What is Commerce?

  • Post last modified:24 November 2021
  • Reading time:14 mins read

Commerce is the sum total of all those processes, which are engaged in the removal of hindrance of persons (trade), place (transport and insurance), and time (warehousing) in the exchange (banking) of commodities.

What is Commerce?

Commerce is the sum total of all those processes, which are engaged in the removal of hindrance of persons (trade), place (transport and insurance), and time (warehousing) in the exchange (banking) of commodities.

Concept of Commerce

Commerce is the subject that deals with the study of the exchange and distribution of goods and services to meet the consumers demand. It is a social science that is associated with trade and aid to trade. There are the following terms used in definitions:

  • Exchange: It means a change of ownership and distribution means make available of goods and services.

  • Goods: It is anything made which are in form to be used by people. It should be tangible thing.

  • Services: It is intangible thing that being offered to people.

Nature of Commerce

Commerce is considered to be a part of the business. It is that activity of business that is concerned with the exchange of goods and services. Some persons feel that commerce and business are synonymous.

The following characteristics will help in understanding the nature of commerce:

  1. Economic Activities
  2. Exchange of Goods and Services
  3. Earning Motive
  4. Creation of Utility
  5. Regularity of Transactions
  • Economic Activities: Economic activities are taken up with a motive to earn profits. Commerce deals with those activities which are undertaken for profit. So only economic activities are included in commerce. It is the motive which is important and not the activity. Some activity may both be economic and non-economic.

    A trader buys goods to sell them again and earn profit while a consumer buys goods for consumption. In the first case a motive is to make profit while in the second situation the motive of profit is absent.

    For a trader buying goods is an economic activity and a part of commerce while the purchase of goods by a consumer is non-economic activity, hence out of the purview of commerce.

  • Exchange of Goods and Services: Commerce involves an exchange of goods and services for profit. The goods may be produced or procured from other sources. The purchase of goods should be to re-sell them. It means that goods should be purchased for trading purposes.

  • Earning Motive: The motive for undertaking trading activities is to earn profit. Profit is an incentive or reward for undertaking commercial activities. Any activity which does not have the incentive of profit will not be a part of commerce.

    If a trader gives some goods as charity then it will not be a part of commerce because profit motive is missing. But if the same trader sells goods to customers, it will form a part of commerce because profit motive is present. So earning motive must be present in activities or transactions.

  • Creation of Utility: Commerce creates place and time utility in goods. The goods may not be consumed at the place of production. These may be needed at different places. The goods are taken to those places where they are in need.

    Transportation facilities help in creating place utility in goods. The goods are also needed at different periods of time. It may not be possible to produce goods whenever they are demanded. The producers go on producing goods as per their capacity.

    The goods are stored up to the time they are not demanded. The production is done at one time and consumers get them as per their needs. The storage facilities create time utility in goods. Both place and time utilities are helpful in increasing the volume of trade.

  • Regularity of Transactions: The transactions should be regular. No isolated transaction will be a part of commerce. The sale of old furniture for replacing it by new is not a part of commerce. At the same time the sale of furniture by a furniture trader is commerce since the transactions are regular.

Scope of Commerce

Commerce has a wider scope. It deals with not only the activities related to transfer of goods and services but also with the development and promotion of trade and its allied activities. The activities relating to various branches of commerce will have to be properly understood.

The study of trade will include internal and external (foreign) trade, wholesale and retail trade, mercantile agents associated with trade, etc. The foreign trade will be concerned with import and export trade and the procedures to be followed in such trade.

There are a number of hindrances in undertaking trade. These may relate to transportation of goods, raising of finances, storing of goods for future consumption etc. These hindrances necessitate the study of various modes of transport, banking activities, warehousing and insurance facilities.

All these facilities will help in the development of commerce. Both internal and external trade needs the use of cheques, bills of exchange, promissory notes, hundis, etc. The knowledge of drawing negotiable instruments is essential in financing the trade.

Evoluation of commerce

Commerce originated from the study of different stages that commerce passes through. It passes through:-

  • Primitive stage to the modern stage. At the early stage, people produced goods and commodities for their own satisfaction on use. Later, they found having surplus that otherwise would be destroyed.

