CXC PAST QUESTIONS AND ANSWERS – PRINCIPLES OF BUSINESS

 

1) The first question is a compulsory 10 marks question, taken from May ­ June 2002 past paper (General). Question

1. It involves Economic Systems and Government Control of Business Activity.

(a) List TWO types of economic systems. (2mks)

(b) Explain the differences between the types of economic systems listed in (a) above. (4mks)

(c) Suggest two ways by which the government of your country can control business activity. (4mks)

Total 10 marks

Before reading the discussion and guidelines to answering the question, you may wish to plan an answer that you would give to the question. Remember, there may be other possible answers than the ones suggested.

DISCUSSION AND GUIDELINES

(a) Any two types of economic systems can be listed, for example, the free economic system and the planned economic system. This part of the question does not require any expansion or explanation.

(b) The characteristics or features of the economic systems listed can be used to show the differences between them.

Conjunctions such as whereas, on the other hand, while and however should be used to indicate your reference to the opposite feature for the other economic system. For example, in the free economy, most of the scarce resources are owned and allocated by private individuals and firms while in the planned economy, scarce resources are owned and allocated by the government.

The marks allotted for this part of the question would indicate that a minimum of two differences is required.

(c) Governments’ control of business activity can come in many forms including:

* Legislation ­ The passing of laws that businesses should abide by.

* Price controls ­ Government stated maximum prices for selected goods and services

* Nationalisation ­ Direct ownership and control of industries by the Government, for example, where monopolies are exploiting consumers.

* Increased taxation ­ To reduce monopoly profits.

Registration and other legal requirements for setting up of businesses.

* Employment of inspectors to monitor the affairs of businesses e.g. price inspectors and sanitary inspectors.

* Setting up of government agencies such as The Bureau of Standards to monitor the quality of goods produced and imported.

Remember, you are asked to suggest only two ways.

2) Now let’s move on to another question. CXC past paper May/June 2003 (General), Question 1.

(a) List TWO functions of a business. (2 marks)

(b) Briefly describe TWO of the following types of business organisations:

(i) Partnership
(ii) Public Limited Company
(iii) Co-operative (4 marks)

(c) State TWO advantages which the Public Limited Company has over the Partnership type of business. (4 marks)

Total 10 marks.

DISCUSSION AND GUIDELINE ANSWER

(a) Any TWO functions of a business can be listed e.g.to sell goods and services to satisfy people’s wants and to provide employment for people. Expansion on and explanation of the functions is not required.

(b) The TWO types of businesses can be described by defining them and /or outlining their features or characteristics. For e.g. in describing the partnership one might say that a partnership is formed with two to 20 members who pool their resources together to run a business with a view to making a profit.

Partnerships are normally required to sign a Deed of Partnership and register with the Registrar of Companies.

(c) The advantages which the Public Limited Company has over the Partnership type of business includes the fact that:

* A larger number of part owners, since the Public Limited Company has a minimum of seven shareholders and no maximum.

* More capital can be raised than in a partnership since an appeal can be made to the general public through the Stock Exchange.

* The Public Limited Company is a separate entity from the shareholder owners, therefore, the individual shareholders cannot be sued, the company must be sued.

* The Public Limited Company has a Board of Directors elected by the shareholders.

* These companies may enjoy economies of scale.

* Risk is spread over many shareholders.

Remember, you are asked to state only TWO advantages of the Public Limited Company over the Partnership.

3) CXC past paper May/June 2003 (General) Question 5.

The following information appeared in a daily newspaper.

Property Services, No. 56 Newpark Saletown
Public Auction Sale
On January 25, 2002 at 10:00 a.m.
I will offer for sale on the date and at the place mentioned above the following vehicle: One l999 Toyota Mini Bus
Terms of Sale:

  • Strictly cash on the fall of the hammer.
  • Vehicle on view on the morning of the sale.
  • Vehicle will be sold as is where is.

- John Brown, Auctioneer.

Tom Phillip who lived 20 miles away, drove to the address on the date specified with the intention of purchasing the minibus.

On arrival, he was told by the auctioneer that the minibus was no longer available and was removed from the items to be auctioned.

Tom Phillip became furious, threatened to sue for breach of contract and demanded a refund of his traveling expenses

(a) Define the term ‘contract’. (2 marks) (b) (i) By attending the public auction
sale, did Tom Phillip accept a firm offer? (1 mark)
(ii) Give ONE reason for your answer in (b)(i) above (2marks)

(c) What do you understand by ‘vehicle will be sold as is where is’? (2 marks)

(d) (i) Define the term ‘breach of contract’. (2 marks)

(ii) State ONE way in which a court may settle a breach of contract.
(1 mark)

(e) State TWO ways by which a contract can be terminated or discharged (4 marks)

(f) (i) Should John Brown refund Tom Phillip’s traveling expenses? (1mark)

(ii) Give ONE reason for your answer to (f)(i) above. (2 marks)

(g) (i) Advise Tom Phillip whether he will succeed in court against John Brown. (1 mark)

(ii) Give ONE reason for your advice in (g)(i) above. (2 marks)

Total 20 marks

DISCUSSION AND GUIDELINE ANSWER

* (a) You must be careful to define a contract, and not an agreement. A contract is defined as a legally binding agreement or an agreement that is created with legal intentions.

If you state that a contract is an agreement without stating any legal aspect, you may only score half of the marks, since all contracts are agreements, but not all agreements are contracts.

* (b) (i) The answer to this part of the question is simply NO.

(ii) The vehicle was not offered for sale, therefore, one cannot accept an offer that was not made. An acceptance MUST be to a firm offer.

* (c) This means that the vehicle is to be sold in the condition that it is presently in at the place or physical locality that it is at.

(d) (i) Breach of contract means that a party or parties to the contract fail to keep their part or parts to the contract.

(ii) The court can rule that the party that has breached the contract be forced to abide by their side of the contract. Or, with the injured parties agreement, the existing contract can be terminated and a new one can come into existence that satisfies all parties.

* (e) There are a number of ways in which a contract can be discharged or terminated. You are asked to state TWO ways. Some ways are suggested below:

* By death of either party to the contract

* By bankruptcy, which must be proven in the legal sense.

* By frustration, which means that something, which was possible at the time the contract was made, now becomes impossible .

* The agreed time for the contract to elapse has passed.

* By agreement of all concerned parties

* By breach. However, in this case the contract can only be terminated with the permission of the injured party.

* By law. This is when something that was legal at the time the contract was made now becomes illegal by law. Therefore, the contract must come to an end.

* (f) (i) No, John Brown should not refund Tom Phillip?s traveling expenses.

(ii) There was no contract and no breach of contract.

Tom Phillip took it upon himself to make the journey to the auction and so the cost of doing so must fall on his own shoulders

(g) (i) Tom Phillip will NOT succeed in court against John Brown.

(ii) There was no contract and there was no breach of contract. He would win the case if an existing contract had been breached.

4) CXC past paper May/June 2004 (General) question 4.

Tasty Fruit Ltd. is a manufacturer of several types of exotic tropical fruit juices. Without consultation, Mr. Albert, the general manager, took a decision that with immediate effect all breaks would be reduced from 15 minutes to five minutes. He claimed that the change became necessary to enable the factory to process a larger amount of fruit juices daily.

(a) What type of leadership style did Mr. Albert appear to be practising? (2 marks)

(b) (i) Name TWO other leadership styles. (2 marks)

(ii) Describe ONE of the leadership styles you named in (b)(i) above. (2 marks)

(c) Identify TWO situations that can result from the action taken by Mr. Albert. (4 marks)

(d) (i) State FIVE qualities of a good manager. (5 marks).

(ii) Give an example to show how lack of one of the qualities you mentioned at (d)(i) above can affect the operation of the factory. (2 marks)

(e) State THREE responsibilities of management to its employees. (3 marks)

Total 20 marks

DISCUSSION AND GUIDELINE ANSWER

(a) Autocratic/Authoritarian leadership style.

(b) (i) Any TWO of the following can be named: laissez-faire/free reign leadership style, democratic leadership style, charismatic leadership style.
(ii) Laissez-faire ­ individuals are given the broad outlines, but left on their own to carry out the major aspects of the decisions.
Democratic ­ those who will be affected by the decision are consulted before the decision is taken, though the leader still reserves the right to make the final decision.
Charismatic ­ the leader leads by virtue of his/her personality or charisma. Any ONE of the leadership styles can be described.

(c) The following situations may result: poor management-worker relationship; industrial action may be taken by workers; resignations by workers; workers may become discontented; poor self-esteem of workers and reduced productivity of workers. Any TWO situations may be used.

(d) (i) The qualities of a good manager include: honesty, flexibility, ability to carry out management functions and responsibilities, show genuine concern for employees and customers, ability to motivate workers, be adaptable to various situations, able to work on own initiative, ability to use Management Information Systems, be aggressive, but not too aggressive, be reliable etc.
(ii) If for example the manager is unable to motivate his employees, they will become lax and productivity will fall. The business will end up loosing profits.
The negative effects of the lack of any of the qualities you listed in (d)(i) can be explained.

(e) Responsibilities of managers to employees include: to treat them fairly, to give them safe, clean environment to work in, to allow them the freedom to join trade unions, to support their desires to be educated and trained, to pay fair wages and salaries, to honour leave entitlement, to give adequate compensation for injury on the job etc. Any THREE responsibilities can be stated.

5) CXC past paper January 2005, (General) question 5.

Recently, the employees of the telephone company have engaged in various industrial activities in support of their trade union. The trade union was involved in ‘collective bargaining’ with the management of the company for a new three-year industrial agreement for its members. The management retaliated by taking certain actions against the employees who charged that their rights were being violated.

(a) Give FIVE examples of industrial activities which the employees could have engaged in without striking. (5 marks)

(b) Identify TWO actions the management could have taken in retaliation against the industrial activities by the workers. (2 marks)

(c) Explain the term ‘collective bargaining’. (2 marks)

(d) List FIVE responsibilities of the management to its employees. (5 marks)

(e) Apart from ‘collective bargaining’, outline THREE other functions of a trade union. (6 marks)

Total 20 marks

DISCUSSION AND GUIDELINE ANSWER

(a) Examples of industrial action apart from striking include: sick out, go-slow, sit-in, overtime ban, work-to-rule and boycotting the company’s products etc.

