which may create unfair
competition
➢To correct balance of payment deficit by limiting import
➢To protect good cultural and social values which may be influenced by unaccepted values they are
likely to acquire from other country through interaction
➢To expand market for locally produced goods by restricting the number of foreign goods in the market.
➢To enable the country earn foreign exchange through imposing taxes and other tariffs
Advantages of trade restrictions
• It promotes self reliance as industries have an opportunity to engage in the production of goods and
services that were previously imported
• It protects the local industries from stiff competition that they may have faced from the well
developed countries
• It may help to correct the balance of payment deficit
• It restrict the entry of harmful goods into the country as it controls the inflow of imports in to the
country
• It enables the country to conserve their valuable social and cultural values from the external influence
• It help in creating more job opportunities through diversification in the production
• It promotes the growth of local/infant industries in the country.
Disadvantages of trade restriction
▪ There will be availability of limited variety of goods in the country that will limit the consumer’s choices
▪ May lead to production of low quality goods as there will be no competition for the producing firms
▪ Other countries may also retaliate, leading to reduction in export from their country
▪ There is likely to be high prices charged on the locally produced goods, since the small firms which
produce them may not be enjoying the economies of scale
▪ The country is likely to be exposed to small market, should all countries restrict which may lead to
reduction in trade.
▪ As a result of the continued protection, some industries may develop a tendency of remaining young
to still enjoy the protection, which limits the level of development
▪ It may lead to emergence of monopoly as the protected industry may end up remaining alone in the
market, bringing about the problems of monopolies

Trends in International Trade

i. Liberalization that has led to removal of many trade restriction among the countries, increasing the
levels of trade
ii. Development of E-Banking which has enable the international trader to get access to their bank
accounts from wherever they are in
iii. Development of export processing zones (EPZ) by the government to allows the industries involved
just concentrate in the exported goods only. It enable the country enjoy the following benefits
(advantages of EPZ)
➢It creates job opportunities to the citizens

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➢It creates market for locally produced raw materials that they use in their production
➢It encourage the foreign investors to invest in the countries, i.e. in the processing zones, increasing the
level of investment in the country
➢Encourages export in the country as the incentives given to them by the government makes them to
produce more and more for export
➢It stimulates industrialization in the country in all sector including the ones producing for local
consumptions

However EPZ’s have the following problems/disadvantages

• Most of them employs foreigners in their management team, denying the locals a chance to get
employed
• They do not generate revenue to the government, especially during tax free periods
• They are concentrated in few towns, bringing about imbalance regional development
• Some of them encourages social evils such as prostitution in areas where they are developed
iv. Development of e-commerce/website trading which has promoted the selling and buying of items
through the internet, with payments made online.
E-commerce has the following benefits/advantages:
✓One is able to access the market worldwide, as the countries are connected to the internet

✓There is no discrimination, as both the small and large industries are able to transact through the
internet
✓It is fast to transact the business through internet, as it saves on travelling time and therefore suitable
for urgent transaction
✓It is cheap especially on the cost of sending, receiving and storing information
✓It is easy for firms to share valuable information about production
THE STOCK EXCHANGE MARKET

This is a market whereby the buying and selling of shares and other securities takes place. Shares are the
smallest units of capital that can be sold to persons by a company for them to become share holders.
Other securities traded in this market includes debentures (a unit of loan sold by the companies to the
members of the public), government bonds (a long term borrowing certificate by the government from
its people) and government treasury bills ( a short term borrowing certificate by the government from
its people).
Common terms used in stock exchange
i) Securities:- a document certifying that one has lent money to the issuer (the person borrowing the
money)
ii) Broker:- a person/firm registered by the capital market authority (CMA) to buy and sell shares and
other securities on behalf of their clients
iii) Jobber:- a person/firm who buys and sell shares and other securities with an aim of making a profit
iv)CDSC account:- Central Depository Settlement Corporation account for mobilizing the shares and
securities to be traded on at the market
In the stock exchange market only registered/listed/quoted companies are allowed to sell their shares. A
quoted/listed company is a company that has been registered as a member of the stock exchange

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market.
The quoted companies can sell their shares through the Initial Public Offer (I.P.O) or normal trading in
the market.
IPO is the initial price that the company will float its shares to the members of the public to
buy/subscribe to for the first time. These shares are said to have been issued in the primary market.
After the IPO the shares are then accumulated as stock and traded on in the stock exchange market
(secondary market).
All the trading of the shares is done through the company’s agents or brokers