  • They started to exchange those surplus commodities with other commodities from other people with what they produced. This exchange involves goods to goods. (Barter Trade)

Barter Trade

It is the exchange of goods with other goods. During this stage of commerce there was no medium of exchange. This exchange (barter trade) has several limitations which are:-

  1. Double coincidence of wants: It was difficult to find people who needs ones product and have a commodity the same needed for exchange.

  2. Divisibility: It was difficult to divide the commodity according to the needs of the customers.

  3. Difficult to measure the value of the commodity: It was difficult to measure the value of the commodity as there was no standard of measure. The measure of value was according to the ones needs.

  4. Portability: Some of the commodities were to be carried the whole, the exchange of maize and cassava all commodities have to be carried to the market.

  5. Problem of unit of exchange: How much goods are available to attain the needs.

Due to these difficulties in this stage people came into other stage known as commodity exchange.

Commodity Exchange

It is the exchange of goods by the use of selected commodities or goods which have been chosen by the society to be used as a medium of exchange. The selected commodity will be used in the exchange with other goods or services.

The selected commodity to be used as the medium of exchange has to be accepted by society.

Such commodity should be durable so that it can serve the purpose for a long time. Also, the commodity selected was of value. Thus commodities like gold, copper, silver and diamond were used as commodities for exchange.

In the latest stage of commerce, exchange is facilitated by the introduction of money into circulation as a medium of exchange to overcome the problems of commodity exchange.

There are the following factors that played important role in the growth of commerce

  • The diversification of natural resources encouraged the exchange of goods between different area and countries.

  • The difference of human wants also induced the exchange of goods.

  • Specialization or division of labour becomes another main cause of trade or exchange of goods.

  • Improvement of transport and communication system was also a great help in the expansion of commercial activities.

  • Development of money and banking system was another reason for great production and exchange activities.

Importance of Commerce

The importance of commerce is established by three basic facts of human life. These facts are:-

  1. Unequal distribution of natural resources
  2. Difference of standard of living
  3. Mutual Interdependence

Unequal distribution of natural resources

The natural resources, human skills are not equally spread over the surface of the earth. Commerce helps to neutralize geographical disadvantage by bringing about exchange of goods between different regions. Rubber for instance available in Malaysia is made available to consumer all over the world.

Difference of standard of living

The standard of living of the people is different in different countries. The various commercial activities help in narrowing the gap between the rich and the poor

Mutual Interdependence

Human life is a patent example of mutual interdependence. No man by himself can produce all his requirement of goods, clothing, shelter, medicines and other comforts. The needs of man are satisfied by the effort of others through the use of money.

Components of Commerce

Commerce can be classified into two categories:

  • Trade
  • Aid to Trade

Classification of Trade:

  1. Internal Trade
  2. External Trade
  3. Wholesale Trade
  4. Retail Trade.

Internal Trade or Home Trade:

The purchase and sale of goods inside the country is called internal trade. Goods can be taken to any place but within the boundaries of the country.

Internal trade may be divided as such:

  • Local Trade: When the demand for products is limited only to a particular place, it is called local trade. Goods are produced according to the local needs of the consumers.

    The producers and the consumers belong to the same place. The goods traded in local markets are generally goods of daily use and perishable goods. These goods are vegetables, milk, bread, etc.

  • Provincial or State Trade: These goods are of a durable nature and sent throughout the state or province. The trade is limited to the boundaries of the state.

    Sometimes government puts some restrictions on the sale of goods outside the state. Sometimes, goods are produced according to people needs, requirements or customs of a particular region of state, then these goods are not required outside the boundaries of the state.

  • Inter-State Trade: The trade conducted throughout the country but within the national boundaries is called inter-state trade. The goods traded are of durable nature and can be stocked for a longer period.

    The production of these goods is on a large scale basis and they are sent to all parts of the country. Various kinds of textiles, kerosene, petrol, iron, steel, etc. are traded on the inter-state basis.

External Trade or Foreign Trade:

When trade takes place between two countries, it is called foreign trade. Two countries are involved in foreign trade. The hindrances of place, time, risk, exchange are overcome with the help of various agencies. External trade generally requires permission from the respective countries.

External trade may be import trade or export trade. When goods are purchased from outside countries, it is called import trade. On the other hand, when goods are sold and sent out to other countries, it is called export trade.

