Negotiable instruments distinguished from other types of contracts

Bill of exchange

Bill of exchange, 1933

A bill of exchange is essentially an order made by one person to another to pay money to a third person. A bill of exchange requires in its inception three parties—the drawer, the drawee, and the payee. The person who draws the bill is called the drawer. He gives the order to pay money to the third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill. The party in whose favor the bill is drawn or is payable is called the payee. The parties need not all be distinct persons. Thus, the drawer may draw on himself payable to his own order.

A bill of exchange may be endorsed by the payee in favour of a third party, who may in turn endorse it to a fourth, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counterclaims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.

In some cases a bill is marked "not negotiable" – see crossing of cheques. In that case it can still be transferred to a third party, but the third party can have no better right than the transferor.

Bill of lading

A bill of lading can be used as a traded object. The standard short form bill of lading is evidence of the contract of carriage of goods and it serves a number of purposes:

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  It is evidence that a valid contract of carriage, or a chartering contract, exists, and it may incorporate the full terms of the contract between the consignor and the carrier by reference (i.e. the short form simply refers to the main contract as an existing document, whereas the long form of a bill of lading (connaissement intégral) issued by the carrier sets out all the terms of the contract of carriage);
  
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  It is a receipt signed by the carrier confirming whether goods matching the contract description have been received in good condition (a bill will be described as clean if the goods have been received on board in apparent good condition and stowed ready for transport); and
  
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  It is also a document of transfer, being freely transferable but not a negotiable instrument in the legal sense, i.e. it governs all the legal aspects of physical carriage, and, like a cheque or other negotiable instrument, it may be endorsed affecting ownership of the goods actually being carried. This matches everyday experience in that the contract a person might make with a commercial carrier like FedEx for mostly airway parcels, is separate from any contract for the sale of the goods to be carried, however it binds the carrier to its terms, irrespectively of who the actual holder of the B/L, and owner of the goods, may be at a specific moment.
  

In international economics and international trade, terms of trade or TOT is (Price of exportable goods)/(Price of importable goods). In layman's terms it means what quantity of imports can be purchased through the sale of a fixed quantity of exports. "Terms of trade" are sometimes used as a proxy for the relative social welfare of a country, but this heuristic is technically questionable and should be used with extreme caution. An improvement in a nation's terms of trade (the increase of the ratio) is good for that country in the sense that it can buy more imports for any given level of exports. The terms of trade is influenced by the exchange rate because a rise in the value of a country's currency lowers the domestic prices for its imports but does not directly affect the commodities it produces (i.e. its exports).

Limitations

Terms of trade should not be used as synonymous with social welfare, or even Pareto economic welfare. Terms of trade calculations do not tell us about the volume of the countries' exports, only relative changes between countries. To understand how a country's social utility changes, it is necessary to consider changes in the volume of trade, changes in productivity and resource allocation, and changes in capital flows.

The price of exports from a country can be heavily influenced by the value of its currency, which can in turn be heavily influenced by the interest rate in that country. If the value of currency of a particular country is increased due to an increase in interest rate one can expect the terms of trade to improve. However this may not necessarily mean an improved standard of living for the country since an increase in the price of exports perceived by other nations will result in a lower volume of exports. As a result, exporters in the country may actually be struggling to sell their goods in the international market even though they are enjoying a (supposedly) high price.

In the real world of over 200 nations trading hundreds of thousands of products, terms of trade calculations can get very complex. Thus, the possibility of errors is significant.

Import quota

An import quota is a limit on the quantity of a good that can be produced abroad and sold domestically.^[1] It is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time. If a quota is put on a good, less of it is imported. ^[2] Quotas, like other trade restrictions, are used to benefit the producers of a good in a domestic economy at the expense of all consumers of the good in that economy.

Effects

Because the quota raises the domestic price above the world price, domestic sellers are better off, and domestic buyers are worse off. In addition, the license holders are better off because they make a profit from buying at the world price and selling at the higher domestic price. Thus, import quotas decrease consumer surplus while increasing producer surplus and license-holder surplus.

While import quotas and other foreign trade policies can be beneficial to the aggregate domestic economy they tend to be most beneficial, and thus most commonly promoted by, domestic firms facing competition from foreign imports. Domestic firms benefit with higher sales, greater profits, and more income to resource owners. However, by increasing domestic prices and restricting accessing to imports, foreign trade policies also tend to be harmful to domestic consumers.

Import quotas vs. tariffs ^[5]

Both tariffs and import quotas reduce quantity of imports, raise domestic price of good, decrease welfare of domestic consumers, increase welfare of domestic producers, and cause deadweight loss. However, a quota can potentially cause an even larger deadweight loss, depending on the mechanism used to allocate the import licenses. The difference between these tariff and import quota is that tariff raises revenue for the government, whereas import quota generates surplus for firms that get the license to import.

For a firm that gets a license to import, profit per unit equals domestic price (at which imported good is sold) minus world price (at which good is bought) (minus any other costs). Total profit equals profit per unit times quantity sold.

Government may charge fees for import license. If the government sets the import license fee equal to difference between domestic price and world price, the import quota works exactly like a tariff. The entire profit of the firm with an import license is paid to the government. Thus government revenue is the same under such an import quota and a tariff. Also, consumer surplus and producer surplus are the same under such an import quota and a tariff.

So why do countries use import quotas instead of always using a tariff?

When an import quota is used, it allows a country to be sure of the amount of the good imported from the foreign country. When there is a tariff, if the supply curve of the foreign country is unknown, the quantity of the good imported may not be predictable.

If world supply in the home country is upward-sloping and less elastic than domestic demand (as may be the case when the home country is the United States) then the incidence of the tariff may fall on producers, and the price paid domestically may not rise by much. Then if the tariff is supposed to make price of the good rise to allow domestic producers to sell at a higher price, the tariff may not have much of the desired effect. A quota may do more to raise price. However in competitive markets there is always some tariff that raises the price as high as the quota does.