POB CSEC NOTES

TOPIC PAGE NUMBER

The Nature of Business
 Terms and Concepts related to Business  6

 Instruments of Exchange  11

 Reasons Businesses are Established  13

 Forms of Business Organizations  14

 Economic Systems  19

 Stakeholders and their Role in Business  22

Activities

 Functions of a Business  23

 Role of a Business within a Community  23

Internal Organizational Environment

 Functional Areas of Business  31

 Functions of Management  32

 Responsibilities of Management  33

 Organizational Charts  34

 Types of Organizational Charts  35

 Characteristics of a Good Leader  38

 Leadership Styles  39

 Sources of Conflict within an Organization  40

 Methods used to gain an upper hand during  41

Periods of Conflict

 Strategies used to resolve Conflicts  42

 Guidelines: Good Management & Staff  43

Relations

 Role of Teamwork  44

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  Strategies for Effective Communication  45

 Management Information System  46

 Personal Needs Satisfied Through  47

Employment

Establishing a Business
 Role of an Entrepreneur  51

 Reasons Persons Establish their own  52

Businesses

 Steps in Establishing a Business  53

 Functional Areas in the Operation of  55

Businesses

 Sources of Research in Establishing a  56

Business

 Process between Planning and the Operation  57

of a Business

 Regulatory Practices Instituted by  58

Governments

 Advantages & Disadvantages:Types of  60

Businesses

 Sources of Capital in Setting up a Business  62

 Features of a Business Plan  63

 Purpose of a Feasibility Study  65

 Ethical and Legal Issues  66

 Consequences of Unethical and Illegal  67

Practices

The Legal Aspects of Business

 Concept of a Contract  71

 Characteristics of a Simple Contract  72

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  Differences between a Simple & a Speciality  73
Contract

 Difference between an Offer & an Invitation  74

to Treat

 Conditions under which Offer and  75

Acceptance are Communicated

 Ways in which Contracts may be Terminated  76

 Validity of Contracts  77

 Why Documentation is Necessary in  78

Business Transactions

 Business Documents for Various Purposes  80

 Information on Transport Documents  80

 Instruments of Payment  81

 Insurance and Assurance  84

 Insurance Principles  85

 Types of Insurance Policies  86

 Importance of Insurance to Businesses  87

Production
 Factors of Production  92

 Industries Developed from Natural  93

Resources in the Caribbean

 Difference between Production and  94

Productivity

 Effects of Migration  95

 Role of the Entrepreneur : Decision Making  96

Process

 Role of Capital in Production  97

 Levels of Production  98

 Types of Production  99

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  Cottage Industry  100

 Linkage Industries  101

 Factors that determine Business Location  102

 Functions of a Small Business  103

 Effects of Growth on a Business  104

 Economical and Social Implications of  105

Technological Development

Marketing
 Difference between Market and Marketing  109

 Marketing Activities  110

 The Marketing Mix  111

 Market Research  112

 Factors that Influence Consumer Behaviour  113

 Types of Market Structures  114

 How Price is Determined  115

 Packaging and Presentation of Goods  117

 Copyright, Patent & Trademark  118

 Methods of Promoting Sales  119

 Techniques of Selling  121

 Terms of Sale  122

 Consumer Organizations  123

 Links in the Distribution Chain  125

 Methods of Retailing  126

 Forms of Transportation  127

 Problems of Distribution  129

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Business Finance
 Role of Commercial Banks  134

 Functions of the Central Bank  135

 Relationship between the Central Bank and  136

Commercial Banks

 Strategies to Manage Personal Income  137

 Sources of Short & Long Term Financing  138

 Savings and Investments  139

 Stock Market  140

Role of Government in an Economy

 Responsibilities of a Government in an  143
Economy

 Ways in which Businesses Protect the  144

Environment

 Ways By which Government Regulates  145

Business Activities

 Purpose of Taxation  147

 Direct and Indirect Taxes  148

 Regressive, Progressive and Proportional  149

taxation

 Government Assistance Offered to  150

Businesses

 Social Services Provided by Governments  151

Social Accounting and Global Trade

 Factors that determine a Country’s Standard  155
of Living

 National Income  156

 Economic Growth and Development  157

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  International Trade  158

 Balance of Trade & Balance of Payment  159

 Balance of Payment Problems  161

Regional and Global Business Environment

 Economic Institutions and Systems  165

 Economic and Social Problems in the  170

Caribbean

 Possible solutions to Economic and Social  172

Problems

The Nature of Business

1. Terms and Concepts related to Business

Definitions

(a) enterprise:

According to the Finance and Investment Handbook, fifth edition, an enterprise refers to a
business firm. The term is often applied to a newly formed venture. Another view of the
term is that it is an undertaking, especially a bold or difficult one. e.g. Japs Chicken.