(b) The action that management could have taken includes: lockouts, black-listing, suspensions, termination of work contracts, deductions of salary etc.

(c) Collective bargaining refers to the trade union function in which the trade union representing the workers and the employer or employers’ association discuss issues relating to employees with a view to settlement which is suitable to both sides.

(d) See answer (e) in previous question.

(e) Other functions of the trade union include: securing better wages and fringe benefits for workers, securing better work environment, job security, ensuring that workers get the leave they are entitled to, ensuring that workers are not exploited in any way, education of members as to the role of trade unions, scholarships to members and family etc. The THREE points chosen should be expanded on by brief explanations and /or examples.

6) Past CXC paper May/June 2002, (General) question 7.

Many governments throughout the Caribbean region have been encouraging persons to become entrepreneurs.

(a) What do you understand by the term ‘entrepreneur’? (2 marks)

(b) Suggest THREE reasons why entrepreneurship is being encouraged in your
country. (3 marks)

(c) List THREE characteristics of a successful entrepreneur. (3 marks)

(d) Discuss TWO problems an entrepreneur may encounter. (6 marks)

(e) Outline how an entrepreneur may overcome any ONE of the problems discussed in (c) above. (2 marks)

(f) List FOUR ways in which governments may assist entrepreneurs. (4 marks)

Total 20 marks

DISCUSSION AND GUIDELINE ANSWER

(a) The entrepreneur is a human factor of production that is responsible for organising the other factors of production and bearing the risks in production.

(b) Among the reasons why entrepreneurship is being encouraged are: entrepreneurship provides opportunity for self employment, it also reduces unemployment, it increases the production of goods and services, increases the variety of goods and services produced, Gross National Product is increased, makes use of idle skills, and uses up local raw materials. Any THREE reasons may be suggested.

(c) The characteristics of a successful entrepreneur are many and varied. They include: ability to work hard, ability to take calculated risks, ability to make effective decisions, ability to organise, ability to motivate and the ability to think quickly and clearly in any situation. Again, any THREE characteristics may be listed.

(d) The problems of the entrepreneur include: problems in sourcing capital, lack of managerial skills, lack of suitable collateral, inability to assess market potential, inability to evaluate competition, lack of appropriate technology and the inability to procure suitable machinery and equipment.You should expand on the TWO problems you choose to discuss by explaining them and giving examples.

(e) You should begin this part of your answer by stating the problem selected and then outline your suggestion for overcoming the problem. For example, if you select the problem of the difficulty in sourcing capital, you could suggest that the entrepreneur explore several sources of capital and that he even combine different sources of capital, such as his own savings, along with a loan from a bank or credit union.

(f) The ways in which governments can assist entrepreneurs include: providing them with ‘soft loans’ (loans with little or no interest), providing education and training on enterprise management, giving tax incentives, providing entrepreneurial consultants to monitor and assist entrepreneurs, providing factory shells for them to operate their businesses in, and providing markets for their goods and services. Any FOUR ways can be listed.

7) CXC past paper January 2001,( General), question 2.

For many years, persons from Caribbean territories have migrated to Europe and North America. Very often these persons only return for holidays or upon retirement.

(a) Explain what is meant by migration. (2 marks).

(b) State THREE negative effects of migration on the labour force in your country.
(3 marks).

(c) Explain TWO positive effects migration may have on your country (4 marks).

(d) Identify ONE measure your country uses to encourage nationals to return.
(1 mark)
.

Total 10 marks

DISCUSSION AND GUIDELINE ANSWER

(a) Migration refers to the permanent movement of people from one area to another within a country (internal movement), or from one country to another (external movement) for at least one year. The correct time period of the movement must be included in your explanation in order to obtain full marks.

(b) The negative effects of internal or external migration or both may be given. Internally, the negative effects of migration include: shortage of labour in one area and surplus of labour in another area, overpopulation in one area with resulting social disorders, e.g., crime, etc. External migration results in negative effects such as ‘the brain drain’, families abandoned and left to fend for themselves by migrants, lower standard of living, etc. Any three negative effects will be accepted.

(c) Migration can have positive effects on a country.
This is especially true of external migration which reduces the strain on the government, in cases where the migrants were previously unemployed. Also, many of these migrants return years later and contribute positively to their countries through skills learnt in other countries and/or through money they bring back.
The points brought out must be explained accurately in order to score full marks.

(d) Governments may encourage nationals to return by offering attractive and affordable housing, jobs for those who require them, by allowing them to return with their personal effects without having to pay duties, or only requiring them to pay small amounts of duty, by ensuring that their country is as close to crime-free as possible, etc. Any one measure properly stated will be accepted.

8) CXC January 2000 paper (General) , question 6.

Rapid structural change is being experienced throughout the world, bringing with it a growing importance of the contribution of small firms/businesses to economic development in every country. Many industries and firms are now buying and selling goods via the computer through a system called the Internet.

(a) Define the term small business. (2 marks).

(b) Given the following sectors in the Caribbean, indicate which FOUR are most likely to be dominated by small businesses:
(i) bauxite production
(ii) retailing
(iii) agriculture
(iv) petroleum refining
(v) finance and banking
(vi) personal services
(vii) fishing. (4 marks).

(c) Discuss FOUR ways through which small businesspersons can use the Internet to assist them in their business goals. (8 marks).

(d) Suggest THREE reasons why the government of your country should encourage the growth of small businesses as a way to promote economic development. (6 marks).

Total: 20 marks

DISCUSSION AND GUIDELINE ANSWER

(a) There are a number of acceptable definitions of the small firm. You may wish to use any of the three definitions from Trinidad and Tobago, or any other definition that you are comfortable with. The Trinidad and Tobago definitions are:

* A firm whose total assets excluding land and buildings does not exceed TT$500,000.

* According to The Central Statistical Office, a small business is a business that employs less than 10 workers.

* A firm that employs only one top manager who should manage the business and perform other functional duties as well.

Generally speaking, a small firm is one with virtually no middle management, i.e., there is hardly any supervisors or subordinate managers.

(b) The FOUR sectors most likely to be dominated by small businesses are retailing, agriculture, personal services and fishing.

(c) The Internet allows small business persons to: communicate with others in the same field, get information and ideas that are current in their field, advertise their products, source raw materials and goods at reasonable prices, source markets/outlets for their goods and services, get access to Internet buying and selling which boosts sales, etc. The points must be discussed fully to show how the small business benefits from the Internet in order to gain the full eight marks.

(d) Governments should encourage the growth of small businesses because:

* They provide healthy competition to larger firms and force them to sell at more reasonable prices.

* Small businesses reduce unemployment through employing people.

* They produce goods and services that people want and this will increase standard of living.

* They contribute towards GNP/National Income.

* They use up natural and other idle resources.

* They provide linkages to other firms so they can be certain of their sources of raw materials and/or their outlets.

* New ideas are usually tried out in small firms.

* Small firms often grow into larger successful businesses, these firms are flexible and can produce what is required for economic development. The THREE reasons chosen must be developed properly in order to gain the full six marks.

9) CXC (General) paper May/June 1999, questions six and seven.

Let us start with question six:

a) Classify three types of productive activities. (3 mks)

(b) Identify three types of productive activities that are carried out in the Caribbean and list the country in which each is carried out. (6 mks)

(c) (i) State five factors which determine the location of an industry. (5 mks)

(ii) Discuss three economic and social implications of technological developement. (6 mks)

Total: 20 mks

DISCUSSION AND GUIDELINE ANSWER

(a) There are four types of productive activities: extraction, construction, manufacturing and service activities. Any three of the four can be used for the answer.

(b) A number of activities and countries can be used for this answer. Consider the following:

Agriculture Jamaica
Fishing Barbados
Mining Guyana
Construction Trinidad
Manufacturing Trinidad
Transport St. Lucia
Tourism Jamaica
Communication Barbados

You should note that other activities and countries may be considered, however, you should identify three different productive activities and the countries in which the activities are observed.

(c) (i) The factors that influence the location of industry include: land, nearness to markets, nearness to raw materials, nearness to a suitable labour supply, nearness to power, climate, infrastructure and the government.

(ii) The economic and social implications of technological development include: increased output, improved standard of living or quality of life, greater speed in producing, improved quality of production, structural unemploy-ment, physical impairment and stress and alienation.

Note that the points discussed can be economic or social in nature and may also be positive or negative. Each implication must be discussed, not listed, for full marks.

10) Now for the second and final question for this lesson.

(a) Differentiate between the terms ‘market’ and ‘marketing’. (2 mks)

(b) List four marketing activities. (4 mks)

(c) Identify four factors influencing the behaviour of consumers in their choice of local hamburgers over foreign hamburgers. (8 mks)

(d) Discuss three methods a local business may use to promote local hamburgers. (6 mks)

Total: 20 mks

DISCUSSION AND GUIDELINE ANSWER

(a) A market refers to a situation in which buyers and sellers are in contact for the purpose of buying and selling goods and services. Marketing, on the other hand, refers to everything that is done to get goods and services to the right people at the right time and priced in the most efficient manner, while making a profit.

(b) Any four marketing activities can be listed.

Included are: market research, advertising, sales promotion, branding, distribution, sales, pricing; public relations, research and development, marketing mix, etc.

(c) Taste, tradition, quality, price, brand loyalty, income, knowledge of the owners, convenience, the way the good is advertised, etc.

(d) Methods of promotion that can be used include: advertising, sales promotions, publicity, public relations and competitive pricing. Each method should be discussed, e.g., advertising may increase the demand for local hamburgers. The business will sell more and make more profit.

11) CXC past paper, January 2001, General Proficiency, Question 6.

This question is based on economies and diseconomies of scale and mechanisation.

Company XYZ Ltd. manufactures and markets a range of candles of different shapes and lengths. Since its incorporation in 1989, sales volume has increased tenfold. In order to meet demand, the company has had to expand its production capacity and support systems considerably.