Wholesale Trade:

In wholesale trade, goods are purchased in large quantities and are sold to retailers. A wholesaler is a link between the producer and the retailer. This helps the producers in making bulk production and selling in large quantities. A wholesaler does not come into direct contact with the consumer.

Retail Trade:

Retail trade involves selling goods to the final consumers. The goods are sold in small quantities to the consumers. A retailer purchases goods from a wholesaler and sells them to the consumers. He provides a link between the wholesaler and the consumer.

Aids to Trade

  • Trade: There is a need for some channel which may remit goods from the producers to the users. The producers may not come into direct contact with consumers or users of their products. There is a need for some agency which can facilitate the flow of goods.

    This is possible with the help of trade. Trade is the process of purchasing or procuring of goods and services and selling them to those who need them.

  • Transport: Goods may be produced at places where they are in less demand. These goods are to be taken to the places of consumption. With the help of transport facilities we can create ‘place utility’ in goods.

    The goods are taken from a place where there is less demand, to the places where they are in more demand. The place utility helps the producer to increase the production and earn a remunerative price.

    The consumer is also helped by supplying him with the goods which otherwise might not have reached him. The various modes of transport i.e., road, rail, sea, air have helped the growth of commerce and industries.

    The producer can produce goods on any scale; the demand will be there, provided the goods suit the consumers.

  • Distribution: The producer of goods may not be able to come into direct contact with the consumers. In the present day world, the consumers are in millions and it is not possible for the producers to know the consumers.

    A chain of middlemen acts between the producers and consumers. The middlemen purchase goods from the producers and take them to the consumers.

    Both sides are relieved of their worries. The chain of wholesalers, retailers, brokers, agents, etc. operate between the producers and the consumers and remove the hindrance of persons.

  • Banking: There is always a time lag between production and sale of goods. The traders purchase goods from the producers and then sell to the consumers. It takes time to collect money after sale. There is a need to finance trade activities.

    The commercial banks help trade in the shape of overdraft, loans, or cash credit. The banks play an important role in international trade where trading parties are not known to each other.

    The documents are sent through banks who release the documents after collecting the dues. So banks help in overcoming financial problems.

  • Warehousing: Goods are produced in anticipation of demand. They may also be produced at a time when they are not needed. So there is a need to store goods up to a time these are not required for consumption. The hindrance of time is overcome with the help of warehouse.

    The foreign trade needs the help of warehoused even more because there is more time gap between production and consumption.

    Agricultural products are produced seasonally, but they are required throughout the year. So there is need to store them so that they may be supplied according to demand.

  • Advertisement and Salesmanship: The consumers may not be aware of the availability of various goods in the market. The absence of information about goods is a great hindrance in the way of consumers buying them.

    The producer will also like to increase his customers. The advertisement and salesmanship help in informing the consumer about the availability and usefulness of various products in the market.

  • Insurance: There is a risk involved in transporting goods from one place to another. There can be a risk due to fire or theft. The fear of loss of goods due to any cause acts as an obstacle in the development of trade.

    The insurance companies provide coverage for all types of losses of goods. The insurance coverage has given a fillip not only to the national trade but also to the international trade.

  • Communication: The buyers and sellers at wholesale and retail levels need the services of various agencies which communicate their message among themselves. The producers intimate to their customers about the production of goods.

    The intending buyers send orders to the producers for supply of goods. The services of post offices, telephones, telegraph office, telex, etc. are utilized for communicating purposes.

Business and Commerce

There are following difference between Business and Commerce.

  • Meaning: – Business is a systematic attempt by business persons to produce goods and services and sell them in the market, with a view to earn the reward in the form of profit, while Commerce is that part of business activity which is concerned with distribution of goods and services produced by industry (business).

  • Concept: – Business is a broader concept as it includes commerce, while commerce is a narrow concept as it is a part of business.

  • Skill: – Business requires technical as well as marketing skills, while commerce requires only marketing skills.

  • Classification: – Business is classified into industry and commerce, while commerce is classified as trade and auxiliaries to trade.

  • Involvement:– Business consists of all industries, commerce and services occupation, while commerce consists of only commercial occupation

  • Aims: – Business is any activity carried out with an intension of making profit while standing of a risk less where by commerce is only activities related to trade and aid to trade.

Leave a Reply