Customs

The practice of levying duties on goods entering or leaving the country originated in the Middle Ages when the king or monarch began to charge both export and import duties on goods, taking a part of the goods as payment. Later, money payments determined usually by the amount customarily paid were also accepted. This is where the term customs comes from.

The tariff policy of a country usually protects the interests of the home economy by enabling its products to penetrate foreign markets while protecting its own markets from being flooded by foreign goods.

Import tariffs are therefore kept as high as possible (except for raw materials and other goods, the imports of which are essential to the economy) and exports tariffs very low, if applicable at all.

Besides import and export duties, there are transit duties. A transit duty is a tax levied on goods passing through a customs area.

Tariffs are often classified as either protective or revenue. Protective tariffs are designed to shield domestic production from foreign competition by raising the price of the imported goods. Revenue tariffs are designed to obtain revenue for the government.

If tariffs are imposed according to the weight of goods or according to their quantity (so much per ton, per item, per metre, etc.), they are called specific tariffs. If they are levied according to the estimated value of the goods, they are known as ad valorem tariffs. A combination of these two is the compound tariff.

The customs tariff of a country is either a double-column tariff or a single-column tariff. A single-column tariff is used when the rates are valid in general for all countries. When different rates are used (preferential rates for certain countries, for example), a double-column tariff is applied.

Foreign Exchange

Centuries ago gold or silver coins were used as money. The value of each nation's money was determined by the gold (or silver) content of each coin. Today, each country has its own currency with names such as euro, dollar, pound, hryvnia, etc. A distinction is made between domestic currency and foreign currency. A distinction can also be made between foreign currency and foreign exchange.

Foreign exchange is a broader term than foreign currency, as it also includes short term credit instruments (bills of exchange, etc.) in foreign currencies. (Foreign exchange also means the system of dealing in and converting the currency of one country into that of another).

Currencies can be (a) free or convertible (hard) currencies (b) transferable currencies, which can be transferred from one bank to a foreign bank on the basis of agreements, and (c) closed currencies (soft currencies), which can only be used by special arrangement in international payments.

The price at which one currency can be exchanged for another (i.e. the price of a currency on the foreign exchange market) is called the exchange rate or rate of exchange.

Under a floating exchange rate the rates of exchange are determined by market trading based on the supply of and demand for specific currencies. As demand fluctuates, the rates fluctuate also - rising when demand is greater than supply and declining when supply exceeds demand. Under a fixed exchange rate the government keeps the price fixed, in the short run by accumulating or depleting its foreign exchange reserves or else by borrowing abroad or introducing foreign exchange restrictions.