(b) entrepreneurship:

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You must be careful here not to define the entrepreneur. Entrepreneurship is the process
or act of organising resources and acceptance of risk and uncertainty with the ultimate
aim of profit. The entrepreneur is the person who organises production and bears the
risks.

(c) barter:

This refers to the direct exchange of goods and services for other goods and services.
Thus, goods can be exchanged for goods, services for services or goods for services,
without the use of money. For barter to take place, there must be a “double coincidence of
wants” (the persons who are bartering must want the goods or services each other already
has) E.g. if a person wants to exchange 10 kgs of sugar to get a car tyre, that person must
find someone who has an extra tyre and wants to exchange (swap) it for sugar.

(d) profit:

This is the excess of returns over expenses. It may also be defined as the positive that
results from selling goods and services for more than it costs to produce them. For
example, if it costs $8 to produce a pencil, and the pencil is sold for $12, the profit, which
is found by taking the cost price away from the selling price, is $4. (Profit = Selling Price
– Cost Price, where the Price is greater than the Cost Price). Profit is sometimes termed
net profit. Profit is the reward to the entrepreneur for organising and bearing risks in a
successful business.

(e) loss:

This term indicates that the cost of production is greater than the selling price. Hence, if a
pencil costs $8 to produce and then it can only be sold for $6, there is a loss of $2. (Loss
= Selling Price – Cost Price, where the Selling Price is less than the Cost price). When the
entrepreneur is not successful, rather than reaping profits as his reward, he will reap
losses.

(f) trade

Trade refers to the exchange of goods and services directly (barter) or indirectly (using
money) whether internally (within the country) or internationally (among countries). E.g.
In Trinidad, wholesalers selling fruits and vegetables to market vendors.

(g) organization

This is often used as synonymous with enterprise considered above. However, more
specifically, it refers to the administrative personnel or apparatus of a business. Thus, it
looks at the order or arrangement of the business. E.g Kentucky Fried Chicken (KFC)

(h) economy

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An economy or economic system refers to the way the scarce economic resources of a
country are managed. Therefore, the economy of Trinidad is the way Trinidad manages
its resources. There are three broad categories of economy:

1) the free market economy.

2) the command economy.

3) the mixed economy.

(i) producer

A producer is one who makes goods and creates services using different quantities and
types of factors of production, i.e. land, labour, capital, entrepreneurship and technology.
E.g. farmers (entrepreneurs) utilizing money (capital) to purchase land, fertilizers and
seeds to plant crops, to hire labour and to harvest produce using the necessary equipment,
machinery (capital) and technology.

(j) consumer

A consumer may be defined as an individual or a group of individuals who utilise goods

and services for their own satisfaction. E.g. students purchasing Jansport schoolbags.

(k) exchange

This means to give one thing and receive another in its place, or to trade and thereby
change the ownership of goods and services. Exchange may be direct or indirect.

(l) goods

This refers to tangible items that one can see and touch. There are two main types of
goods; goods for consumers and goods for producers. E.g. vegetables

(m) services

This refers to intangible items. A service is a situation that consumers experience. There
are two types, direct or personal services, for example, teaching, and impersonal services
like insurance.

(n) market

While many persons define market as a place where goods and services are bought and
sold, we should bear in mind that not all markets operate in specific places. Therefore, it
is more accurate to define a market as a situation in which buyers and sellers
communicate for the purpose of buying goods and services. There are four elements of a
market: buyer, seller, goods/services and price.

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 (o) commodity

A commodity is a product, especially a good rather than a service. E.g. a notebook

(p) capital

Capital is a factor of production, goods created for the use in production, for example,
machinery and equipment. Capital may also be money used in the business.

(q) labour

This is also a factor of production. It is human, physical and mental effort used in
production, usually to earn a salary or wage. There are different ways of classifying
labour: skilled, semi-skilled and unskilled.

(r) specialization or division of labour

It is also known as division of labour. It refers to the concentration of efforts in

production on one or few processes rather than on completing the entire process. E.g. in
the assembly of cars, some employees are responsible for installing engines only, while
others may be responsible for attaching the car seats. The main advantage of
specialisation is increased output.

