Internal TradeClass 11 Business Studies Notes

Introduction to Trade

Trade is the simple act of buying and selling goods and services with the goal of making a profit. It's a fundamental human activity that has existed since the earliest civilizations. In our modern world, trade is more important than ever because new products are constantly being created and sold globally. No single person or country can produce everything it needs, so we specialize in what we do best and trade for the rest.

Based on the geographical location of buyers and sellers, trade is divided into two main categories:

• Internal Trade: Buying and selling that happens within the borders of a single country.
• External Trade: Trade that occurs between two or more countries.

This chapter focuses on internal trade, exploring its types and the organizations that help it run smoothly.

Internal Trade

Internal trade refers to all the buying and selling of goods and services that takes place within the geographical boundaries of a nation.

A key feature of internal trade is that no custom duty or import duty is charged on the goods, as they are produced and consumed domestically. Payments are typically made in the country's official currency, also known as legal tender.

Internal trade is broadly classified into two categories:

1. Wholesale Trade: Buying and selling goods in large quantities.
2. Retail Trade: Buying and selling goods in small quantities, usually to the final consumer.

These two types of trade rely on wholesalers and retailers, who act as essential middlemen (intermediaries) in getting products from the manufacturer to the millions of consumers across the country.

Wholesale Trade

Wholesale trade involves buying goods and services in large quantities with the intention of reselling them or for intermediate use. A wholesaler is a person or business that sells to retailers, merchants, or industrial users, but not directly to the final consumer in significant amounts.

Wholesalers are a crucial link between manufacturers and retailers. They buy in bulk from producers and sell in smaller lots to retailers. In doing so, they perform many vital functions:

• Grading and packing products into smaller lots.
• Storing goods in warehouses.
• Transporting products.
• Promoting goods and gathering market information.
• Collecting small orders from many retailers and combining them into large orders for manufacturers.

Services of Wholesalers

Wholesalers provide valuable services to both manufacturers and retailers, helping to ensure goods are available at the right time and in the right place.

Services to Manufacturers

Wholesalers offer several key services that help producers focus on what they do best: manufacturing.

• Facilitating Large-Scale Production: Wholesalers collect small orders from numerous retailers and place a large, bulk order with the manufacturer. This allows the manufacturer to produce on a large scale and benefit from economies of scale (lower cost per unit).
• Bearing Risk: Wholesalers buy goods in their own name and store them in their warehouses. This means they take on risks like price drops, theft, fire, or spoilage, relieving the manufacturer of this burden.
• Financial Assistance: Wholesalers often pay manufacturers in cash for their bulk purchases, which means the manufacturer's capital isn't tied up in unsold stock. Sometimes, they even provide advance payments for large orders.
• Expert Advice: Since wholesalers are in close contact with retailers, they understand market trends, customer preferences, and competitor activities. They pass this valuable information back to the manufacturer, helping them make better decisions.
• Help in Marketing: Wholesalers manage the distribution of goods to a vast network of retailers. This frees the manufacturer from the complex task of marketing and selling to thousands of individual shops, allowing them to concentrate on production.
• Facilitating Production Continuity: Wholesalers buy goods from manufacturers throughout the year, as soon as they are produced. They store these goods until there is demand from retailers, allowing manufacturers to maintain a steady production schedule.
• Storage: By taking delivery of goods and storing them in their own warehouses, wholesalers reduce the manufacturer's need for large storage facilities for finished products.

Services to Retailers

Wholesalers make the lives of retailers easier and their businesses more efficient.

• Availability of Goods: Retailers need to stock a variety of products from different manufacturers. Wholesalers make this easy by acting as a single source for many products, saving retailers the effort of contacting multiple producers.
• Marketing Support: Wholesalers often conduct advertising and sales promotions that benefit retailers by increasing customer demand for products.
• Grant of Credit: Wholesalers frequently offer credit facilities to their regular retail customers. This allows retailers to run their business with less working capital.
• Specialised Knowledge: Wholesalers are experts in a specific line of products. They share this knowledge with retailers, advising them on new products, their uses, quality, and pricing. They might even help with store layout and product displays.
• Risk Sharing: By buying in smaller quantities from wholesalers, retailers avoid the risks associated with holding large inventories, such as storage costs, spoilage, and price fluctuations.

