Several basic concepts are important for understanding international trade. So, we discuss here the basic concept of international business in detail below:
The basic concept of international business
1. Exporting and Importing: Exporting is concerned with the selling of domestic goods in another country. Importing is concerned with purchasing goods made in another country.
2. The balance of Trade: The Balance of trade represents the difference between the visible export and import. It may be shown in the following way.
- Balance of Trade= Visible export-Visible import.
- Favorable balance of trade: Favorable balance of trade indicates that a country’s export is higher than its import.
- Unfavorable balance of trade: When a country’s imports are higher than its exports, then it is called the unfavorable balance of trade.
3. The balance of Payment: A Balance of payment represents the difference between visible plus invisible export and visible plus invisible import. It may be shown by the following equation.
- Balance of payment = (Visible export + invisible export)-(Visible import +invisible import)
- Favorable balance of payment: If more money is flowing in the country than flowing out of the country.
- Unfavorable balance of payment: An unfavorable balance of payment exists when more money is flowing out of the country than flowing in.
4. Exchange Rate: It is the rate at which one country can exchange its currency with other country’s currency. The exchange rate is of four types:
- Devaluation: Reducing the value of the nation’s currency in relation to currencies of other nations.
- Revaluation: revaluation increased the value of a country’s currency in relation to that of the other countries.
- Fixed exchange rate: It is an unvarying exchange rate, which is set by the government.
- Floating exchange rate: An exchange rate that fluctuates with market conditions.
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