Procedure of buying shares:

i. Opening a CDSC account through broker
ii. Filling in the purchase order form by stating the type and the number of shares to be bought
iii. The broker identifies and negotiate with the willing buyer
iv. The shares are then paid for through brokers at a commission
v. Shares are then transferred and credited in the buyers CDSC account
Procedure for selling shares:

i. Opening a CDSC account through broker

ii. Filling in the sales order by stating the price and the number of shares to be sold
iii.The buyer identifies and negotiate with the willing buyer
iv.The buyer pays for the shares through the broker
v. Shares are transferred and credited in the buyer’s CDSC account with the sellers CDSC account being
debited
Roles of stock exchange market

They perform the following roles:

➢They facilitate the buying of shares by creating a conducive environment for the investors who wants
to buy shares.
➢They facilitate the selling of shares by creating a ready market for those who wish to sell their shares
➢They safeguard the investors’ interest by ensuring that the companies to be listed have met a given
standard of performance. If not they will be deregistered
➢Assist the company to raise capital through IPO or sales of shares in the market
➢Provide useful information to the investors which is always timely and accurate to assist them in their
decision making
➢They create employment opportunity to those who facilitate the buying and selling of the shares such
a jobbers, brokers, etc
➢They help the government in raising the revenues in terms of fees and rents to the government
➢They avail variety of securities for the investors to choose from before investing.
➢They measure the country’s economic progress through checking the performance of the stock, which
may be an indicator of the economic performance.

Revision questions
1. Outline four benefitsbthat Kenya derives by being a member of preferentialbTrade Area PTA

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2.Explain five ways b in which a country benefits by participating in international trade

3.Give four reasons why it may be necessary for a country to control imports

4.Outline five transactions which are recorded in balance of payment account of a country

5. Explain five measures that a country may take to promote her exports

6.State four methods of controlling imports

7.Explain the meaning and significance in each of the following terms as used in foreign trade.Terms of
trade, balance of payment, exchange rate, balance of trade and common market.

8.Explain the significance of each of the following documents as used international trade. Bill of lading,
proforma invoice, indent, letter of credit

9. State four factors that may limit the success of trade agreements among African countries

10.Highlight five ways in which a bill of lading is useful to an importer of goods

11.Highlight four problems a country may experience by participating in international trade

12.Outline four circumstances underwhich a proforma invoice may be used

13.Explain six problems being faced by the KenyabExternal Trade Authority (KETA)

14. Explain the factors that may lead to deteriorating terms of terms for a country

15.Explain five disadvantages that a country may experience from imposing trade restrictions on trading
partners.

16.Discuss five reasons why less developed countries are reluctant in implementing free trade
agreement

17.State three functions of departments of international trade in the ministryof commerce and industry

18.Explain six circumstances under which a country may restrict international trade(12mks)

19. State four items that usually appear on the credit side of the current account of a country

20. Explain five measures that the government may take to improve the volume of exports

21.Explain the following terms as used in international trade

I)Loco

ii) F.O.R

iii) F.A.S

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iv) Bill of landing

v) Indent

vi) Letter of hypothecation

22. State four forms of economic integration that may exist between countries

23. Outline five characteristics of an economic union form of integration.10mks

23. Explain five disadvantages that a country would suffer if she restricted trade with other countries

25. Outline four benefits that Kenya derives from being a member of Preferential Trade area
26. Give four demerits of economic intergration to a country

27. State four roles of international monetary fund

28. Outline four special concessions offered by the governmenttoencourage establishment of industries
in a particular area

29. Identify four advantages of export processing zones to a country establishment.

30. East Africa community has not realized the benefits which accrue from its establishment.
31. Discuss five factors that may lead to deteoriorating terms ofbtrade of a country

32. A country was experiencing balance of payment surplus. Explainany five factors that might have
caused that.

33. Explain Five reasons why many countries tend to prefer free trade

34. Explain five causes of persistent balance of payment disequilibrium in East Africa

35. Explain five measures that the Government of Kenya may take to control her persistent Balance of
payment deficit ;

36. Explain five measures of correcting balance of payment disequilibrium

37.Describe five documents used in international trade

38.Outline six benefits Kenya derives from being a member of East African community

39. Reasons why a country may restrict trade with other countries

40. Explain five reasons for Trade Restriction

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