Retail Trade

A retailer is a business that sells goods and services directly to the ultimate consumers for their personal, non-business use. Retailers typically buy in larger quantities from wholesalers and sell in very small quantities to customers. Retailing is the final step in the distribution chain.

Services of Retailers

Retailers are the vital final link between producers and consumers, providing essential services to both, as well as to wholesalers.

Services to Manufacturers and Wholesalers

• Help in Distribution of Goods: Retailers make products available to final consumers who are spread across a wide geographical area. They provide place utility by having the product where the customer needs it.
• Personal Selling: Many products require a personal touch to sell. Retailers engage in personal selling, explaining features and benefits to customers, which helps manufacturers and wholesalers finalize the sale.
• Enabling Large-Scale Operations: By handling sales to individual consumers, retailers free up manufacturers and wholesalers to operate on a larger scale and focus on their core activities.
• Collecting Market Information: Because retailers are in direct contact with buyers, they are an excellent source of information on customer tastes, preferences, and attitudes. This feedback is crucial for manufacturers in making marketing decisions.
• Help in Promotion: Manufacturers and distributors run promotional campaigns like offering coupons, free gifts, or sales contests. Retailers actively participate in these activities, helping to boost product sales.

Services to Consumers

• Regular Availability of Products: Retailers ensure that a variety of products from different manufacturers are consistently available, allowing consumers to buy them whenever they are needed.
• New Product Information: Through effective product displays and personal selling, retailers inform customers about new products, their features, and their benefits.
• Convenience in Buying: Retailers are usually located near residential areas and are open for long hours. They also break down bulk quantities into smaller units that suit consumer needs, making shopping highly convenient.
• Wide Selection: Retailers typically stock a variety of products from different manufacturers, giving consumers a wide range of choices.
• After-Sales Services: Many retailers offer services like home delivery, supply of spare parts, and attending to customer complaints, which are important factors for repeat purchases.
• Provide Credit Facilities: Some retailers offer credit to their regular customers, allowing them to purchase goods now and pay later. This can help consumers increase their consumption and improve their standard of living.

Terms of Trade

In business transactions, certain standard terms are used to define the conditions of a sale.

• Cash on Delivery (COD): Payment for goods is made at the time of delivery. If the buyer cannot pay, the goods are returned to the seller.
• Free on Board (FOB) or Free on Rail (FOR): In this contract, the seller is responsible for all expenses until the goods are delivered to a carrier (like a ship, train, or truck). After that point, the buyer bears the costs and risks.
• Cost, Insurance, and Freight (CIF): The price quoted by the seller includes the cost of the goods, the insurance during transit, and the freight (shipping) charges to the destination port.
• Errors and Omissions Excepted (E&OE): This phrase is often included in documents like invoices to indicate that the seller reserves the right to correct any mistakes or forgotten items later.

Types of Retailing Trade

Retailers can be classified in many ways, but a common method is based on whether they have a fixed place of business. On this basis, there are two main categories:

1. Itinerant Retailers (no fixed shop)
2. Fixed Shop Retailers (permanent establishment)

Itinerant Retailers

Itinerant retailers are traders who do not have a permanent place of business. They move from street to street or place to place with their goods in search of customers.

Characteristics:

• They are small traders with limited financial resources.
• They typically deal in low-cost, daily-use consumer products like fruits, vegetables, or toiletries.
• Their main advantage is providing convenience by bringing products to the customer's doorstep.

Types of Itinerant Retailers:

• Peddlers and Hawkers: These are some of the oldest types of retailers. They carry their products on their heads, hand carts, or bicycles and move from place to place. They sell low-value items like toys, snacks, and vegetables.
• Market Traders: These retailers set up shop in different places on fixed days, such as a weekly market day (e.g., every Saturday). They cater to lower-income groups and sell low-priced consumer goods.
• Street Traders (Pavement Vendors): These traders are commonly found in places with a lot of foot traffic, like near railway stations or bus stands. They sell items of common use like newspapers, magazines, and snacks. They tend to stay in one location more often than market traders.
• Cheap Jacks: These are petty retailers who set up temporary shops in a business locality. They change their location based on business potential, but less frequently than hawkers. They often deal in consumer items and services like watch or shoe repair.

Fixed Shop Retailers

Fixed shop retailers maintain a permanent, physical establishment to sell their merchandise. This is the most common form of retailing.

