Domestic Trade – Definition – Types – Advantages

domestic trade
Written by Waseem Raza

What is domestic trade?

The exchange of commodities within the geographical boundaries of a country is called domestic or home trade.

In this type of trade, the seller and buyer both are residents of the same country. For example, a trader in Karachi selling goods to another trader in Rawalpindi is a type of home trade. In-home trade, services, or commodities produced are sold all over the country which improves the living standards of the general public, creates employment opportunities, and facilitates the economic development of a country. Home trade is further divided into the following two categories.

Wholesale Trade

In wholesale trade, a wholesaler buys commodities in large quantities from the procedure and then sells them to retailers in small quantities. A wholesaler acts as an intermediary between producers and retailers who can be a merchant or a commission agent. He creates a bridge between the producer and the retailer. In this way, he makes his role very important for both the producers and retailers.

Retail Trade

In retail trade, a retailer buys large quantities from wholesalers and sells in units to the end users. The retailer is considered the last link in the channel of distribution. A retailer acts as an intermediary between wholesalers and end users. A retailer can be a small-scale retailer such as a hawker and general shop or a large scale such as a superstore. Practically, producers and wholesalers are also functioning as retailers in way of distributing commodities to the end users in order to bypass the intermediaries and reduce prices.

Key Features of Domestic Trade

The following are key features of home trade:

  • All trade transactions are taken within the geographical boundaries of a particular country.
  • It covers only local or domestic markets.
  • The local currency is used in receipts and payments.
  •  Normally, home trade involves the exchange of local goods. However, foreign goods may also be traded
  •  Facilities, problems, and business environments are the same for all traders.
  • Goods are handed over to buyers immediately.
  • Transportation charges are relatively lesser.

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Advantages of Domestic Trade

  1. Home trade creates the demand for locally produced goods, which leads to an increase in production.
  2. It enables manufacturers to concentrate on production activities rather than go in search of consumers.
  3. It provides goods to consumers who can concentrate on their own occupations rather than go in search of producers.
  4. Expansion in home trade provides employment opportunities to the masses and reduces the problem of unemployment.
  5. There are no legal formalities and restrictions to conduct home trade.
  6. There is no need for foreign exchange as the local currency is used for receipts and payments.
  7. The growth of home trade provides better opportunities for industrial development. Industries are facilitated by the consumption of their products, providing raw materials, machinery, etc.
  8. In agricultural countries, domestic trade plays a vital role in agricultural development. Agricultural development is based on the availability of the latest technology, seeds, fertilizers, pesticides, etc. All these requirements are easily available in the whole county due to home trade.
  9. Since goods are transferred from one place to another within the boundaries of a particular country, so local transport: can be easily availed for this purpose.
  10. With the help of domestic trade, various commodities can be made available in different areas of the country. Due to this, people do not face any problems getting their required goods.
  11. In domestic trade, the government charges only nominal taxes like sales tax etc. and the traders do not pay import and export duty.
  12. There is no restriction on the movement of goods within the country, so the goods can be sent freely anywhere in the country which makes home trade easy.
  13. With the help of domestic trade, the shortage of goods can remove by transferring them from the area having a surplus to the area with the shortage. With the smooth flow of supply of goods, prices remain stable and equal throughout the country.
  14. All the facilities provided, and restrictions imposed by the government are the same for each trader in domestic trade. None can have a favorable advantage or undue disadvantage.
  15. Due to home trade, the supply or availability of medicines is easy to make and maintain. For example, the easy availability of medicine in clinics, health clubs, medical stores, and even in small shops is possible with the help of home trade.
  16. In-home trade, a producer can purchase raw materials and other factors of production at low prices from that area where these are available at cheaper rates. Having cheap raw materials and other means of production, the goods can be produced at a lower cost to compete in the market.
  17. Living standards can be improved with the help of home trade. Because more trade leads to more businesses that create more employment opportunities for the masses and resultantly increase the income level of people and make goods easily available. All the above, elements lead to a high standard of living.
  18. In-home trade, the buyer gets immediate possession of goods; he can use them according to his need which extends trade activities. xix. Due to home trade, the best possible utilization of available resources of the country is possible in the best interests of the general public.
  19. The importance and demand for workers increase with the expansion of home trade and they can go to those places, where employment opportunities arise.
  20.  Due to the development in the home trade, local and foreign investors find viable investment opportunities to earn huge profits.
  21. The goods can be bought or sold on a credit basis without any hesitation. Due to this, the exchange of goods and services is possible with less capital or without capital.

