Explanation

a) Distinguish between domestic trade and external trade: Domestic trade is the exchange of goods and services within the borders of a country and involves the use of only one currency, ete. External trade is the exchange of goods and services across the borders of a country and involves the use of different currencies.

(b) Distinguish between terms of trade and balance of trade: Terms of trade is the rate at which a country's export is exchanged for its imports OR Terms of trade  = \(\frac {\text {lndex of exports prices}} {\text {Index of import prices}}\) X 100
Balance of trade is the difference between the value ofa country's visible exports and its visible Imports over a time period.

(c) Outline four causes of balance of payments deficit in a country:

(i) Increased demand for foreign consumer goods due to high taste for foreign goods.

(ii) Demand for foreign capital goods due to rapid industrialization.

(iii) Unfavorable terms of trade because of falling commodity prices.

(iv) Decrease in the demand for local exports as a result of emergence of synthetic substitutes.

(v) Export of unprocessed primary products which attract lower prices in the world market.

(vi) Debt servicing due to borrowing from foreign lenders and inability to raise enough capital from domestic sources.

(vii) Transfer of capital abroad by foreign investors and citizens which lead to capital flight.

(viii) Large amount of payments for foreign invisible items e.g shipping. insurance. aviation and tourism expenditure on foreign missions

(ix) Increased expenditure on foreign mission

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