The concept and definition of trade and commerce

Many think that trade and commerce mean the same thing, but really, trade means a narrower concept than commerce.

Trade means the exchange of goods and services between two or more parties in return for money or money’s worth. Commerce is concerned with facilitating the exchange of goods and services between the parties, therefore it is sub-classified as trade (the exchange of goods and services) and auxiliaries to trade, including activities such as insurance, transportation, warehousing, advertising, and so on, covering all activities that complete the exchange.

The meaning of trade:

Trade means the sale and purchase of any valuable and marketable commodity or service. The commodity or service travels from the producer, either directly, or through an intermediary, to another economic agent as a production input, or to a consumer for final consumption.

In this concept the terms of product, service, final consumer also carry specific meanings.

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- A product (commodity) is any item that can be offered in the market to satisfy some existing needs, i.e., it is a bundle of physical and other qualities. The emphasis is on the physical features.

- A service is not associated with a physical object, and therefore it cannot be saved or stored.

- The final consumer is a person, who will use up all the commodity to satisfy some need or want, i.e., the commodity will not return to the production process.

- Trade plays an intermediary role in connecting the producer and the consumer, and wholesalers and retailers are the key actors in this process.

- The market is the group of actual and potential sellers and buyers, and the system of their transactions. The market is the ’place’, where demand and supply appear. The other two components of the market are price and income.

Trade plays an intermediary role in the economy, as a process that connects production and consumption. Both the purchase of inputs and sale of outputs take place in the market. Trade is the result of the increasing division of labour. By assisting the division of labour, it enhances the productivity of the national economy, the efficiency of resource utilisation, and the pay-off of the invested financial assets.

Trade, as the regular purchase and sale of goods, is a typical activity of firms, business enterprises. It necessarily involves the actual process of exchanging goods, i.e. the transport of goods from producers to users. The user can be another producer, another firm, or the final consumer, as well. This activity is a natural activity for any firm.

Looking at it from a higher viewpoint, the process of buying and selling requires a system, an organisation, containing companies and firms that deal mainly with the exchange of goods. In this sense the trade sector consists of retailers and wholesalers.

Adding to it all the necessary auxiliary activities (insurance, storage, inventory management, transfer of payments and of information) we arrive to the much wider concept of commerce.

The function of trade (or commerce, in the wider sense) is to manage the market and arrange the distribution of goods (Figure 3.1). Managing the market means to find consumers for the producers’ supply, or find goods, i.e. supply for the consumer demand. The role of trade activities include the assessment of consumer demand, and searching for, and purchasing the demanded goods (or initiating the production of such goods), and then arranging the sale transaction. The distribution function means

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that trade matches the producer supply and the consumer demand in space, time, and variety, and carrying out other auxiliary tasks.

Trade and commerce play a significant role in the freight of goods, in the transportation, classification, storage, packaging of goods, and in delivering the goods to the customer. Today the various functions of commerce are increasingly performed by specialised actors (e.g. logistics companies), or by the producers themselves (e.g.

classifying and packaging the product), while sometimes trading companies may deal with the actual production of goods, too.

Figure 3.1: Trade as an Organisational System

During the process of distribution the most important activity is to connect the different places of production and consumption. Production takes place usually in a concentrated form, while consumption is dispersed, therefore the produced goods have to be also dispersed. In agriculture, besides concentrated production, the multiagent production forms also exist, i.e. the products are produced by many dispersed producers. Then the produced output has to be collected from many producers, which takes extra time and requires extra costs.

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The bridging of the temporal difference of production and consumption is particularly important. Production may be seasonal while consumption evenly distributed throughout the year (e.g. of vegetables, fruits), or consumption may be seasonal and production is continuous (as of heating fuels, fashion clothes). The uneven patterns caused by seasonality are smoothed out by storage, involving either the producer, the merchant, or the customer.

The harmonisation of different production and consumption structures is an explicit commercial task. The producers produce large quantities of a few goods, while the consumers want small quantities of many goods. It is the task of commerce to create the ’mixture’ of goods that the customer wants.

Auxiliary tasks may emerge besides the above listed activities, i.e. maintenance and repair services, or the quality assurance of the goods, and the protection of the consumer’s health and safety. Commerce is often involved in these, too.

As Figure 3.1 shows, the role of commerce may be active or passive. The passive role involves a one-way process. The production of a commodity, its transport to a commercial establishment, followed by its sale to the consumer is a passive process, with a one-way information flow, without considering the consumers’ specific features. An active process, however, means a two-way process, when commerce transmits the market demand and consumer opinions to the producer. A commerce unit orders the product or service on the basis of a previous market research, and after selling the commodity, it may survey the customers’ opinions, or measure consumer satisfaction.