NABTEB Commerce 2022 Theory — Question 6

Model answer

(a) Means of payment in international trade: - Cash in advance: the safest method for exporters, because they are securely paid before goods are shipped and ownership is transferred. - Letter of credit: a letter of credit, or documentary credit, is basically a promise by a bank to pay an exporter once all terms of the contract are executed properly. - Open account terms: a sale in which the goods are shipped and delivered before payment is due, usually in 30, 60 or 90 days. Means of payment in home trade: - Cash payment: transferring cash to the seller of the goods when or before goods are delivered. - Issuance of a cheque: writing a cheque in favour of the seller for the amount of the goods, which he will transfer to the buyer. (b) Reasons countries engage in international trade: - Comparative advantage: some countries can produce certain products at a relatively cheap price compared with others. - Difference in natural resource endowment: countries are blessed with different natural resources; international trade enables a country to get what it does not have. - Political alignment: political alignment can make countries engage in international trade. - Differences in technical know-how: differences in technological advancement encourage countries to trade to access what they lack. - Government policy: government policy can encourage or discourage international trade. - To make exchanges that save cost.