Characteristics:

• They generally have more resources and operate on a larger scale than itinerant traders.
• They deal in a wider range of products, including durable and non-durable goods.
• They have greater credibility with customers and can offer more services, such as home delivery, guarantees, repairs, and credit facilities.

Fixed shop retailers are further divided by size into small shop-keepers and large retailers.

Fixed Shop Small Retailers

• General Stores: Found in local markets and residential areas, these shops stock a variety of products for daily needs, such as groceries, soft drinks, and stationery. They offer convenience by staying open for long hours and often provide credit to regular customers.
• Speciality Shops: These stores specialize in a specific line of products, such as men's wear, children's toys, or electronic goods. They are often located in central areas to attract many customers and offer a wide choice within their specific category.
• Street Stall Holders: These small vendors operate from stalls at busy street crossings. They sell cheap items like cigarettes, soft drinks, and toys to "floating customers" (people passing by).
• Second-hand Goods Shops: These shops buy and sell used goods like books, furniture, and clothes at lower prices. They cater to people with modest incomes but may also stock rare antique items for collectors.

Fixed Shop Large Stores

These retailers operate on a large scale, with a large volume and variety of goods.

1. Departmental Stores A departmental store is a large retail establishment that offers a wide variety of products under one roof, organized into different departments (e.g., clothing, electronics, groceries).

• Features:
  • They provide many services, such as restaurants, restrooms, and telephone booths, catering to higher-income customers.
  • They are usually located in a central, busy part of a city.
  • They are often organized as joint-stock companies.
  • They buy directly from manufacturers, eliminating middlemen.
  • Purchasing is centralized, but sales are decentralized across departments.
• Advantages:
  • Attract a large number of customers due to their central location.
  • Offer one-stop shopping convenience.
  • Provide attractive services like home delivery and credit.
  • Benefit from economies of large-scale purchasing.
• Limitations:
  • Lack of personal attention to customers due to large scale.
  • High operating costs, leading to higher prices.
  • High risk of loss if fashion or tastes change, leading to large amounts of unsold stock.
  • Inconvenient for quick, emergency purchases.

2. Chain Stores or Multiple Shops Chain stores are a network of retail shops owned and operated by a single organization (either a manufacturer or an intermediary). All shops have a similar appearance, sell standardized products, and follow the same policies.

• Features:
  • Located in various populous areas to be close to customers.
  • Purchasing is centralized at a head office, which distributes goods to all branches.
  • Each shop is managed by a Branch Manager who reports daily to the head office.
  • All sales are on a cash basis at fixed prices.
• Advantages:
  • Enjoy economies of scale from centralized purchasing.
  • Eliminate middlemen by selling directly to consumers.
  • No bad debts because all sales are cash-based.
  • Unsold stock can be transferred from one store to another where there is demand.
  • Risk is spread out; a loss in one shop can be offset by profits in others.
• Limitations:
  • Offer a limited selection of goods, often only the parent company's products.
  • Branch managers have little initiative, as they must follow head office instructions.
  • Can lead to a lack of personal touch with customers.
  • If demand for their specific product line falls, the entire organization can suffer huge losses.

Difference between Departmental Stores and Multiple Shops

3. Mail Order Houses Mail order houses are retail businesses that sell their products through the mail, without any direct personal contact with buyers. They reach customers through advertisements in newspapers, magazines, and catalogues.

• Process:
  1. The business advertises its products with all relevant details.
  2. Customers place orders by post.
  3. The goods are sent to the customer through the postal service.
  4. Payment can be made in advance, through Value Payable Post (VPP) (pay upon delivery), or through a bank.
• Suitable Products: Goods that are standardized, easy to transport, in high demand, and can be described through pictures (e.g., books, small electronics).
• Advantages:
  • Requires less capital as there is no need for a physical store.
  • Eliminates middlemen, potentially lowering prices.
  • No bad debts, as credit is not offered.
  • Can reach customers anywhere with postal services.
• Limitations:
  • Lack of personal contact can lead to mistrust.
  • High promotion and advertising costs.
  • No after-sales service.
  • Delayed delivery of goods.
  • Highly dependent on the efficiency of postal services.

4. Consumer Cooperative Store A consumer cooperative store is an organization owned, managed, and controlled by its consumer-members. Its main objective is to reduce the number of middlemen and provide goods at reasonable prices.

