TERMS OF TRADE

Subject: 

ECONOMICS

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Term:

FIRST TERM

Week:

WEEK 12

Class:

SS 3

Topic:

TERMS OF TRADE

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Previous lesson: 

The pupils have previous knowledge of

BALANCE OF PAYMENT

that was taught as a topic in the previous lesson

Behavioural objectives:

At the end of the lesson, the learners will be able to

• explain terms of trade
• say the meaning of commonly used term of trade
• solve simple questions on terms of trade

Instructional Materials:

• Wall charts
• Pictures
• Related Online Video
• Flash Cards

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Methods of Teaching:

• Class Discussion
• Group Discussion
• Asking Questions
• Explanation
• Role Modelling
• Role Delegation

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Reference Materials:

• Scheme of Work
• Online Information
• Textbooks
• Workbooks

Content:

TERMS OF TRADE

The term of trade is the period in which you can use products. It is the time that you return all received goods and pay for any shipping costs. You can check if there is a minimum order quantity, or if there are restrictions on shipping methods or countries that we do not ship to, depending on your country.

SPECIAL TRADE TERMS AND MEANS OF PAYMENT TERMS OF QUOTING PRICE.

1. CIF (Cost, Insurance and Freight): A price quoted CIF simply means that it includes the cost of goods insurance, carriage to the port of destination but exclude delivery from the dock to the purchaser’s premises. The importer is responsible for other charges.
2. FOB (Free on Board): It simply means the cost of goods and the expenses incurred for putting goods on board a ship are included. That is all the expenses incurred until the goods have been placed on a ship are borne by the seller while the buyer is responsible for the cost of unloading the goods.
3. FOR (Free on rail): This price quotation is used when rail transport is used. It means that the seller bears all the charges including leading the goods on rail. The buyer has to pay subsequent charges.
4. FREE Dock: This is an exporter’s price quotation, which includes the cost of the goods but transport charges only is for the docks from which the goods are to be shipped.
5. F (Cost and Freight): “Cost and freight” means that the price quoted covers carriage of the goods to the importer’s destination but excludes payment for insurance.
6. A.S. (Free Alongside Ship): This means that the price quoted includes all charges involved in conveying the goods to the ship but does not include cost of loading the goods onto the ship.
7. Free On Quay (F.O.Q): This means that the price quoted includes all charges and expenses involved in delivering the goods to the quay. The buyer takes responsibility for loading onto the ship.
8. FRANCO: “Franco” means that the price quoted covers all charges involved in carrying the goods up to the warehouse of the importer.
9. Ex-Ship: “Ex-Ship” is a term of sale which indicates that the seller is the one who bears the cost of carriage until the goods have been properly unloaded from the ship at the port of destination.
10. Carriage Forward: A price which is quoted “Carriage Forward” represents only the cost of the goods to which the cost of transportation will be added at a later date. This applies in a situation when the seller cannot estimate the cost of transport, but he will nevertheless deliver the goods to the destination of the buyer and add transport later.
11. Cash On Delivery (C.O.D): “Cash on delivery” means that the buyer may not be allowed to take possession of the goods until he has made payment for them. This term of sale is used in order to sustain the seller’s right to repossess the goods even if the goods are in the possession of the buyer or his agent.
12. Terms of payment may also vary depending on the country, type and number of products being ordered. Some common terms include:
13. -Payment in full upon delivery- This is a very common term when ordering smaller amounts of products or for B2B transactions. It usually requires payment before receiving the product, so it is important to ensure that the merchant is reliable and has a good reputation.
14. -Payment by invoice or credit card- This term of payment allows you to pay for your purchase over time, which may provide more flexibility when ordering larger amounts of products. It usually requires a deposit upon placing the order and the remaining balance before receiving the product.
15. -Payment terms based on a percentage of the total cost- This is a common term for large orders, typically those that are made by businesses. It can allow you to pay for your purchase through multiple installments and may also offer discounts on larger orders.

DISCOUNT

DISCOUNT: This can be defined as an amount of money that is taken off the price of a product in order to encourage bulk purchases and immediate payment. Some common types of discount include:

Early payment discount (also known as cash discount)- This is a type of discount that allows you to obtain a certain percentage off the price of your order if you pay within a specific time frame. Early payment discounts can often be negotiated with merchants, so it is important to ask about this option when placing an order.

Quantity discount– This is a type of discount that allows you to obtain a lower price if you purchase a larger quantity of products, typically above a specified minimum amount. Quantity discounts can often be negotiated with merchants, so it is important to ask about this option when placing an order and inquire about the possibility of combining the discounts.

Loyalty discount- This is a type of discount that may be offered to frequent customers, typically those who have placed multiple orders in the past and have demonstrated their loyalty to a particular merchant. Loyalty discounts can often include other benefits such as free shipping and exclusive offers, so it is important to keep track of your order history in order to take advantage of this type of discount.

REASONS FOR GRANTING DISCOUNTS

1. To encourage bulk purchases.
2. It helps to avoid the risk of bad debts.
3. To encourage prompt payment.
4. Discount attracts customers.
5. It avoids tying down of capital.
6. To provide for the retailer’s profit.

There may be other reasons for granting discounts, depending on the specific circumstances and needs of individual merchants. Ultimately, it is important to be aware of any discounts that may be available when placing an order and negotiate with merchants in order to obtain the best possible deal.

TYPES OF DISCOUNTS

1. Trade Discount: This is an allowance given by the manufacturer or wholesalers to retailers in form of deduction from catalogue price of goods supplied to cover the retailer’s margin.

Feature of Trade Discount

1. Allowed for quantity purchases.
2. Appears in the day book alone.
3. Allowance off the invoice price.
4. It must be deducted before cash discount.
5. Cash Discount: This is a percentage allowance for prompt payment of an account or for payment within a specified period of time.