(a) List FOUR internal economies of scale the company might experience. (4 marks)

(b) Identify FOUR diseconomies of scale the company might experience. (4 marks)

Expansion has invariably led to increased mechanisation of various aspects of a business.

(c) (i) Explain FOUR benefits the company might experience because of mechanisation. (8 marks)

(ii) Discuss TWO negative effects the introduction of mechanisation might have on the company. (4 marks)

Total: 20 marks

DISCUSSION AND GUIDELINES ANSWER

(a) You will remember that economies of scale refers to advantage to a firm or company from going into large-scale production. The economies of scale include:

  • Technical economies/economies in the use of factors of production.
  • Managerial economies/economies in administration.
  • Research and development economies.
  • Financial economies.
  • Marketing economies/commercial economies.
  • Social economies.
  • Risk-bearing economies etc.

Any FOUR economies or advantage may be listed.

(b) Diseconomies of scale refers to the disadvantages to a firm or company from large-scale production. The diseconomies include:

  • Increased costs, e.g. increased marketing and financial costs.
  • ‘Red tape’, which is the elaborate and time-consuming procedures through which consumers must pass.
  • Changing techniques of production may cause expensive machinery to lay idle.
  • Larger businesses often result in loss of coordination and lack of control, e.g. communication between management and workers may slow down, wastages of factors, etc.

Any FOUR diseconomies or disadvantages may be listed.

(c) (i) Recall that mechanisation means partially replacing human or animal muscle power by a machine, e.g., a tailor buying a sewing machine instead of sewing by hand. The benefits of mechanisation include:

  • Output increases because work is speeded up and more can be produced in less time.
  • Fewer workers are needed as machines can do the work of a number of persons.
  • Costs are saved. These costs that are saved can be transferred to the market in the form of lower prices to consumers.
  • The quality of output often increases.
  • It encourages more skilled workers to enter the workforce, i.e., workers who can operate specific machinery etc.

Any FOUR benefits can be explained. For full marks, the benefits must be brought out clearly.

(ii) The negative effects of the introduction of mechanisation on the company might include:

  • Unemployment caused by the fact that less labour is required than when work is done entirely by hand, therefore, the excess labour is normally laid off.
  • Some machines are of a technical nature and require skilled persons to operate them. In some cases these skilled persons are hard to find.
  • When machines are out of service, overhead cost increase.
  • Machines may be costly to maintain, as in some cases parts may have to be imported with the use of scarce foreign exchange.

As in (c) (i) above, the negative effects of mechanisation must be properly discussed in order to gain full marks.

12) CXC past paper, January 2001, General, question 8

The Caribbean island of Green Mountain is having problems with its financial institutions. Customers of some banks are adding to the problems as many have withdrawn their deposits from the banks. The government has asked the central bank to do all it can to prevent a collapse of the commercial banking sector.

(a) State FOUR characteristics of money. (4 marks)

(b) List TWO functions or services offered by commercial banks. (2 marks)

(c) For EACH of the functions mentioned above, explain what benefit customers obtain from using these functions. (4 marks)

(d) List FOUR features of central banks. (4 marks)

(e) Select THREE of the features of central banks you mentioned above, and explain how they help to promote smooth operation of the banking system in your country. (6 marks)

Total marks: 20

DISCUSSION AND GUIDELINE ANSWER

(a) You must be careful not to confuse the characteristics of money with the functions of money.

The characteristics of money are the features of money. Money should be:

  • Generally acceptable
  • Durable or long-lasting
  • Homogeneous
  • Divisible into large and small units
  • Scarce or limited in supply
  • Portable

Any FOUR characteristics may be stated.

(b) The functions or services offered by commercial banks today are many and varied. They include the following:

  • Accept deposits from customers for safekeeping and makes these deposits available to customers when needed.
  • Lend money to qualified customers at interest.
  • Allow standing order payments at customers’ requests.
  • Make the use of the cheque as a means of payment possible.
  • Sell travellers’ cheques and buy and sell foreign currency.
  • Give financial advice to customers.
  • Help customers to open letters of credit.
  • Act as agents in collecting dividends on behalf of their customers.
  • Act as executors and trustees to the written wills of their customers.
  • Allow customers use of the banks’ safety deposit boxes and night safe facilities etc.

Any TWO functions or services may be listed.

(c) Whichever TWO functions you choose to explain, you must ensure that you properly explain the benefits of them to the customer. For example:

The function of accepting deposits from customers benefits the customers in that it allows them to keep their money in a safe place instead of keeping it at home. In addition, for most deposit accounts, the customer earns interest on his deposits and this encourages him to save with commercial banks.

Commercial banks lend money to qualified customers by opening loan accounts, by means of overdrafts and by discounting bills of exchange. Whatever the method, customers are granted loans and benefit from large sums of money, which they perhaps could not save for, while they benefit in being able to pay back loans in small installments. Customers benefit in getting loans for various purposes including education, vacation and for purchasing cars and other assets.

(d) The features of the central bank includes:

  • Carrying out government’s monetary policies.
  • Control and monitoring of commercial banks and other financial institutions.
  • Issuing notes and coins and recalling them from circulation when necessary.
  • Being banker to commercial banks and to the government.
  • Negotiating on behalf of the government in international financial agreements, e.g. with the IMF, etc.

Any FOUR features may be listed.

(e) Again, in explaining the THREE chosen features, you must be careful to show how they promote smooth operations of the banking system. For example, in monitoring the commercial banks and other financial institutions, the central bank ensures that governments’ monetary policies are carried out and that they are not promoting the opposite policy which would cause chaos in the financial system and in the country. You must explain THREE features in like manner.

13) CXC past paper, May/June 2005, general, question 9

The question, reproduced below, surrounds the topic of international trade and balance of payments:

The following information was taken from the final accounts of Tropicalo, a country in the Caribee Isles. The figures are quoted in US ($M).

$US
Visible trade
Exports 24 000
Imports 26 000
Invisible (net)
Exports 20 000
Imports 15 000

(a) (i) Differentiate between a country’s terms of trade and its balance of trade. (3 mks)

(ii) Calculate Tropicalo’s balance of trade using the figures given above. (2 mks)

(b) Calculate Tropicalo’s current account balance using the figures given above. (3 mks)

  • You are not required to explain the calculations in (a) (ii) and (b).

(c) Identify two ways in which a country may have a surplus on its current account. (4 mks)

(d) (i) Explain what is meant by ‘balance of payment’. (2 mks)

(ii) Discuss three ways by which a country would be able to finance the deficit in its balance of payments. (6 mks)

Total 20 marks

DISCUSSION AND GUIDELINE ANSWER

(a) (i) A country’s terms of trade refers to the rate at which its goods and services exchange for the goods and services of another country. It is calculated as:

Index of export prices x 100
Index of import prices

Whereas, a country’s balance of trade is the difference between the country’s imports and exports of goods only. To properly differentiate between the two terms, the candidate should use terms such as ‘on the other hand’, ‘while’, ‘whereas’, etc.

(ii) The balance of trade in this case is:

24,000
- 26,000

-2,000

US ($M)
(minus 2,000 US($M) )

(b) The current account balance takes into consideration the visible trade balance and the invisible trade balance. From (a) (ii) we found the visible trade balance (balance of trade) to be minus 2,000 US ($M). The invisible trade balance is plus 5,000 US ($M). This is the difference between invisible exports and invisible imports. The current account balance is plus 3,000 US ($M).

  • (c) Exporting more goods and services than it imports
  • Import less than it exports
  • If the positive visible balance exceeds the negative invisible balance

(d) (i) A country’s balance of payments is its annual record of trading with other countries in terms of income from exports and expenditure for imports.

(ii) To finance a deficit is different from correcting the deficit. To finance the deficit, the country must find ways to make the balance of payments balance by covering the deficit. This includes:

  • Importing the deficit amount on credit
  • Loans from other countries
  • Loans from international financial institutions e.g., International Monetary Fund and the World Bank.
  • Debit the foreign reserves account
  • Grants from other countries
  • Sell gold reserves, etc.

Any short-term solution which results in the amount of money to cover the deficit, if properly discussed, will earn two marks each.

14) January 2006, General past paper, question number eight

Government has a responsibility to protect consumers as well as to provide a climate for businesses to survive.

(a) State TWO reasons why consumers need protection. (4 mks)

(b) Identify THREE ways in which the government of your country can ensure that consumers’ safety and well-being are protected. (6 mks)

(c) Discuss THREE ways in which the government may help businesses to succeed. (6 mks)

(d) State TWO ways by which the government can ensure that businesses protect the environment. (4 mks)

Total : 20 marks

Now, for my discussion and guideline answers. I hope they will help you in getting a fair understanding of the question.

Discussion and guideline answers.

(a) There are many reasons why consumers need to be protected. These reasons include the fact that they receive:

  • Short change, short weights and short measurements
  • Unsafe and poor quality products
  • Misleading price reductions and false sales
  • False claims about products
  • Insufficient goods for their money
  • Unfair treatment when faulty goods are returned, etc.

In addition, consumers are not always able to make a good assessment of the goods they buy. They cannot protect themselves and therefore need to be protected.

Candidates should state clearly any TWO reasons for consumer protection.

(b) Some of the ways in which the government can ensure that consumers? safety and well-being are protected are:

  • By setting up consumer protection agencies such the Ombudsman, the Bureau of Standards and the Consumer Affairs Commission.
  • By educating and advising consumers through pamphlets, radio and TV programmes.
  • Through the introduction of penalties for producers and sellers who show lack of regard for consumers.
  • By passing legislation/laws that ensure consumer protection, e.g., processed food acts, Public Health Act, The Standard Act and The Food and Drugs Act.
  • By the control and supervision of prices.
  • By enforcing fair trading practices.
  • By supervising hire purchase and credit control, etc.

(c) Government can help businesses to succeed by:

  • Giving them loans with little or no interest to be paid back.
  • Allowing them subsidies and grants which result in the lowering of costs of production.
  • Providing business educational opportunities free or at very low cost.
  • Allowing the importation of essential raw materials duty free.
  • Providing free zone areas for the location of businesses.
  • Reducing corporation tax which reduces overall costs and boosts profits.
  • Assisting businesses in finding markets and in the marketing of their products, etc.