An economy is defined as a place or a country where resources are managed by a

government to bring about maximum benefits for the entire society.

Caribbean countries are characterized as developing economies. Developing economies are

described as those with their average income earned, rate of literacy and health services lower
than industrialized/developed nations.  They are so characterized because they have a high
potential for growth and achieving the status of developed countries.

Early Caribbean economies dated from the Taino and Kalinago Indians who lived in simple
villages. These villages were ruled by a leader who organized all economic activities. They
hunted, fished and grew crops to provide the means of survival for their village. Present
Caribbean economies are much more sophisticated. For most Caribbean countries, it is
consumer demand that drives the production and distribution of goods and services.

Government manages the economy. They set the laws that govern households and
businesses. They provide the necessary services (road, water, transportation, communication
etc,) so that businesses may operate efficiently. Households and businesses must in turn pay
their taxes.

Households consume the goods and services provided by firms. Households are known as
consumers.

Firms produce commodities/goods and services that satisfy needs and wants for its market. 
They are the producers in an economy.  They obtain and maintain markets through consistent
advertising and sales promotion.

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Business enterprises are legal entities operating in an economy to provide goods and services
at a profit.  Profits are the excess of earnings/revenue over its costs. Profits are an incentive
for businesses to continue operating. Businesses will close down if they are making losses.
This is an excess of cost over revenue. If costs are greater than expenses then a business
entity is making a loss.

Whether man lives in a simple economy or in a more sophisticated one he must survive. He is
seen as an economic animal as in order for survival he must be involved in economic
activities such as production, consumption and exchange. He either produces the good he
consumes or he is involved with exchange through barter or money purchases. If he produces
his own goods and provides his own services, he is involved with direct production.
However, if he obtains goods by bartering or by purchasing them he is involved in indirect
production

Barter is the exchange of goods or services for other goods or services. This system is rarely
practiced in modern economies, but still occurs. For example, a Caribbean Government
agreeing to exchange its country’s bauxite for cars manufactured by an industrialized
country. In early economies individuals had to barter goods and services to obtain those
commodities that they did not produce for themselves. Money did not exist and so barter was
the only means of exchange.

There were several problems with the barter system:

1. A common measure of value did not exist. Therefore some persons felt cheated, as what is
being exchanged is more valuable than what is received.

2. A double coincidence of wants may not exist. The wants of both persons wishing to trade
must coincide with what is being offered by each other. That is, an individual may wish to
exchange what he produces (e.g. animal skins for another commodity such as clay pots).
However, if the individual who makes the clay pots does not want skins then no trade will
occur. This individual will need to find someone with clay pots who wishes to obtain skins.

Specialization is defined as the division of labour. This is used in production processes in

both early and modern economies to complete tasks more efficiently. In the Taino Indian
village, the men would hunt and the women would tend crops. This is an example of simple
specialization. Complex specialization involves the breaking down of tasks into minute tasks,
and assigning each task to an individual or a unit group. For example, in a garment factory, a
single dress will be sewn by several persons, one person will sew the sleeves, and another
will sew the collar. Simple specialization in early economies resulted in the barter system, as
man needed to trade to obtain those goods and that he did not produce for himself.

The advantages of specialization include improved quality of output, and shorter production
time, because of the repletion of a single task. This results in increased efficiency, and
reduced costs. However, repletion of a small task may become boring and de-motivate
employees to work efficiently. Therefore quality may decline as well as output.

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 2. Instruments of Exchange

The problems of the barter system created the need for a medium that could be used to
facilitate trade. Money solved the problems of the barter system. Money is anything that is
acceptable for the purchase of goods and services. Presently it is in the form of notes and
coins.  Early forms of money included shells, beads, precious metals and stones.

The Characteristics of Money

1. Acceptable – money is universally accepted

2. Durable – long lasting

3. Divisible – Can be easily broken down into smaller units. E.g. $100 can be broken down
into $10 bills and so facilitating the purchase of small quantities

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4. Homogeneous – similar e.g. all $100 bills are the same in appearance

5. Convertible – easily exchanged for goods and services

6. Scarce – this ensures its value

7. Portable – easy to carry

Functions of Money

1. It is a medium of exchange i.e. since money is acceptable by all, persons will not have
difficulties to trade

2. A measure of value – the price of an item indicates its value

3. It is a store of wealth i.e. money can be easily stored/saved.

4. It is a standard for deferred payments. i.e. it can be used to repay debts over time.

Types of Money

1. Notes and Coins

2. Quasi Money/ substitute money – examples are postal orders, soda machine tokens,
cheques and credit cards.
3. Near Money – assets that can easily be turned into cash, e.g. certificate of deposits, bills of
exchange.

