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Cash in Advance Definition

Cash in Advance (CIA) Definition

Cash in advance refers to a condition in the international trade providing that the importer must pay cash to the owner of the goods before shipping the goods.

A Little More on What is Cash in Advance

Cash in advance method of payment is used in the international trade bay the traders to minimize the problems associated with credit risks or failure to pay for the goods after shipment. This method of payment implies that when the exporter ships the goods to the importer, he is confident on the payment. It reduces the situation that the importer may fail to pay for the products thereby creating discourse to the exporter. This method is most commonly used for export/import business. However, it can also be used in other types of business other than export/import business.

Cash In Advance: How It Works

Before the importer receives a shipment of a product from a foreign trader, they are required to pay cash in advance for the products. This method of payment makes foreign producer more secured against failure on the side of the importer to pay.  In some cases, this deal may be applicable when the exporter ships the goods in advance before the importer make payment, but the ownership of the good remain to exporter until the importer make payments of the goods. The payment is made through credit card or wireless service.

Despite the benefits of this method to the exporter, this method is not commonly used in the international trade. This is because they create problems regarding buyer`s cashflows thus making it inconvenient means of payment.  This may also have adverse effects on the exporter in the case of a competitive market since the importer will move to another exporter who does not use the method.

Terms

The terms cash in advance describes the purchase term whereby the cash is paid prior to the shipment. This minimizes the risks to the seller and increases the risks to the buyer. This type of agreement is associated with other terms such as Free on Board and constraint.

The free-on-board terms-present that the importer becomes in charge of the product once they are discharged by the exporter and become liable to all risks associated with the product such as financial risks, damages of the products and any other risks. However, these risks are rare unless the product in the deal is fragile and has phenomenal value.

Constraints – refers to a condition that limits the efficiency and effectiveness of carrying out the business operation. For example, when a company has $ 5000 cash at hand, and an income of $3000, it is considered to have a constraint of $ 8000. This means that when the business transaction requires the use of cash in advance method, then the company can only obtain a limit of $8000

References for Cash in Advance (CIA)

Academic Research for Cash in Advance (CIA)

  • Money as real options in a cash-in-advance economy, Beck, S., & Stockman, D. R. (2005). Economics Letters, 87(3), 337-345. This paper investigates the impacts of uncertainty in the value of money in making payment for the products. The study characterized the equilibrium and the optimal where the money has a positive value.
  • Money, social status, and capital accumulation in a cash-in-advance model: a comment, Chang, W. Y., & Tsai, H. F. (2003). Journal of Money, Credit, and Banking, 35(4), 657-661. This paper examines the impacts of steady-state of monetary growth on the capital stock in an economy characterized by wealth-made social status. The study discovered that inflation has negative effects on the capital stock in the long run when the consumptions and investments are constrained liquidity.  Furthermore, when all the consumption goods are a portion of the investment goods, then the inflation creates an uncertain effect on the capital stock in the long run.
  • R&D and economic growth in a cash‐in‐advance economy, Chu, A. C., & Cozzi, G. (2014). International Economic Review, 55(2), 507-524. This paper analyses the impacts of monetary policies on social welfare and economic growth in a Schumpeterian growth model with consumption, cash‐in‐advance (CIA) constraints on R&D investment and liquidity problems regarding R&D. According to the author, the model of CIA constraints on consumption and R&D presents that an increase in the nominal rate increases or decreases the economic growth and R&D.
  • Alternative approaches to money and growth, Wang, P., & Yip, C. K. (1992). Journal of Money, Credit and Banking, 24(4), 553-562. This paper investigates the relationship between money and economic growth using the various approaches developed recently. The paper focuses on the economy that has both endogenous capital stock and labor supply.  The study applied the approaches such as the cash-in-advance, money-in-the-utility-function, and transactions-costs approach to determine the financial effect on economic growth.
  • Exchange rate volatility and deviations from unbiasedness in a cash-in-advance model, Bekaert, G. (1994). Journal of International Economics, 36(1-2), 29-52. This article investigates time-series features of forwarding premium, exchange rate changes, and forward bias based on the Svenson’s cash-in-advance model. The study simulates and solved the model using the process of realistic forcing.
  • Liquidity effects and the monetary transmission mechanism, Christiano, L. J., & Eichenbaum, M. (1992). (No. w3974). National Bureau of Economic Research. This article discusses the basic mechanisms and frictions underlying the new class of models and investigates areas for creating persistence. According to the author, expansionary monetary policy disturbance creates a continuous decrease in interest rates and a continuous increase in output and employment. The study further presents that the shortcoming of the monetary policies is that they cannot rationalize continuous liquidity effects.
  • Monetary policy and equilibrium indeterminacy in a cash-in-advance economy with investment, Yip, C. K., & Li, K. F. (2004). Economics Bulletin, 5(2), 1-7.  This paper examines the impacts of interest monetary policies especially the interest rate in the cash-in-advance economy.  The study discovered that tight policies on interest rates create unique equilibrium and passive monetary policies can result in indeterminacy. The simulation depicts that even under the investment, passive monetary policies can still render indeterminacy.
  • Timing and real indeterminacy in monetary models, Carlstrom, C. T., & Fuerst, T. S. (2001). Journal of Monetary Economics, 47(2), 285-298. This article presents the approaches to the theoretical analysis of monetary policies that will help in ensuring that these policies do not create indeterminacy and support the economic changes.  The study uses discrete-time money-in-the-utility function model show how small changes in the business arena can lead to dramatic variations in the policy restrictions to achieve determinacy.
  • The cyclical behavior of household and business investment in a cash-in-advance economy, Li, V. E., & Chang, C. Y. (2004). Journal of Economic Dynamics and Control, 28(4), 691-706. This article explores the monetary explanation of control of two trade cycles. First, it explains that families and financial investments positively procyclical and correlated. Secondly, it presents that business investments tend to reduce the household investment over the cycle.  The study discovered that the use of a given interest rate regulation provided by the monetary authority presents a model to capture both direction and timing household and business investment.
  • Chaotic dynamics in a cash-in-advance economy, Michener, R., & Ravikumar, B. (1998). Journal of Economic Dynamics and Control, 22(7), 1117-1137. This paper presents a valid condition for the occurrence of the deterministic cycles and conflicts that arises in cash-in-advance models. The study depicts chaotic equilibria to be likely in the cash-in-advance model since such models have unique features.
  • Exchange rate determination, interest rates, and an integrative approach to the demand for money, Guidotti, P. E. (1989). Journal of International Money and Finance, 8(1), 29-45. This paper provides a framework through which cash-in-advance approaches and money-in-the-utility-function models can be seen as equal.  The paper integrates the concept of money demand to these models to attain equilibrium relationship regarding exchange rate, interest rate and trade.

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