For this part of the question, the THREE points selected must be properly discussed to score full marks.

(d) The protection of the environment has become increasingly important. The government can ensure that businesses protect the environment by:

  • Introducing a pollution tax.
  • Taking over the production where businesses fail to protect the environment.
  • Passing legislation or laws against practices that damage the environment.
  • Having inspectors go around and ensure that practices are not damaging to the environment.
  • Giving warnings which if not adhered to, result in the business being taken to court or some other action.
  • Encouraging the location of businesses in special areas where their production practices will not harm the environment, etc.

1. The basic needs of man are:

a) land, money, car
b) food, money, land
c) food, clothing, shelter
d) food, shelter, money

2. The most important principle upon which barter trade depends is known as:

a) insurable interest
b) indemnity principle
c) utmost good faith
d) double coincidence of wants

3. Mary lives in a country in which the state makes all the decisions about economic activities. That country has adopted the:

a) planned economic system
b) mixed economic system
c) free economic system
d) Capitalist economic system

4. The most important role of a business in any community is to:

a) pollute the environment
b) earn foreign exchange
c) provide revenue for the government
d) provide goods and services to satisfy the wants of people

5. Consumers are those individuals who:

a) buy their goods from a consumers cooperative society
b) consume all the goods produced by manufacturers
c) provide goods and services for our satisfaction
d) utilise the goods and services provided to satisfy wants

6. The public sector comprises:

a) a body of public corporations, public companies and municipal undertakings
b) a combination of public companies and public corporations
c) an association of all public companies within the country
d) central and local government organisations and state corporations

7. Which of the following business organisations belong to the private sector?

a) municipal authority
b) nationalised industries
c) public corporations
d) public limited companies

8. In a partnership, an investor is a partner.

In a large company, an investor is a:

a) sole trader
b) manager
c) director
d) shareholder

9. What is the maximum number of share holders a private limited company can have?

a) two
b) five
c) fifty
d) eighty

10. The relationship between the highest level of management down to the various departments is known as:

a) flow
b) rank
c) staff
d) line

11. If X offers Y a book for $5, but Y says that he can only pay $4.50 for it, this is an example of:

a) an offer
b) a counter offer
c) an invitation to treat
d) consideration

12. An item displayed in a store with a price tag is an example of:

a) an offer
b) a counter offer
c) an invitation to treat
d) consideration

13. John buys goods to the value of $150, but is allowed 20% trade discount on the invoice, plus 5% cash discount. He will therefore pay:

a) $112.50
b) $114.00
c) $126.00
d) $142.50

14. If you received less goods than was ordered and paid for, your supplier would send you:

a) a credit note
b) an invoice
c) a debit note
d) a bill of exchange

15. When a cheque is crossed, it means that:

a) something is wrong with it
b) it is cancelled and not good anymore
c) the money cannot be withdrawn immediately, but has to be lodged to an account
d) it can be taken to a bank and the money stated withdrawn at once

16. Which of the following is the most important characteristic of money?

a) acceptability
b) durability
c) limited supply
d) portability

17. The only bank which can claim to be a lender of last resort is the:

a) merchant bank
b) central bank
c) commercial bank
d) trustee savings bank

18. The document that has details of the source of goods, the raw materials from which the goods are made, is called the:

a) shipping note
b) certificate of origin
c) bill of lading
d) bill of exchange

19. Assurance policies specifically refer to:

a) personal life coverage
b) coverage of risks involving cargo transport
c) loss of goods due to hurricane
d) loss of sale of goods

20. A man insured his property for $80,000, but its true value was $100,000. A fire caused $10,000 worth of damage. The insurance will pay out:

a) $10,000
b) $8,000
c) $5,000
d) $6,500

The answers to multiple choice questions:

1.c 2.d 3.a 4.d
5.d 6.d 7.d 8.d
9.c 10.d 11.b 12.c
13.b 14.a 15.c 16.a
17.b 18.b 19.a 20.b.

1. Which of the following is not a factor of production?

(a) food
(b) land
(c) labour
(d) capital

2. Which one of the following will have the effect of reducing the supply of labour?

(a) a high birth rate
(b) a large population
(c) a high proportion of old people
(d) a low proportion of very young people

3. The labour force of a country is:

(a) all people below retirement age
(b) all persons who are employed or are available for work
(c) the total population
(d) all persons over the school leaving age

4. The education of the labour force is a major determinant of which of the
following?

(a) the supply of labour
(b) the labour force as a whole
(c) the mobilisation of labour
(d) the efficiency of labour

5. Which of the following does not have a direct effect on the efficiency of labour?

(a) the quality of education of the workers
(b) the wages paid to workers
(c) a country’s cultural practices
(d) working conditions

6. Labour is classified as:

(a) size, age, mobility
(b) size and mobility
(c) skilled, semi-skilled and unskilled
(d) skilled and semi-skilled

7. The rewards to the factors of production are:

(a) salaries, wages, profit and interest
(b) wages, rent, profit and interest
(c) rent, capital and profit
(d) profit, capital, rent, wages

8. Occupational mobility of labour refers to the:

(a) ease with which workers are transported to their jobs
(b) frequency with which workers move from one job to another
(c) degree of efficiency with which workers perform their tasks.
(d) willingness and stability of workers to acquire new skills.

9. Each year, some high school graduates of the Caribbean rural communities move to the towns and cities to live and work. The movement of such persons could be described as:

(a) expected migration
(b) external migration
(c) cross-country migration
(d) internal migration

10. People who migrated from the West Indies in the early 1950′s went to all of the following countries on a large scale except:

(a) Great Britain
(b) Japan
(c) Canada
(d) United States of America

11. Unemployment that results from a ‘slump’ in the economy can be described as:

(a) frictional unemployment
(b) seasonal unemployment
(c) residual unemployment
(d) cyclical unemployment

12. The ’4-H’ Club and the Lion’s Club are examples of`
(a) multinational companies
(b) community self-help organisations
(c) monopolies
(d) voluntary chain stores

13. Natural resources may also be referred to as:
(a) capital
(b) labour
(c) land
(d) Entrepreneurial skills

14. Which of the following is the best example of capital as a factor of production?

(a) machinery
(b) shares
(c) debentures
(d) money

15. Circulating capital is:

(a) money and inventory used to finance the day to day running of a business.
(b) Capital that changes from one form to another and back to its original form
(c) The money paid to workers for maintaining day to day production.
(d) Any man-made item that assists in production.

16. Which of the following is a fixed asset?

(a) A bicycle for private use
(b) A washing machine for resale
(c) A motor car for family use
(d) A truck for delivery of goods

17. The reward to capital is:

(a) profit
(b) interest and dividends
(c) rent
(d) wages

18. The term ‘human resources’ refers to

(a) materials and goods made by human beings
(b) raw materials used in the manufacture of goods
(c) persons available for productive and professional services
(d) capital invested by shareholders in a company.

19. The ‘Human Resources’ are:

(a) students in tertiary institutions
(b) labour and entrepreneurial skills
(c) monies used by humans in production
(d) resources produced by humans.

20. A person responsible for bringing together and organising the factors of production is the

(a) entrepreneur
(b) trade-unionist
(c) manager
(d) financier

End of Test

1. The advantages of a sole trader over a partnership form of business include which of the following?

i) Profits are shared.
ii) Risks are greater.
iii) The sole trader is his or her own boss.
iv) The partners can contribute capital to expand the business.

A) (i) and (ii) only
B) (i) and (iii) only
C) (iii) only
D) (i) and (iv) only

2. In a partnership, an investor is a partner. In a large company, an investor is a:

A) sole trader.
B) manager.
C) director.
D) shareholder.

3. A sleeping partner is otherwise known as a:

A) careless partner.
B) active partner.
C) dormant partner.
D) general partner.

4. Which of the following are disadvantages of a private limited company?

i) It has an independent legal status.
ii) The firm cannot raise capital on the stock exchange.
iii) The firm cannot have more than 50 shareholders.
iv) The firm has too many taxes to pay.

A) (i) and (ii) only
B) (ii) and (iii) only
C) (i) and (iv) only
D) (iii) and (iv) only

5. To comply with legal requirements to register a private limited company, the firm must provide at least two documents. These are:

A) a prospectus and a certificate of origin.
B) a memorandum of association and articles of association.
C) a certificate of trading and tax file number.
D) a share certificate and a debenture certificate.

6. Those partners who, when their business goes bankrupt, stand to lose all their personal possessions as well as their investments are known as:

A) unlimited liability partners.
B) limited liability partners.
C) ordinary partners.
D) sleeping partners.

7. The form of business where shares are allowed to be sold only to owners of the business or to their relatives or employees is known as:

A) partnership.
B) private limited company.
C) public limited company.
D) multinational company.

8. The main aim of a co-operative retail society is to:

A) make a profit from its member-customers.
B) buy and sell goods retail.
C) buy goods wholesale and sell them cheaply to its members.
D) organise and plan the running of the society.

9. Company A owns all these businesses: soft drink company, bakery, shipping company and motor-car assembly company. Company A is an example of a:

A) conglomerate.
B) multinational.
C) private limited company.
D) partnership.

10. If one company, A, has or owns the majority shares in another company, B, then company A can best be regarded as being a:

A) holding company.
B) partnership.
C) co-operative.
D) joint-stock company.

Now you can have a look at the answers to see how well you have done.

1. C 2. D
3. C 4. B
5. B 6. A
7. B 8. C
9. A 10. A

Guidelines for Principles of Business School Based Assessment (S.B.A.)


For students doing the topic: Establishing a Business: Production

1.     Description of business – In this part you are required to give a brief description of your intended business. The examiner should

(a)   The name of your intended business e.g. Xtreme Graphics production

(b)  The type of business e.g. sole, proprietorship etc.

(c)   What is the proposed business  engaging in? e.g. production of local fruit juices

(d)  The major aims or aims of your business e.g.  To make 100% profit by ensuring customer’s satisfaction.