Reasons for Granting Cash Discounts

1. To encourage customers to pay promptly.
2. To provide an incentive for large orders or bulk purchases.
3. To avoid tying up capital in accounts receivable.
4. To allow retailers to earn a profit on their sales.
5. Each merchant may have different reasons for offering cash discounts, depending on their specific

Features of Cash Discount.

1. It is conditional.
2. Appears in the accounting records.
3. It ensures prompt payment.
4. It is deducted after trade discount has been deducted.

1. Quantity Discount: This type of discount is given to buyers who purchase goods in large quantities in a single delivery. Most quantity discount arrangements apply to either single order or single delivery. Quantity discount are deductions from the list price by a seller to encourage customers to buy in large quantity or to make the most of their demand from him.

Features of quantity discount.

1. It is given to buyers who buy in large quantities.
2. It applies to a single order.
3. It is an additional way of reducing prices.
4. It is based on the size of the purchases.

1. Seasonal Discount: It is a discount given to a customer who places an order during the slack season. This discount may be offered to stimulate sales at special times of the year e.g off-peak period.

Features of Seasonal Discount

1. It is offered at a special time of the year.
2. It is offered to stimulate sales.

Items of Payment.

1. Prompt cash.
2. Cash on delivery.
3. Cash with order.
4. Spot cash.
5. Monthly account.

Means of Payment.

1. Bank drafts.
2. Standing order.
3. Credit transfer.
4. Credit cards
5. Direct debit.

Each merchant may have different reasons for offering seasonal discounts, depending on the needs and demands of their particular business. Ultimately, it is important to be aware of any discounts that may be available when placing an order and to take advantage of these in order to get the best possible deal. 

Post Office System Of Payment

1. Postage Stamps: This is used in paying small amount on items being bought such as in sending for samples. It is a means by which small sum can be sent by post.
2. Postal Order: This is another means of payment. It is not a negotiable instrument. There are different denominations. It is useful for the transmission of small sums of money by post. It can be cashed at the post if it is not crossed. The commission charged is called poundage.
3. Money Order: This is a means of payment provided by the post office for people wishing to transmit sums of money to obtain money order, it is necessary to complete a form at a post office giving particulars of the sender and the payee. It is useful when the sender had no current account.
4. Telegraphic Money Order: A means by which a sum of money can be sent from one place to another without wasting time. Here, the issuing officer sends a telegram to the payee’s post office, the payee having to give proof of his identity before being paid.
5. Postal Giro: This is a means of making monetary transfers provided by the post-office as an alternative to postal order or money order. Accounts will be opened with the post office. Debts between accounts holders can be settled by transfers from one account to another and no interest is paid.

There are a number of different options for paying for goods and services in today’s marketplace, each with its own advantages and disadvantages. Some of the most common methods include postage stamps, postal orders, money orders, telegraphic money orders, and direct debits or transfers through a post office giro account. Which method is best will depend on the needs and preferences of each individual customer, as well as the nature of the transaction. Ultimately, it is important to be aware of any payment options available in order to get the best possible value for your money.

EALUATION

1. An improvement in the Nigeria’s terms of trade should

A) Lead to a fall in cost of her imports in terms of what she must sacrifice to obtain them

B) Make made-in-Nigeria goods cheaper to buy

C) Increase Nigeria’s domestic output of commodities

D) Lead to an increase in her exchange rates

E) Lead to an increase in Nigeria’s exports of petroleum

2. The typical response of a real balance effect in an open economy is to lead to

A) A reduction in investment and exports

B) An increase in the supply of money

C) A reduction in the demand for money and domestic interest rates

D) An increase in foreign exchange reserves held by the central bank

E) An increase in domestic interest rates

3. Which one of the following statements is TRUE?

A) A fall in GDP leads to an increase in national income and vice versa

B) A rise in GDP does not necessarily lead to a rise in per capita income, though it may do so if other conditions are right

C) An increase in trade deficits may be good for the economy, as it allows consumers to buy more products from abroad

D) A rise in economic growth has a positive impact on the current account balance of an economy

E) None of the above statements are necessarily true or false in all circumstances and/or contexts

4. By ‘trade by barter’, we mean

A) Trade done by people in the villages

B) Exchange of goods for money

C) International trade

D) Exchange of goods for goods

E) The trade of the Middle Ages

5. Gains from trade depends on

A) Comparative advantage

B) Absolute advantage

C) Distributive cost advantage

D) Absolute cost advantage

E) None of the above

5. Surplus in the balance of payments lead to

A) Inflation or increasing prices generally

B) Increase in foreign reserves

C) Decrease in foreign reserves

D) Government budget surplus

E) None of the above

6. The expression ‘Terms of Trade’ is used to describe

A) The quality of exports

B) The direction of foreign trade

C) Terms of purchase on deferred payment basis

D) The rate at which exports exchange for imports

E) Import licensing

7. The value of exports of goods and services as a proportion of GDP is called

A) Total export trade balance

B) Foreign exchange earnings index

C) Export index

D) Export price index

E) Terms of trade index

8. A fall in the real income per capita would lead to which one of the following consequences?

A) A decrease in the demand for imports and an increase in the supply of exports

B) An increase in domestic output as a percentage of GDP

C) An increase in output per capita but not overall GDP

D) A fall in the rate of economic growth and possibly higher levels of unemployment

E) None of the above

9. The quantity of a currency that exchanges for a unit of another currency is called its

A) exchange value

B) barter value

C) exchange rate

D) market price

E) unit price

10. Which of the following items in the Balance of Payments Account is an invisible transaction?

A) Imports of cars

B) Export of cocoa

C) Export of crude petroleum

D) Tourism

E) Import of building materials