Trade: Home Trade, Foreign Trade and Balance of Trade/Payments
Foreign trade crosses national frontiers. The examiner tests import, export and entrepot, the difference between the balance of trade and the balance of payments, and your ability to compute both.
Key terms
- Import trade: buying from abroad (Cameroon importing machinery or rice).
- Export trade: selling abroad (cocoa, timber, rubber, cotton).
- Entrepot trade: importing goods solely to re-export them, unchanged or repackaged.
- Visible trade: physical goods. Invisible trade: services - shipping, insurance, tourism, banking.
- Terms of trade: the rate at which exports exchange for imports.
Balance of trade versus balance of payments
Balance of trade = value of visible exports − value of visible imports; goods only. The balance of payments records all transactions with the rest of the world over a year:
- current account - goods + services + income + unilateral transfers;
- capital account - capital transfers;
- financial account - direct and portfolio investment, loans;
- reserves and errors and omissions as the balancing item. A country can run a trade surplus and still have a weak current account if invisible imports and transfers dominate.
Worked example
In one year, visible exports are 2,000 billion FCFA, visible imports 1,750 billion, service exports 300 billion, service imports 500 billion, and unilateral transfers received 400 billion.
- Balance of trade = 2,000 − 1,750 = +250 billion (surplus).
- Balance on goods and services = (2,000 + 300) − (1,750 + 500) = +50 billion.
- Current account = 50 + 400 = +450 billion. Reasoning: transfers are not trade, so they never enter the balance of trade, but they do enter the current account.
Traps
- Putting freight or insurance payments into the balance of trade.
- Treating a deficit as automatically bad; deficits often finance imports of capital goods.
- Confusing entrepot with the re-export of goods manufactured at home.
- Forgetting that CEMAC members trade duty-free among themselves, yet those flows remain foreign trade for Cameroon.