(e)   If possible you can give example(s) of the goods and/ services you will be producing.

2.     Justification of location- in this part you are required to :

(a)   State the location of your intended business, e.g. 152 John Street

(b)  Secondly, you will have to list and explain the factors which influence your choice of location. (Check your textbook) e.g. Closeness to raw materials.

3.     Selection of appropriate labour- as we already know labour is an important of production and if you don’t select the most appropriate type of labour then inefficiency would take occur and productivity will decline. You are required to”

(a)   List the type of labour you will enjoy employ. e.g. cleaner

(b)  Then classify them under the three main categories of labour namely:

-        Skilled

-        Unskilled

-        Semi-skilled

4.     Sources of fixed and working capital- Capital refers to money and all other assets of a person, company or industry that can be converted into money. PHYSICAL CAPITAL ­ consists of fixed capital and working or circulating capital. FIXED ­ capital refers to capital that is of a lasting nature and which does not change its form during the course of production, e.g., factory buildings, machines and tractors. WORKING or CIRCULATING ­ capital changes its form or state during the course of production, e.g., raw materials and partly finished goods.  You are required to identify the sources of these capitals. e.g. loans

5.     Roles of the Entrepreneur- The entrepreneur is a other factors of production and bear risks. Human factor of production whose main functions are to organize the other factors of production. The entrepreneur consciously moves resources from an area of lower productivity and lower yield to an area of higher productivity and higher yields.  You are required to list and briefly explain the roles of the entrepreneur. (Check Note book)

6.     Type of production- Production refers to the combining of the factors to create goods and services to satisfy people’s wants and needs. The types (stages) of production should not be confused with the levels of production. You are required to state the type(s) of production your intended business will engage itself in. ( Check Note Book/ Text book)

7.     Levels of Production – The levels of production classify the amounts of goods and services produced under three different headings:

  • subsistence
  • domestic
  • surplus or export levels.

8.     Quality control measures- in this part you should be able to define quality as it relates to your business and then you will state the measures/ ways of ensuring quality in your intended business. E.g. hiring only trained employees.

9.     Use of technology- We all know that technology plays an important part in any business. If businesses don’t adapts to changes in technology if ultimately lead to making a loss. You are required to show how you will employ technology in your operations.

10.  Linkages-. A linkage industry is an industry which is associated or connected to other industries in such a way that the existence of one is dependent on the other, or it enhances the other’s production process. These industries are also referred to as ‘spin-off’ and ‘screwdriver’ industries. You will be required to:

(a.)  state the type(s) of linkages your intended business will create and

(b)  Why will you create those linkages?

11.  Potential for growth- You are required to state if your business will grow and how will it grow. E.g. employing more machineries

12.  Government Regulations- Governments in any country has regulations as it relates to the setting up and operations of a business. You are required state some regulations that are enforced in your country as it relates to businesses. e.g. require to pay taxes.

13.  Ethical Issues- Ethics has to do with right and wrong, good and bad. You as the entrepreneur should be aware of such issues and its consequences. You are required to list and briefly explain some of those issues as it relates to your business.  E.g. Avoiding of poor labeling

14. Communication of information in a logical way using correct Grammar.

You are required to:

(a)   Write in future tense, i.e. the event will occur sometime in the future

(b)  Correct spelling , punctuation

(c)   Subject and verb agreement i.e. the verb of the sentence must agree with the subject.

E.g. The dog is walking. The subject is dog and it is singular (one) and as a result will take a singular verb.

(d) Remember this is a report and should be written in paragraphs.

THE END

Prepared by: Raymond Govinda

RGOVINDA   Date prepared: 19th July, 2009

Marketing Part 2- Market Structures

Market structures

Now, we will consider another aspect of marketing – market structures. We will start the topic this week and continue it next week.

Definition

This refers to market classification according to the number of firms in the industry, types of product, the existence or non-existence of barriers to entry and the level or degree of competition.

There are four main market structures:

  • Perfect competition
  • Monopoly
  • Monopolistic competition
  • Oligopoly

For each market structure the candidate should know the following:

  • Definition
  • Characteristics/features
  • Advantages
  • Disadvantages
  • Short-run and long-run profits

ü  Perfect competition

Definition: Perfect competition refers to a market structure in which there are numerous firms in the industry each selling a homogeneous product. There are no real examples of perfect competition in real life. However, some markets approach near to perfection. These include agricultural markets, stock markets and markets for foreign exchange.

Characteristics: Some of the key characteristics of perfect competition are:

Numerous buyers and firms in the industry: This means that neither one firm nor one buyer can affect the price in the market. Each is a price-taker.

The product being sold is homogeneous: This means that there are no differences in what each firm is selling, whether real or imagined. Thus, if a firm increases its price, its sales will fall to zero as the buyers will buy from the other sellers who have exactly the same product.

Perfect knowledge of the market: Both buyers and sellers know exactly what is happening in the market. For example, if prices change they are immediately aware of it.

Perfectly elastic demand curve: This indicates that the firms cannot control price, but can sell any amount at the ruling price.

Firms are independent: This means that they do not take into consideration what the other firms in the industry do.

Very high levels of competition: Competition among firms is due to the fact that there are numerous firms selling exactly the same product, each competing for the same consumer demand.

No advertising: Advertising is not necessary since every firm sells the same thing. In the space of competitive and persuasive advertising there may be a small amount of informative advertising.

We will now discuss the advantages and disadvantages of this market structure even though, in the strictest sense, this market structure does not exist in reality. Bear in mind, however, that the whole question of good and bad is relative.

Advantages of perfect competition

  • All buyers and sellers are treated equally.
  • There is only one price ruling in the market at a time and this price is not determined by any single buyer or seller but by the market forces of demand and supply.
  • Competition keeps prices lower than under other market structures.
  • Since the product is homogenous, sellers do not have to spend money on advertising.
  • Competition between firms also forces them to be efficient.
  • Firms under perfect competition respond to changes in consumer demand, therefore, the consumer is said to be sovereign or king.

Disadvantages of perfect competition

  • Lack of variety because an undifferentiated good is produced.
  • They may not be able to afford the technology that allows them to be efficient.
  • The number of firms in the industry makes it impossible for them to benefit from collusion.
  • There may be frequent changes in price as the market forces of demand and supply change.

Let us now consider the possible profits that can be earned in the short run and in the long run under perfect competition.

Short-run equilibrium

In the short run, some of the firms will earn normal profit, some will earn supernormal profit and some will earn subnormal profit.

Normal profit is that level of profit which is just enough to keep a firm in the industry. Once they are earning this level of profit, they will not leave the industry. In this situation, average revenue (AR) is equal to average cost (AC). This level of profit is often referred to as zero-economic profit.

If supernormal profits are being earned, this is so because AR is greater than AC. When AC is above AR or AR below AC, the firm is earning subnormal profit.

Consult an economics textbook to see how these levels of profit are illustrated graphically.

Long-run equilibrium

In the long run, all the firms under perfect competition will be in the situation where they are earning just normal profit AR=AC.

Just how did this come about?

In the long run, all the firms that had been earning subnormal profit in the short run AR<AC will leave the industry and will go into industries where they can at least earn normal profit.

When these firms leave, supply will fall and prices and profits will rise.

The firms that are earning supernormal profits AR>AC will attract other firms into the industry by their attractive level of profits.

As firms enter, supply will increase and prices and profits will fall. This rise and fall in profits will continue until all firms in the industry will be earning normal profit, AR=AC.

When this occurs, there will be no more incentives for firms to either enter or leave the industry. Thus the industry will be in long-run equilibrium. Again, the graphical illustration of this situation can be found in most economics texts.

Well folks, that is it for today. Next week, we will outline another market structure – monopoly.

You can begin to read up on this structure based on the headings I gave you in last week’s lesson. We will learn some interesting facts about this market structure and some common myths will be explained and dismissed. See you, then.

ü  MONOPOLY

Definition and examples of monopoly

A pure monopoly is a market structure where there is only one firm in the industry, therefore, the firm is the sole supplier of that good or service. However, in the case where a firm controls approximately 20 per cent of a large market, it is considered a virtual monopoly.

Examples of monopolies in Jamaica:

  • The Jamaica Public Service Company
  • The National Water Commission

Characteristics/features of monopoly

1. As indicated in the definition, there is only one firm in the industry. The importance of this is that the demand curve for the firm’s goods or services will be relatively inelastic, allowing the monopolist to exercise his monopolistic power and restrict quantity, causing prices to rise substantially. Consumers will either have to pay the higher price or go without the goods or services altogether.

2. There are strong barriers to entry. A barrier to entry is anything that prevents a firm from entering an industry in the long run. Barriers to entry in this case would include things such as legal protection and government restrictions. The importance of strong barriers to entry is that in the long run, new firms will be kept out of the industry.

3. Monopolies are price-makers or fixers. Since they face downward sloping demand curves, they can choose what price to charge. However, they are still constrained by the demand curve in that, having decided on price, they must allow the demand curve to determine the quantity. A rise in price will lower the quantity demanded.

4. The product of the monopolist is unique, therefore, no close substitute for it is being produced by any other firm.

5. The monopolist may price discriminate, that is, charge people different prices for the same good and/or charge different unit prices for successive units bought by a given buyer. Those who price discriminate do so in order to earn increased profits.

Short-run equilibrium

It is likely that the monopolist will earn super-normal profits in the short run. Monopoly does not necessarily mean super-normal profits; some monopolies, at their profit-maximising output, face a situation where average cost is everywhere above average revenue. Thus, they are earning sub-normal (less-than-normal) profits.

Long-run equilibrium

Since there are strong barriers to entry, it is likely that if the firm were earning super-normal profits in the short run, it would maintain or continue to earn super-normal profits in the long run.

If the firm had been earning sub-normal profits in the short run, it would leave the industry in the long run and go into an industry where it can earn at least normal profits.

Homework

Your homework is the simple task of discussing the advantages and disadvantages of the monopolistic market structure. Remember, you can use economics texts to research this area.