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Hindrances in Domestic Trade

  • Sometimes heavy taxes and restrictions are imposed by the provincial or federal governments on transferring goods at the national or district level, which results in a reduction of the trade volume.
  • Cheap and quick means of transportation and communication contribute a lot to the development of domestic trade. But their inferiority may prove an ample problem for home trade.
  • Generally, the goods having better quality are exported and substandard goods are sold locally in domestic trade.
  • Due to bad conditions of peace and stability in some parts of the country, free trade becomes impossible. Due to this, home trade is affected adversely.
  • The rapid change in governments and political crises create instability in home trade and disturb its continuity. So, backward areas do not make progress in trade and business.
  • People living in different areas of the same country have different languages. A trader may face this problem in order to sell his goods.
  • Poor rail-road conditions and lack of infrastructure are the big hindrances in the way of domestic trade, especially in developing countries like Pakistan.

Procedure and Documents of Domestic Trade

i. Inquiry Letter

In this letter, a person/trader seeks necessary information about the goods he wants to buy. The following are the major parts of an inquiry letter:

  • Availability of goods
  • Quality of goods
  • Price and Discount
  • Packing of goods
  • Terms of sale
  • Time required for delivering and transporting goods
  • Mode of Payment

ii. Quotations/Tender

The quotation is the reply to an inquiry letter. It includes all necessary information, terms, and conditions regarding the sale of goods required by the buyer. In government buying, it is called tender. Usually, it contains the following information:

  • Quality of goods
  • Price and discounts
  • Details of delivery expenses
  • Time required for such delivery
  • Mode of payment

iii. Order Letter

If terms and conditions are considered favorable after receiving a quotation/tender from the seller, the buyer may place the purchase order with the help of the order letter. The buyer also retains a copy of the order letter for his future needs.

iv. Acknowledgment of Order Letter

The seller then sends an acknowledgment of the order letter to the buyer with thanks stating that your order has been received.

v. Sales Agreement

After receiving the order in proper form, an agreement of sale of goods is made between buyer and seller. The agreement is called a sale agreement and it may be oral or written.

vi. Execution of Order

The seller adopts the following procedure for the execution of the purchase order.

  • Order is recorded in the order book
  • A copy of the order is sent to the storekeeper to confirm the availability of goods
  • If required stock is available, then goods are sent for packing

vii. Delivery of Goods

The seller decides to deliver the goods to the buyer according to the provisions of the sale agreement.

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viii. Delivery Note

After dispatching the goods, a delivery note is sent to the buyer. This document contains information like means of sending goods and time etc. A Performa invoice is also sent to the buyer along with the delivery of goods.

ix. Performa Invoice

It can be said “Rough Invoice” shows the purchaser how an actual invoice will be prepared if he decides to buy goods. However, it cannot be used in place of the original invoice.

x. Debit Note

If goods bought on credit are returned to the seller due to any reason, the buyer debits the seller’s account and informs the seller through a note. This note is called a “Debit Note”.

xi. Credit Note

If goods sold on credit are returned by the buyer due to any reason, the seller credits the buyer’s account and informs the buyer through a note. This note is called a “Credit Note”.

xii. Invoice

It is an important document of internal trade, which includes quantity, price, and the total value of the goods sold. It is sent to the buyer and payment is made according to the amount written on it. The following are the contents of an invoice:

  • Name & address of the sender
  • Name & address of the buyer
  • Date
  • a Serial number of the invoice
  • Quality or brand of goods
  • Weight or quantity of goods
  • Rate and the total value of the goods
  • Other expenses if any (transportation and packing etc.)
  • Terms of payment and discount
  • Signature of seller

xiii. Statement of Account

Both parties (seller and buyer) record the transactions (sale, purchase, receipt, or payment) in their respective books regularly. This statement shows the transactions, which have taken place during the period. It enables the buyer and seller to compare the entries in their books and settle the accounts accordingly.

xiv. Cash Discount

It is a concession or allowance granted to the buyer for early and prompt payment in case of credit sales. This facility can be availed if the payment is made before maturity.

xv. Payment

After receiving the goods and statement of accounts, the payment is made by the purchaser. Payment can be made by using the following methods within the country:

  • Cash
  • Cheque
  • Bank transfer
  • Bank draft
  • Money order
  • Postal order etc.

xvi. Payment Slip/Receipt

It is an acknowledgment, which shows that a person has made the payment of a certain amount on a date. With the use of this receipt, future misunderstandings regarding the payments can be avoided.

xvii. End of Deal

After the settlement of accounts and completion of all the formalities between parties, the process of local trade comes to an end. Read more

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