Cheques

A cheque is an order to the bank to make payments to the payee stated on it.

Credit Cards/Debit Cards

This allows the card holder to make payments by simply presenting the card to the seller.  A
credit card facility is actually a loan given to a customer and thus it is repaid at an interest.  A
debit card is issued against a customer’s account balance and is therefore not a loan.

Money Order

They can be used to make payments locally or overseas, as they are made out in the currency
in which they are to be paid.  The payee will cash the money order at his bank.

Bank Draft

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A bank draft is a cheque which guarantees payment to the receiver from the issuing bank.
Bank drafts can be made out to a payee in foreign currency and thus used for making
overseas payments. Bank drafts are obtained for a fee from a commercial bank.

Bill of Exchange

This is used to pay for goods bought overseas on credit.  It is an order in writing from an
exporter to an importer requiring payments of a certain sum of money at a fixed future date. 
The time period allowed is normally three months.

Electronic Transfer

This is a system used to transfer funds electronically rather than paper-based payment
methods. Examples include credit and debit card transactions, remittances (through
companies such as Western Union) and money transfers.

Tele-Banking

This system allows a bank’s customer to simply use the telephone to get his banking services
done rather than visiting the bank. Services include; checking account balances and
transaction history, opening a new account, transferring funds.

Internet Banking

This differs from tele-banking in that the internet is used to access the same services.
Customers can go on-line to view their balances and transaction history and transfer funds.

Ecommerce

Electronic commerce more popularly called ecommerce is the buying and selling of goods
and service using the internet. It allows for a full range of trading activities over the internet
such as advertising, placing orders, delivery and making payments.

Reasons Businesses are Established

Starting a business is a lot of hard work. Therefore persons who decide to start a business
must be ready to dedicate a lot of time and energy to its start-up. It is also very costly and
therefore capital will have to be identified to inject into a new business.

Reasons for starting a Business:

1. Financial Independence

Some persons feel restricted financially with the income received from their job. Starting a
business would give them the opportunity to be a successful business person and achieve
financial independence.
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2. Being your own boss

You are able to make decisions about the direction and operation of the business.

3. To use your skills and knowledge for yourself

The skills, knowledge and experience that you have acquired can be put to work for you.

4. Self-actualization/fulfillment

Owning and operating a successful business will give a feeling of accomplishment.

5. To create employment for relatives, friends and community members

Business can assist in providing jobs for persons in communities with high levels of
unemployment.

Forms of Business Organizations

An organization is a system that groups people together towards establishing a common goal.
Business organizations are centered on creating goods and services for profit. There are
several types of business organizations that one can start.

Forms of Business Organizations:

1. Sole Trader
2. Partnership
3. Private Limited Liability companies
4. Public limited Liability Companies
5. Multinationals

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 6. Franchise
7. Conglomerates
8. Cooperatives
9. Nationalized Industries
10. Local and Municipal Authorities
11. Government Departments

All forms of business organizations can either be characterized as a part of the private sector
or the public sector.

The Private and Public Sector

All privately owned industries, services and other business activities are a part of the Private
Sector.

All industries, services and any other business activities that are owned by the state are a part
of the Public Sector. For example, the commercial banks are a part of the Private Sector, and
public schools and hospital are a part of the Public Sector.

The sole trader

The sole trader as the title suggest is a single business owner. This person may employ
several other persons to work in the organization, but he has to make all decisions, acquire all
the capital required and other resources needed for the business on his own.

Advantages

Benefits of operating alone are: all profits are taken by the owner. Consultations are not
necessary for decision making and the legal requirements for start-up is very simple as the
proprietor only needs to submit the registration documents for the business.

Disadvantages

The sole proprietor must work for long hours resulting in little time for family. There is also
limited capital to inject into the business and he alone bears all the risk of the business. He
does not have limited liability and therefore if the business goes bankrupt he may lose his
personal assets e.g. house and car. There is a lack of expertise in areas of business where he is
not knowledgeable which may limit success.

Partnership

A partnership business is formed legally by a minimum of two and a maximum of twenty

persons in a business. There are two types of partnership forms:

-Limited Liability Partnership – at lease one partner must have unlimited liability

-Unlimited liability Partnership- all partners have unlimited liability.