You will recall from our last lesson that, in practice, there is no market which can be classified as perfectly competitive, though I did give examples of a market approaching near to perfection. Where pure monopoly is concerned, there are very few markets that can be classified as such in reality. Most markets, therefore, lie between these two extremes. In other words, most markets are either under monopolistic competition or oligopoly.

ü  Monopolistic competition

This describes an imperfect market structure in which there are a relatively large number of producers offering slightly differentiated products.

Characteristics/features of monopolistic competition

1. A relatively large number of sellers. This makes the market highly competitive. In addition, each firm’s market share is small and collusion (coming together to act as a monopoly in order to gain more profits) is difficult.

2. Independence. Each firm acts independently of the others. That is, no firm takes into account the reaction of its rival firms.

3. Freedom of entry into the market and exit out of the market. In the long run, firms will enter and leave the industry due to the lack of significant barriers to entry.

4. The product is differentiated. Each individual seller has a product which is slightly different from the product of the other producers. This product differentiation is mainly through brand names, but can also be through physical and chemical differences.

5. Advertising takes place. Each seller seeks to increase brand loyalty for his/her product and thereby increase profits.

6. Firms are price makers/fixers. Therefore, their demand curve is downward sloping. It is also fairly elastic because of the relatively large number of firms in the industry.

Examples of monopolistic competition in the Caribbean: hairdressers, restaurants, taxi drivers and gas stations.

Short-run profits

The short-run profits situation is similar to that of the perfect competitor. It is possible to earn supernormal profits. Subnormal and normal profits are also possible.

Long-run profits

In the long run, the similarity between perfect competition and monopolistic competition becomes more obvious. Through entry of new firms and exit of some existing firms, profit will tend towards normal in the long run for all the firms in the industry.

We move on now to yet another market structure, oligopoly.

Oligopoly

Oligopoly refers to a market structure in which a few firms dominate the industry in the sense that between them they share a large proportion of the industry’s output. Some oligopoly firms produce virtually identical products (for example metals, chemicals, sugar) and are known as perfect oligopolies, and some produce differentiated products (for example, cars, soap powder, cigarettes, electrical appliances) and are known as imperfect oligopolies.

Duopoly is a special form of oligopoly in which there are only two firms in the industry.

Characteristics/ features of oligopoly

1. There are only a few firms in the industry. With only a few firms in the industry, each is big enough to influence price. Firms are, therefore, price makers/price fixers.

2. Interdependence of firms. Since there are only a few firms in the industry, each firm will have to take into account the actions of rival firms in the industry, for example, if one airline announces discount fares, generally, all the other airlines will try to match the lower prices.

3. The product is either identical or differentiated. Where the product is identical, there is no need for advertising or non-price competition. However, if the product is differentiated, advertising and non-price competition will take place in order to make consumers believe that one brand is better than the other.

4. There are barriers to entry. These barriers may not be as strong as the barriers for the monopolist; however, the effect is still the same. Barriers will make it virtually impossible for others to enter in the long run.

5. Prices tend to be stable. This is because firms realise that decreases in price can lead to ‘price wars’ and they can end up losing so much profit that they are eventually driven out of the industry. They also know that raising prices will be of no advantage to them since others will not copy them.

6. Firms may be collusive or non-collusive. When they are collusive, they may, for example, formulate an agreement to set prices for everyone at a certain level.

7. Oligopolies may price discriminate in order to earn more profit.

Profits in the short-run

Like the monopolist, many oligopolistic firms will earn supernormal profits in the short run.

Long run

If the barriers to entry are strong, supernormal profits will be maintained. Where a firm is earning less-than-normal profits in the short run, it will leave the industry in the long run.

Now for your practice question:

(a) Define ‘monopolistic competition’ and ‘oligopoly’.(4 marks)

(b) Compare the market structures named in (a) above, under the following headings:

(i) the number of firms in the industry

(ii) the existence or non-existence of barriers to entry

(iii) type of product (6 marks)

(c) Give TWO examples of oligopoly industries and TWO examples of monopolistic industries in the Caribbean. (4 marks)

(d) “A monopolistic firm is earning supernormal profits in the short run.” What do you understand by this statement? (2 marks)

(e) Assume that firms under monopolistic competition and oligopoly are earning supernormal profits in the short run:

(i) How will their long-run profits differ?

(ii) Give reasons for the differences in their long-run profits. (4 marks)

Total marks: 20

This completes market structures. I urge you to do some reading on the topic. You will find some interesting facts if you consult texts in economics.

Marketing

Marketing

It’s good to be with you all again. This lesson begins a new section of the syllabus: marketing. We will distinguish between the terms marketing and market, look at marketing activities and describe the marketing mix. The lesson will conclude with a look at market research.

What is a market?

A market exists under any conditions where buyers and sellers are in contact directly or indirectly for the purpose of exchanging goods and services. The four elements of the market are buyers, sellers, goods and services, and price. If any of the elements is removed, then the market will not exist.

The term market is also used to describe the extent of the demand for a commodity. Hence, a large market means that there is a large demand for the good or service.

What is marketing?

Marketing refers to the set of human activities and efforts which is interrelated and focused on bringing the goods and services to the consumer. It has to do with getting the right goods to the right people at the right price and at the right time in the most profitable and efficient manner.

Marketing activities

These include market research, pricing, packaging, branding, sales promotion, advertising and distribution.

The marketing mix

This refers to everything a firm can do to influence the demand for the product. It is a collective term that is used to refer to the whole range of marketing activities, techniques and strategies that a firm uses to reach its target market.

The variables of the marketing mix can easily be remembered by referring to the four Ps: product, price, place and promotion.

  • Product – The good or service that the consumer wants.
  • Price – Profit is usually incorporated in the price.
  • Place – Product must reach the place where the good or service is required for distribution.
  • Promotion – This refers to the ways in which consumers are made aware of the availability of the product or service and the qualities it has. Advertising is the most dynamic aspect of product promotion.

Market research Concept

The marketing concept requires that a firm be aware of customers’ needs to try to meet those needs and to attempt to make a profit in the process.

Market research assists the firm to meet the goal of the marketing concept by helping the process of finding out what the consumer wants.

Market research investigates what consumers are buying or are likely to buy in the future. It is normally done before the advertising campaign. Sometimes, it is carried out after the product is well established in order to assess and improve advertising and evaluate product performance.

Reasons for conducting market research

Market research will help in making decisions about:

  • where to sell a good or service.
  • how to sell it.
  • consumer tastes – that is which customers need the product and exactly what they want and what they dislike
  • how to price the product.
  • how to promote the product.
  • competition – who are the competitors in the market place and what they are doing.
  • what the size of the market is.
  • consumer behaviour – how consumers will react to certain conditions or when faced with certain factors.

In other words, market research helps us to see what influences the consumer.

Definition

Market research refers to a systematic approach to collecting information, recording and analysing information collected and adopting the information to the marketing plan of the business.

Types

Market research includes the following types of research:

  • Advertising or media research

This is research to see the best means of advertising at the lowest cost. It can also be done after the advertising campaign to test how successful the campaign was in terms of increasing market share.

  • Business and economic research

This is done to study the trends in business, prices and location of plants and distribution centres. It also studies the changing economic conditions which affect the business.

  • Product research

This tests how consumers will accept new products or changes in existing products.

  • Distribution research

This is used to look at the effectiveness of the channels of distribution of the product.

  • Packaging research

Used to test the design, colour and other physical features of the package

  • Sales research

This tests the potential size and make-up of the target market in terms of age, sex income, etc.

  • Consumer research

Used to find out why consumers prefer some goods and services to others and to research the size of the market. It also involves research to see if there are any changes in people’s incomes, tastes or brand loyalty.

That’s it for today. Keep safe until next week when I will continue with topics related to marketing. Bye for now.

Factors that Influence Consumer Behaviour

  • Price
    Consumers will adjust their demand for particular goods and services as the prices of them change. Generally speaking, the lower the price, the greater the quantity demanded.
  • Price of substitutes
    If the price of substitutes is lower, then consumers will switch from the relatively dearer goods and services to the relatively cheaper goods and services.
  • Quality
    Consumers will gravitate towards the better quality products and may even be willing to pay more for them.
  • Taste
    People differ in their preferences for goods and services, so the marketer has to identify these preferences.
  • Tradition
    Long-standing traditions and customs may influence demand. For example, some households purchase Grace products because their mothers and grandmothers purchased this brand and they see no reason to stop.
  • Income/affordability
    The amount of money earned affects one’s ability to purchase goods and services, therefore, some highly priced goods and services will only be purchased by the higher-paid wage earners.
  • Spending patterns
    Some consumers are accustomed to spending a certain amount of money. If prices fall, they may not spend any on those goods and services, because they have already established a pattern of spending which they are not willing to change.
  • Brand loyalty
    Marketers often try to create loyalty for their products among consumers. The hope is that the customer will stay with their existing product because it has satisfied them for sometime.

Customers who are loyal to certain brands cannot be easily wooed or enticed away from these products since they are satisfied with them.

Management information systems

Today, we are looking at the concept of management information systems (MIS) in organisations and the benefits and challenges in using these systems.

At this point, it would be good for us to examine the terms, data and information. Data refers to raw facts, while information refers to processed data. For example, 2, 4, 6 and 8 may be considered as data or raw facts and, as such, have very little, if any, meaning. However, if we process these figures by, say, averaging them, we will arrive at 5. The average has much more meaning and is, therefore, more useful to us.

In the past, managers spent days, even months, waiting for data to be processed into information in order to make important decisions. This has changed in recent times because of the availability of information systems.

MIS refers to any computer-based system that provides timely and accurate information for managers to use in the decision making and management of an organisation.

Benefits of MIS

1. Time, money and labour are saved. Since the computer is used, the time spent in overall decision making to the actual project completion is normally reduced. It is often said that time is money, so, if time is saved, money is also saved.

Additionally, labour costs are saved because routine tasks which would, in the past, be done manually are now done by the computer. Less labour is, therefore, employed, reducing wages to labour.

2. Improvement in production and marketing techniques and profit margins. MIS provides information that will ultimately lead to qualitative and quantitative improvements in production, as well as provide informa-tion which will allow for improvements in marketing techniques, such as advertising and sales promotions. Production and marketing improvements will, most likely, transfer into increased profits margins.

