Debt vs. Equity Financing & International Trade Basics

Debt and Equity Financing

Debt financing: This is when you borrow money from a bank or a financial institution, such as through bonds.

Equity financing: This is when you offer a portion of your company, such as stocks, in exchange for capital. You don't have to pay the money back, but you give up a portion of ownership.

• Bonds: Less risky with lower returns. The return of your money plus interest is guaranteed. Bonds are issued by companies, governments, etc. They are fixed-income securities, with the issuer being the borrower.
• Stocks: More risky with potentially higher returns. However, you assume the risk of the company not being successful.

Equity

• Additional paid-in capital: Capital that shareholders have contributed to the company above the nominal value of the stock.
• Retained earnings: Profits that have not been distributed to shareholders as dividends.

Accounting Equation

Assets = Liabilities + Owners' Equity

Balance Sheet

A balance sheet shows a company's financial situation on a specific date, usually at the end of the financial year. It calculates a company's liabilities, assets, and share capital.

Financial Statements

Financial statements include:

• Income statement: Shows how much was earned or lost in a period.
• Statement of retained earnings: Shows how much of the money earned was reinvested.
• Balance sheet: As described above.
• Statement of cash flows: Shows how much money came in and was paid out.

Financial statements let a company know how much money it makes, how much money it spends, what its assets are worth, and provide data requested by government agencies.

International Trade

• Merchandise or visible trade: Tangible goods, such as freight and cargo.
• Invisible trade: Non-tangible goods and services.
• Certificate of manufacture and certificate of inspection: Documents needed before shipment, serving as a warranty for customers, proving that the shipment was made in good condition.
• Bonded warehouse: Where goods are stored before payment or clearance.
• Balance of trade: The difference between imports and exports of goods.
• Balance of payments: The difference between a country's exports and imports of goods and services.
• Trade surplus: More exports than imports.
• Trade deficit: More imports than exports.

Historical Context

• 1948 GATT (General Agreement on Tariffs and Trade): Established to help the economy recover. It was not a permanent structure and only covered goods for trade.
• 1995 WTO (World Trade Organization): A permanent structure covering goods, services, and trade-related intellectual property.