A deed of partnership must be drafted which set out the terms and conditions of the
partnership.

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Types of Partners  

-Ordinary/General Partners : take an active part in the running of the business.

-Sleeping Partners : invest in the business but do not take an active part in the business.

-Limited Liability Partners : assets will not be lost if the business goes bankrupt.

Advantages

Since more than one person is involved more capital can be raised to inject into the business.
There is more expertise and work load is shared. The risk of the business operation is also
shared.

Disadvantages

All partners will be affected by the action of each partner since each person represents the
business. Decision making may be very slow if partners are not in agreement. There are high
risks for partners who do not have limited liability.

Limited Liability Companies

Limited Liability Companies are companies in which shareholders/investors are protected as

they will not lose their personal assets if the business goes bankrupt. They are not liable for
the debts of the company beyond their level of investment. Therefore if a shareholder buys
shares in a company valuing $5000 then he will only lose that $5000 invested and his
personal assets.

There are two types of limited liability companies.

1. Private Limited Liability Company

2. Public Limited Liability Company

The Private Limited Company only allows friends, relatives and coworkers to purchase
shares and to be a part of the company. Its privacy is also protected by the fact that unlike the
public limited liability company, it does not have to publish its balance sheet in the
newspaper.  The public limited company allows members of the public to purchase shares.
The shares/stocks of public limited companies are traded on the stock market.

Legally the private limited company can only have a minimum of two and a maximum of
fifty persons to join. Whereas the public limited liability company has a minimum of seven
members and there is no limit to the number of share holders that can join.

The legal procedures for both these types of companies are lengthy as they must submit the
several documents.

The Companies Act contains the laws relating to companies. To comply with certain
requirements which were laid down by the Companies Act, the promoters of the company
must present the following documents:

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-The Memorandum of Association

-The Articles of Association

-Statutory Declaration

-Certificate of Incorporation

-Certificate of Trading

The private limited company may begin trading after receiving the certificate of
incorporation, but the public limited company must issue a prospectus inviting the public to
subscribe for shares before a certificate of trading is issued.

A main advantage of limited liability companies is that their shareholders enjoy limited
liability. This type of business is assured continuity of existence as it has several members.
Unlike the sole trading business that comes to an end if the owner dies or is very ill.  These
firms can access capital for expansion by selling shares.

The disadvantages however, are that they are not easy to start due to the number of legal
procedures required.  For the private limited liability company, shares are not easily
transferable as other members must agree to have persons join the company. However,
shareholders in public liability companies are not restricted to sell their shares to whomever
they wish to.

Multinationals
A multinational company is a global organization directed from a main centre or office.
Examples of Multinational companies in the Caribbean are Shell, Kentucky Fried chicken
and Digicel.

Some of the benefits of multinationals to the Caribbean are that they provide employment,
introduce advanced technology and provide well needed goods and services.

However, there are disadvantages. Profits earned are repatriated to the main centre in their
home country. They may exploit the workers by paying low wages and having them work
long hours.  They cause unemployment when they close down to take advantage of cheaper
labour and lower operational cost in another country.

Franchise
Some businesses begin by the owner acquiring a franchise to operate under an already
existing business name.  A franchise is an agreement between a franchisee (the person
requesting permission to set up business) and the parent company to allow the franchisee to
sell its products or services. Many multinational companies expand into new regions through
franchises.

The franchisee bears the name of the parent company. They must abide by all the rules and
guidelines outlined by the parent company to sell its products. It pays royalties (a fee) to the
parent company to operate under its business name.

Conglomerates

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This is a group of unrelated companies (e.g. a restaurant, shoe store a travel agency etc,)
under one umbrella. A parent company owns a controlling stake in each company which
conducts business separately.

Nationalized Industries
Nationalized industries are government owned and controlled businesses.  A chairman and
board of directors are appointed by the government to run them.  Businesses run by the
government in most countries tend to be those that provide essential services such as water,
electricity and transportation.  Nationalized industries are beneficial to a country as they
provide essential goods and services at very affordable cost or free.  For example, a water
company providing standpipes to rural communities. Although beneficial, they operate at
high costs to the society as their operations tend to be inefficient. They are supported by
taxpayers money and do not operate on the basis of making profits.

Cooperatives
They are business entities owned by their members who purchase shares to join them. They
are usually established because of a need existing among a number of persons who wish to
acquire particular goods and services at a reasonable cost. For example, members of a credit
union purchase shares in these entities in order to obtain loans at low interest rates.