3. Increased competitiveness. MIS enables managers to access information on their competitors. They can study their competitor’s techniques with the aim of doing better than they do.

4. Less likelihood of errors being made. The reason is that it is a computer-based system which tends to be accurate.

5. It allows for decisions to be made at all levels in the business. Decisions can be made by top, level and lower-level managers. It is also useful for other employees in the organisation.

6. Communication within the organisation is improved. This is so since the information is, most of the time, clear and accurate – two elements of good communication.

7. Managers are assisted in carrying out their management functions, for example, planning, controlling and directing. It also improves the efficiency of the functional managers within the organisation.

Challenges of MIS

1. The cost of setting up and maintaining MIS. Since the system involves the purchasing of costly computers, the maintaining of these computers and the cost of security systems, the capital outlay is very high and could initially be a hindrance to its use in organisations.

2. The high cost of training. Managers must be trained to use the systems. Therefore, the overall cost of human resource development increases.

3. Human error. Human error can affect the efficiency of the system. This means that human error can result in problems which can cause time to be lost and, even-tually, cause profits to fall.

4. Often, too much information is supplied. Too much information can be just as harmful as too little.

5. Sometimes, information is not timely. This means that it is not always on hand when it is needed and information that is provided too late cannot be utilised effectively.

Homework

Now you can work on this essay-type question.

(a) What is a management information system? (2 marks)

(b) List two groups in an organisation that benefit from MIS. (2 marks)

(c) Explain four reasons why MIS is valuable in an organisation. (8 marks)

(d) Discuss four challenges of a MIS. (8 marks)

Role of government

Forms of government assistance to businesses

One of the roles of government is to assist businesses. In doing so, these businesses will be able to expand and produce more. As they produce more and accumulate a surplus, this excess or surplus can be exported and earn foreign exchange, which will in turn benefit the country as they will be better able to pay for their imports and, perhaps, have a surplus to go towards the economic growth and development of the country. Governments assist in a number of ways.

1. They lend some businesses money/capital. This is especially true if the business is a small one. Government institutions for lending include the Small Business Association of Jamaica, MIDAS (Micro Investment Development Agency) and Jamaica Trade and Invest (formerly JAMPRO). These loans are usually at low rates of interest and, therefore, are cheaper than elsewhere.

2. They are involved in training and technical assistance. For example, they have HEART/Trust NTA and the National Youth Service.

3. Governments set up research and information centres to assist businesses in getting accurate and timely information that may benefit them. For example, the Statistical Institute of Jamaica (STATIN) and the Jamaica Information Service.

4. Governments also give subsidies and grants to businesses, which helps them to cut the costs of production and, ultimately, to produce more. Subsidies can be in the form of money or materials, while a grant is a monetary gift that does not have to be repaid.

5. For businesses that have just been set up, governments may grant tax concessions until they can stand firmly on their own two feet.

The impact of social services provided by government

A large proportion of government revenue is used to provide social services for the country. These social services have a positive impact on the country, in that the welfare or well-being of individuals, families and businesses is improved. Social services are usually granted according to the need, that is, to low-income families and families with persistent difficulties. These services are often regarded as merit goods and result in reducing the inequalities between the rich and the poor. In welfare states such as Sweden, there is no extreme poverty. Let us consider some specific social services and the positive impact that they may have.

(a) Government health care. This results in a larger portion of the population being healthy as a result of general health, dental, optical and medical care. These are provided through government clinics and hospitals. A healthy population means a healthy future labour supply and, ultimately, increased efficiency and increased production.

(b) National insurance scheme. One positive effect is the provision of pensions and security for the elderly. There are also widow’s benefits, funeral grants and assistance given in cases of loss of earnings through illness. All of these benefits help to maintain the standard of living of people and prevent them from falling into a state of poverty.

(c) Education. Government provides public schools and assists them through ministry grants. The result is that a greater portion of the population becomes informed and literate than if education was entirely through private means. More persons will be able to get jobs through being educated and this will reduce the unemployment rate.

(d) Roads and transportation. Improved roads and transportation by government will mean greater access to goods and services. Greater access means greater standard of living for persons on a whole.

Questions:

1. (a) Define the term government. (2 marks)

(b) Outline THREE responsibilities of governments in your economy. (6 marks)

(c) Discuss the functions of THREE government agencies involved in the protection of the environment. (6 marks)

(d) Explain THREE ways in which the government may regulate business activity in your country. (6 marks)

Total marks: 20

2. (a) Distinguish between the terms tax and taxation. (4 marks)

(b) Discuss THREE purposes of taxation (6 marks)

(c) Distinguish between a proportional tax and a regressive tax. (4 marks)

(d) Define direct taxes and indirect taxes. (4 marks)

(e) Give ONE example of EACH type of tax named in (d) above. (2 marks)

Total marks 20

Social accounting and global trade 1

Standard of living

Standard of living refers to the level of living which a person, family or whole nation maintains, in terms of the various amounts of and kinds of goods and services consumed. Standard of living varies from person to person, family to family and nation to nation. It also varies over time. The national standard of living means the average standard of living of all the persons living in that country.

Quality of life looks at the extent to which a person, family or nation enjoys the benefits of its wealth. A country may have a high standard of living in terms of being able to provide many goods and services for its people, but the quality of life may be low if the people are not able to access the wealth provided.

Factors indicating standard of living of a country
(wealth of a country)

  • The level of consumption of goods and services. Generally speaking, the greater the amount of goods and services consumed, the higher will be the standard of living. The counter argument to this is that the quality of the goods and services may have deteriorated while the level of consumption increased. The question, therefore, would be, did the standard of living really increase?
  • Average disposable income of the population. Disposable income refers to net income, the amount of money that is available to be used as one would like to. In economics, disposable income is either spent on consumption goods and services or saved. As far as standard of living is concerned, the higher the average disposable income of the population, the higher will be the standard of living. The counter argument here is that the disposable income may be high, but if it is unequally distributed, many people may have a low standard of living.
  • The level of national ownership of capital equipment. As a country increases its ownership of capital equipment, it is able to produce more goods and services and, thereby, increase its standard of living. However, this means that they will first have to save or reduce consumption in order to accumulate this capital. During this time, the standard of living may actually fall.
  • Access to modern technology. Modern technology enables a country to produce more and to produce more efficiently, thereby, increasing standard of living. However, for developing countries like Jamaica, the cost and maintenance of modern technology is high which often results in loss of jobs. This, in turn, means a lower standard of living.
  • The level of investment in research and technology. The more a country spends money in research and technology, the greater will be its improvements in the level and quality of goods and services and then the greater will be the standard of living. Again however, cost becomes a dominant factor as research and technology can be very costly.

Indicators of a country’s quality of life

Quality of life refers to the extent to which the country enjoys the benefits of its wealth. The factors that affect this include:

  • The extent of security enjoyed. The greater the level of security enjoyed by the citizens, the greater will be the quality of life. High levels of crime can prevent citizens from accessing the wealth that will increase their quality of life.
  • The availability of health, educational and recreational facilities. Greater access to these will surely increase the quality of life. Access, however, may be dependent on ability to pay. Governments can increase a nation’s access to these areas by subsidising the cost, or by providing them free of cost.
  • Diet and nutrition. The amount of food and drink is not the important thing as far as quality of life is concerned. If people are not having balanced meals, then their diet and nutrition will be poor and the quality of life will fall even if they are consuming more.
  • Life expectancy. This refers to the average number of years a person is expected to live. If people are expected to live longer than before, it will mean that the quality of life has, in fact, increased.
  • The rate of infant mortality. Infant mortality refers to death among infants. If a country is experiencing reduced death rates among infants, then their quality of life would be said to have increased. This could be because of improved research in health and improved health or greater access to health care.
  • Access to public utilities. The greater the access to public utilities such as electricity and portable water, the greater will be the quality of life. If only a few persons in a country have access to these utilities then, generally speaking, the quality of life will be very low.

The distinction between economic growth and development

Economic growth is a quantitative concept; that is, it deals with numbers or figures or amounts. It refers to the real growth in or expansion in national output, and is most often measured in terms of real Gross Domestic Product (GDP).

The concept of economic growth is positive. This means it always refers to an increase in output. Negative growth, while quantitative, as is economic growth, refers to a decrease in the national output.

The production possibilities frontier can be used to illustrate economic growth. A production possibilities curve is a curve showing all the possible combinations of two goods that can be produced using up all the resources and at a given state of technology. When economic growth takes place, the production possibilities curve shifts to the right. The curve may shift to the right and economic growth results if the productivity of labour or other factors of production improve; if there is an improvement in technology; or if there is an increase in resources.

Try to find a diagram of a production possibilities curve. Copy it into your notebooks then shift the curve to the right. The first curve represents production possibilities for the country NOW, and the second one will represent the production possibilities at a future date, for example, five years later.

Economic development is qualitative and refers to the process by which the standard of living and the well-being of the entire nation are improved by raising real per capita income. Economic well-being is concerned with the quality of housing, clothing, education, food, health, peace of mind, security, eradication of poverty and eradication of inequalities in income and wealth, and so on. If any of these factors increases or improves, there will be economic development.

Human resource development looks at improving the human resources of labour and entrepreneurship. Improvement of labour and the entrepreneur means that the productivity of both will increase. In turn, there will likely be an increase in economic growth and development.

The human resource can be improved through education, training or retraining, improved health facilities, improved working conditions and an improvement in the factors of production that they have to work with.

The role of education in economic growth and development

Improved education and training means that labour and entrepreneurship will now have greater capacity to increase the national output and improve the well-being of the nation. Through education and training, labourers may learn new and more efficient methods of production and, thereby, increase the overall output. The entrepreneur might learn how to better organise and bear risks, thereby, causing improved output and improved economic well-being. Education, thus, improves the productivity and efficiency of both of the human factors.

