Trade is defined as the exchange of goods and services between two or more parties. It can be classified into two broad categories: formal trade and informal trade.
Key Facts
- In formal trade, currency is the medium of exchange.
- It involves exchanges that generate records and statistics.
- Formal trade is conducted in markets that are under the supervision of the government.
- Employees in the formal sector enjoy job security, fixed working hours, and social security benefits.
- Formal sector enterprises are licensed and liable to pay taxes to the government.
- Trade unions can be formed by workers in the formal sector to protect their interests.
Informal Trade:
- In informal trade, the medium of exchange can be currency or goods and/or services.
- It encompasses exchanges in which no records or statistics are generated.
- Informal trade consists of workers and enterprises that do not come under the regulation of the government.
- Employees in the informal sector do not have fixed working hours, job security, or social security benefits.
- Informal sector enterprises are not liable to pay taxes to the government.
- Workers in the informal sector do not have the right to form trade unions.
Formal Trade
Formal trade refers to the exchange of goods and services that are conducted in accordance with established rules and regulations. It is typically characterized by the use of currency as the medium of exchange and the generation of records and statistics. Formal trade takes place in markets that are under the supervision of the government, such as stock exchanges or commodity markets.
There are several advantages to formal trade. First, it provides a level of certainty and predictability for businesses. They know that they will be able to buy and sell goods and services at a fair price and that their transactions will be recorded and protected. Second, formal trade helps to promote economic growth by creating jobs and stimulating investment. Third, it can help to reduce poverty by providing opportunities for people to earn a living and improve their standard of life.
Informal Trade
Informal trade, on the other hand, refers to the exchange of goods and services that takes place outside of the formal economy. It is typically characterized by the use of barter or other non-monetary forms of exchange and the absence of records or statistics. Informal trade often takes place in small, local markets or through personal networks.
There are several reasons why people might engage in informal trade. For example, they may not have access to formal markets, they may not be able to afford the costs of formal trade, or they may simply prefer to trade in a more personal way.
Informal trade can have both positive and negative consequences. On the one hand, it can provide opportunities for people to earn a living and improve their standard of life. It can also help to promote social cohesion and cultural exchange. On the other hand, informal trade can also lead to the spread of counterfeit goods, the exploitation of workers, and the evasion of taxes.
Comparison of Formal and Informal Trade
The following table summarizes the key differences between formal and informal trade:
| Feature | Formal Trade | Informal Trade |
|---|---|---|
| Medium of exchange | Currency | Currency, goods, or services |
| Records and statistics | Generated | Not generated |
| Government supervision | Yes | No |
| Advantages | Certainty, predictability, economic growth, poverty reduction | Opportunities for people to earn a living, social cohesion, cultural exchange |
| Disadvantages | Costs, bureaucracy | Counterfeit goods, exploitation of workers, tax evasion |
Conclusion
Formal and informal trade are two important components of the global economy. Formal trade is essential for economic growth and development, while informal trade provides opportunities for people to earn a living and improve their standard of life. Both types of trade have their own advantages and disadvantages, and it is important to understand the differences between them in order to make informed decisions about how to participate in the global economy.
References
- IPBES: Trade (formal or informal)
- GeeksforGeeks: Difference between Formal Sector and Informal Sector
- Reno & Zahm LLP: What Is the Difference Between an Informal & Formal Business Structure?
FAQs
What is formal trade?
Formal trade refers to the exchange of goods and services that are conducted in accordance with established rules and regulations. It is typically characterized by the use of currency as the medium of exchange and the generation of records and statistics.
What is informal trade?
Informal trade refers to the exchange of goods and services that takes place outside of the formal economy. It is typically characterized by the use of barter or other non-monetary forms of exchange and the absence of records or statistics.
What are the advantages of formal trade?
Formal trade provides a level of certainty and predictability for businesses, promotes economic growth by creating jobs and stimulating investment, and can help to reduce poverty by providing opportunities for people to earn a living and improve their standard of life.
What are the disadvantages of formal trade?
Formal trade can be costly and bureaucratic, and it can sometimes lead to the exclusion of small businesses and marginalized groups.
What are the advantages of informal trade?
Informal trade can provide opportunities for people to earn a living and improve their standard of life, promote social cohesion and cultural exchange, and allow for more flexible and personalized transactions.
What are the disadvantages of informal trade?
Informal trade can lead to the spread of counterfeit goods, the exploitation of workers, and the evasion of taxes. It can also be difficult for governments to regulate and monitor informal trade, which can lead to problems such as smuggling and money laundering.
What are some examples of formal trade?
Examples of formal trade include the buying and selling of stocks and bonds on a stock exchange, the import and export of goods between countries, and the sale of goods and services in a retail store.
What are some examples of informal trade?
Examples of informal trade include the sale of goods and services on the street, the exchange of goods and services between friends and family members, and the barter of goods and services between different communities.