• Features:
  • Formed by at least 10 people who register it under the Cooperative Societies Act.
  • Capital is raised by issuing shares to members.
  • Managed democratically by an elected committee, with a "one member, one vote" rule.
  • Profits are used to give bonuses to members or for social welfare.
• Advantages:
  • Easy to form.
  • Members have limited liability (only up to the capital they contributed).
  • Democratic management.
  • Lower prices due to the elimination of middlemen.
• Limitations:
  • Lack of initiative, as managers often work on an honorary basis.
  • Shortage of funds, as capital comes only from a limited number of members.
  • Members may not patronize the store regularly.
  • Management often lacks professional business training.

5. Super Markets A super market is a large, self-service retail store that sells a wide variety of food, grocery, and household products. It operates on a model of low prices, wide selection, and self-service.

• Features:
  • Operates on the principle of self-service.
  • Sells a complete line of food and grocery items.
  • Prices are generally lower due to bulk purchasing and lower operational costs.
  • All sales are on a cash basis.
  • Located in central, high-traffic areas.
• Advantages:
  • Offers a wide variety of products at low cost under one roof.
  • Central location makes it easily accessible.
  • No bad debts due to cash-only sales.
  • Benefits from large-scale operations.
• Limitations:
  • No credit facilities.
  • No personal attention for customers.
  • Careless handling of goods by some customers can increase costs.
  • Requires huge capital investment to establish and run.

6. Vending Machines Vending machines are a modern form of retailing where customers can buy products by inserting coins or notes into a machine.

• Suitable Products: Pre-packed, low-priced products with high turnover that are uniform in size and weight.
• Limitations:
  • High initial cost of installation and maintenance.
  • Customers cannot see or feel the product before buying.
  • No option to return unwanted goods.
  • Requires reliable machine operation to avoid customer frustration.

Goods and Services Tax (GST)

The Government of India introduced the Goods and Services Tax (GST) on July 1, 2017, with the motto 'One Nation and One Tax'. The goal was to create a single, unified market across the country, making it easier for businesses to operate and ensuring a smooth flow of goods.

GST replaced 17 different indirect taxes and 23 cesses that were previously levied by the Central and State governments. It is a single tax on the supply of goods and services, from the manufacturer all the way to the consumer.

Key Features of GST:

• Applies to the 'supply' of goods or services, not their manufacture or sale.
• It is a destination-based tax.
• It consists of Central GST (CGST) and State GST (SGST).
• It allows for input tax credit, which prevents the cascading effect (tax on tax). This helps reduce the final price for consumers.
• There are four main tax slabs: 5%, 12%, 18%, and 28%.
• An Anti-profiteering Authority was set up to ensure that businesses pass on the benefits of lower taxes to consumers.

How GST Benefits Citizens:

• Reduction in the overall tax burden.
• No hidden taxes.
• Development of a national market.
• Higher disposable income for consumers.
• Increased economic activity and more employment opportunities.

Role of Commerce and Industry Associations in Promotion of Internal Trade

Associations like the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Confederation of Indian Industry (CII) are formed by businesses to promote and protect their common interests. These "chambers of commerce" play a vital role in strengthening internal trade.

They interact with the government to shape policies that:

• Reduce obstacles to trade.
• Improve the interstate movement of goods.
• Simplify tax structures.
• Remove bureaucratic hurdles.

Key Areas of Intervention:

• Interstate Movement of Goods: They work with the government on issues like vehicle registration, transport policies, and the construction of highways to facilitate smooth transportation.
• Octroi and Local Levies: They advocate for policies that ensure local taxes do not hinder the smooth flow of trade.
• Harmonisation of Sales Tax and VAT: They play a key role in interacting with the government to create a rational and uniform tax structure across states, which is essential for balanced trade.
• Marketing of Agro Products: They intervene to help streamline local subsidies and marketing policies for agricultural goods.
• Weights and Measures: They work with the government to formulate and enforce laws on weights, measures, and brand protection to safeguard the interests of both consumers and traders.
• Excise Duty: They interact with the government to ensure the streamlining of central excise duties, which affect product pricing.
• Promoting Sound Infrastructure: They hold discussions with government agencies to encourage investment in crucial infrastructure like roads, ports, and railways.
• Labour Legislation: They engage with the government on labour laws to help create a flexible environment that maximizes production and employment.