Now for your homework:

(a) Distinguish between economic growth and economic development (6 marks)

(b) Why is economic growth regarded as a quantitative concept while economic development is regarded as a qualitative concept? (4 marks)

(c) Discuss TWO factors that might result in economic growth and TWO factors that might result in economic development (8 marks)

(d) Explain ONE way in which education can cause economic growth and development (2 marks)

Total marks: 20

Balance of payments (continued)

THE BALANCE OF PAYMENTS MUST BALANCE

Ultimately, the balance of payments must balance since every export becomes an import and every import an export. Balancing the balance of payments means that there must neither be a surplus nor a deficit in the end. A way must be found to finance the surplus or deficit through external strategies which are shown in the official financing account.

(a) Define the term balance of payments.

(a) What is meant by a country’s balance of trade?

(b) Calculate the BALANCE OF TRADE for the country

shown below:

Visible trade US ($ M)
Exports 26,000
Imports 29,000
Invisible (net)
Exports 20,000
Imports 15,000

(d) Name TWO items that are regarded as invisibles.

(e) Calculate the current account balance.

THE OFFICIAL FINANCING ACCOUNT

This account shows how the balance of payments is financed; that is, it shows what is done with the surplus or the deficit on the balance of payments. Let us look at some ways of financing a balance of payments deficit.

FINANCING A BALANCE OF PAYMENTS DEFICIT

  • borrowing from international financial institutions like the International Monetary Fund and the World Bank
  • borrowing locally
  • drawing down on the official reserves of foreign exchange
  • selling an asset locally or overseas
  • borrowing from other countries
  • receiving gifts and grants
  • rescheduling of the debt
  • Importing on credit. Permission must be granted from the exporting country.

What if the balance of payments showed a surplus? This surplus could be financed or used in the following ways.

FINANCING A BALANCE OF PAYMENTS SURPLUS

  • lend money, for example to other countries
  • purchase an asset locally or overseas
  • increase the official reserves of foreign exchange
  • pay outstanding debts
  • invest the surplus
  • give gifts and grants to other countries

Below is an example of the official financing account. Assume that the balance of payments figure is US$1,500m.

THE OFFICIAL FINANCING ACCOUNT

US $M
Foreign currency borrowing +800
Official reserves +700
Total +1500

Now we have balanced the balance of payments by eliminating the deficit of US $1,500m.

What if a country continues to have an adverse balance of payments, year after year? Well, that country must find ways of correcting that adverse balance of payments. The country has a balance of payments problem and must, therefore, earn more by: increasing exports through:

  • offering incentives and subsidies to local manufacturers
  • encouraging foreign investment
  • extending credit facilities
  • reducing spending
  • improving marketing skills and sponsoring exhibitions
  • devaluing the local currency, which makes exports cheaper

Reducing imports by:

  • increasing tariffs (duties) on imported goods and services
  • setting quotas to limit the physical amount imported
  • requiring special licences to import
  • devaluation, which makes imports dearer
  • foreign-exchange controls, which limit the amount of foreign currency available to individuals

The questions below will test how much you have grasped of this lessons.

(a) What is the official financing account? (2 marks)

(b)(1) List TWO ways of financing a balance of payments surplus (2 marks)

(11) List TWO ways of financing a balance of payments deficit (2 marks)

(c) A country has a balance of payments of US$ + 300m, draw up the official financing account to show how this may be financed (2 marks)

(d) Explain TWO ways of correcting an adverse balance of payments.

Total: 10 marks

International trade and balance of payments

International trade

When countries buy goods and services from each other and/or sell goods and services to each other, this is referred to as international trade. International trade is thus trade among countries.

International trade is the largest scale in the development of division of labour and specialisation, wherein countries specialise in the goods and services that they can produce best and at the lowest cost, and then trade with other countries to get the goods and services that they do not specialise in. However, you may ask, why did international trade develop? Let us consider the reasons for international trade.

REASONS FOR INTERNATIONAL TRADE

1. Climate and soil type differences. Not all countries have the same climate and soil conditions. Different crops will grow where the climate and soil types differ.

2. Natural resources. These can only be mined where they are found, for example, bauxite. Some countries are rich in mineral resources; others have little or none at all.

3. Special skills of the labour force. The type of labour determines what is produced. For example, France produces fashions (clothes), cologne and various types of cheese because the labour force has special skills and aptitude in these areas.

4. Lack of quantity and quality of local goods. Very often, countries import goods and services because what they produce locally is not enough for local needs and/or because the quality falls short of what is desirable.

5. Increased transportation and communication. These have made trading on a worldwide scale much easier.

6. Access to a wider variety of goods and services. Wider variety pleases consumers and results in an increase in their standard of living. The same is true for countries.

7. Foreign exchange. This is gained from exports and is used to pay for imports.

8. World output increases. This allows the problem of scarcity to be reduced

9. Cheaper goods and services. Countries may import goods and services because they are cheaper than goods and services sold locally.

Balance of payments

International trade refers to trade among different countries of the world. When countries trade with each other, a record is kept of the financial transactions between them. This record is known as the balance of payments. It is a statement of the trade which takes place between a country’s residents (individuals, businesses and the government) and the residents of all foreign countries. Therefore, Jamaica’s balance of payments shows all the payments we receive from other countries and all payments which we make to them.

There are three components of the balance of payments account, the current account, the capital account and the official financing account. Now we are going to look at each account in turn. Please note that in all parts of the balance of payments account, exports and income are given a plus (+) sign and imports and payments are given a minus (-) sign.

THE CURRENT ACCOUNT

This section of the balance of payments is divided into TWO parts: Part (a) the visible trade account and part (b) the invisible trade account.

The visible trade account records the tangible items – the imports and exports of goods only. The difference between the money value of goods imported and goods exported is known as the visible trade balance or the balance of trade. This balance may be a plus (+) surplus or a minus (-) deficit. If exports exceed imports, the result will be a surplus or a favourable balance of trade. On the other hand, if imports exceed exports, there will be a deficit or unfavourable balance of trade.

The invisible trade account records the intangible items – the imports and exports of services, tourist expenditure and income, income from investments abroad and paid to investments abroad. The services include shipping, aviation and financial services. The balance on this account is known as the invisible balance and it will be a plus (+) favourable if exports (income) of the intangible items exceed the imports. Now you can work out for yourselves what will result in a minus (-) on this account.

The overall current account balance is the difference between our exports of goods and services and the imports of goods and services. As with the visible and invisible balances, the overall current balance may be favourable or unfavourable.

THE CAPITAL ACCOUNT

This account records capital flows – loans and grants to and from other countries and investments bought and sold. (Note that the income from investments is recorded in the invisibles of the current account). As with the current account balance, the capital account balance may be favourable or unfavourable.

Now we need to consider the overall balance of payments figure. This takes into account the current account balance and the capital account balance. If, overall, the exports exceed the imports, the overall balance of payments will be a surplus (+) and if, overall, the imports exceed the exports, the overall balance will be a deficit (-). This means that the country spent more than it earned.

The small firm – Part 2

Hello again. Do you remember last week’s lesson? I hope so. It dealt with definitions and examples of the small firm, characteristics of the small firm and the role of the small firm in Caribbean Communities. This week, we will concentrate on the reasons why many firms remain small and the advantages and disadvantages of the small firms.
Caribbean governments recognise the importance of small firms and try to encourage their existence by charging them less tax or exempting from certain taxes. In some instances, loans are made available to small firms at special rates of interest. In Jamaica, there is the Small Businesses Association of Jamaica (SBAJ) that assists small businesses in the country, including lending them money at low rates of interest. But, why do firms remain small?
Reasons for remaining small
• To keep the business in the family. Expansion may require hiring persons outside of the family.
• Market for the good or service is small. Unless the market grows, the firm will remain small.
• Some firms are linkages to small- and medium-size businesses. Unless they expand, these firms will remain small.
• Some firms remain small because they have missed the opportunities to expand.
• Many firms have not gone into large-scale production because they do not have the necessary collateral to access loans for expansion.
• The owners of some small firms do not have the necessary management and/or technical skills needed for a larger business.
• For many firms, the most efficient size is the small firm.
Advantages of small firms
1. These businesses are often strategically placed; that is, they are located in places that are convenient for customers.
2. They provide goods and services that are not provided by larger firms.
3. They normally sell a variety of goods and services and the items sold are usually unique and customers prefer this to the standardisation of larger firms.
4. People support small firms because operators of these firms know their customers well and often offer them credit.
5. The small firm is more efficient where personal services are to be carried out.
6. The top manager is the sole decision-maker. He/she can, therefore, make decisions quickly and knows exactly what is going on.
7. Small firms have a small number of staff, therefore, staff problems can be more easily detected and dealt with than in larger firms.
8. There is clear communication among employees and it is easier for management to have a good relationship with employees since the business is small.
9. Because small firms offer certain services, large firms are prevented from becoming too large.
10. Small firms stay open for longer hours than larger firms, to their advantage.
11. They are easy to start up and often receive government assistance.
12. These firms benefit from assistance from small business associations, for example the SBAJ.
The disadvantages of small firms
1. Owners have to put in long hours, sometimes without holidays in order to make the business a success.
2. Many of these businesses have limited liability; that is, they may loose more than they have invested in the business if it should fail.
3. The manager is often bogged down by other tasks which, in larger businesses, are delegated to assistant managers and supervisors.
4. They suffer because of competition from larger firms. This is so since the simple, cheap machinery used in small firms may not allow them to compete equally with larger firms.
5. Prices tend to be higher than those of larger firms.
6. Small firms are vulnerable to changes in the economy; they are easily affected by the ‘ups’ and ‘downs’ in the economy.
7. They have difficulty in arranging loan financing since financial institutions are often reluctant to lend them money. When they do lend them money, the rate of interest is often higher and the loan amount is smaller than that of larger firms.
As usual, I will end with your homework.
(a) Define a small firm. (2 marks)
(b) List THREE characteristics of a small firm. (3 marks)
(c) (i) Explain FOUR important roles of small businesses in your local community. (4 marks)
(ii) Discuss TWO advantages and TWO disadvantages of small firms. (8 marks)
(d) State THREE reasons why many firms remain small. (3 marks)
TOTAL: 20 MARKS

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