There are several types of cooperative, for example, Retail/Consumer cooperatives and
Producer cooperatives. Shares invested in a retail cooperative are used to buy goods in bulk at
a very low cost and then resold to members. Producercooperatives may include a group of
farmers who will obtain raw material at a low cost.

Profits are distributed to members based on the amount of goods that they buy and not on the
amount of investment that they make in the business. At the annual general meeting,
shareholders elect their management committees from among their members and vote on
proposals put forward. Benefits of being a part of a cooperative are therefore obtaining goods
and services at low costs and a guaranteed market as members are also customers. A
disadvantage is that its management may be inexperienced as they are chosen from their
membership.

Government Departments

These include the government ministries e.g.  the Ministries of  Finance and Education. A
minister is appointed in charge of each ministry. These departments are very important to the
running of government.

Local and Municipal Authorities are government bodies which are run by elected local
officials, e.g., the Kingston and St. Andrew Corporation (K.S.A.C.) in Jamaica. These bodies
fulfill local needs and allow for more balanced local development. They carry out duties such
as cleaning gullies and drains and fixing community roads.

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 Economic Systems

Every economy is faced with a fundamental economic problem. In every economy, whether
rich or poor, there are limited resources and unlimited wants i.e., the resources of a country
are not enough to satisfy the wants of all its citizens. Since the resources of a country is
limited and wants unlimited, choices will have to be made. For example, the government may
have to decide whether to spend more money on schools, hospitals, transportation or on road
work. The process of choice begins with a scale of preference.  This is a list of all options in
order of preference. For example

Scale of Preference:

-hospitals

-transportation

-schools

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-road work

The option to build hospitals being placed at the top of the scale of preference indicates that
this choice is most preferred as it yields the greatest satisfaction from the resources to be
spent. Transportation is the opportunity cost of this choice as it is the second most preferred
option that had to be given up to accommodate the building of hospitals. Opportunity cost is
defined as the next best alternative foregone as a result of making a choice.

Economic Systems
An economic system is a programme that a country uses to organize production and the
distribution of goods and services, to maximize the benefits to its society. Economic systems
vary worldwide. In this lesson we will discuss four types. These are the Subsistence, Free
Market, Planned and Mixed economic systems.  Governments choose particular economic
programmes that will effectively manage their economies, bring about economic growth and
improve the lifestyles of its citizens. The following economic questions must be answered by
managers of economies.

1.  What to produce?

2.  How much to produce?

3.  What methods of production are to be used?

4.  How will goods and services be distributed?

Answers to questions 1, 2, & 4 will depend on the economic system of each country.

Subsistence Economic Systems

The Subsistence economic system as its name suggests are economies in which just enough is
produced by its citizens for their survival. Since there is no surplus wealth is not created.
Subsistence economies exist in many villages in Africa and South America among peoples
who live in simple societies.

Free Market Economic System also called Free Enterprise or Laissez Faire

Private individuals own the greater share of the property and capital resources that are used in
the production process. There is little or no government intervention in the economic
activities of the country.  The government may provide essential services e.g. transportation
and water. Therefore the private sector provides the majority of goods and services.

Advantages

-Competition among business will result in increased quality of output and lower prices.

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-Competition also leads to innovation i.e. newly invented goods, services and production
processes.

-Consumers are free to choose the goods and services that they wish to purchase and
therefore production is based on their demands.

Disadvantages

-Consumer exploitation by suppliers may go unchecked by government as there is little or no

government intervention.

-There is an unequal distribution of wealth as goods are purchased by only those who can
afford it.

-In the case of no government intervention public goods such as postal service, streetlights
and roads are not provided

The Planned or Controlled Economic System

Property and capital resources are owned by the government on behalf of the society.  The
government makes all decisions concerning the use of the country’s resources and the
distribution of its output.  Goods and services are provided through government-owned and
run operations.  These include factories, telephone services, newspapers, television stations,
etc.

Advantages

-There is a fair distribution of goods and services as the government determines how goods
are distributed.

-Citizens in these economies enjoy a least a basic standard of living as the government
provides all goods and services.

Disadvantages

-Resources are inefficiently allocated as consumers are not free to indicate their demand for
goods and services. Therefore resources are not sent to where they are most needed but into
industries based on the government’s decision.

-The lack of competition reduces innovation and the motivation to produce quality output.

The Mixed Economic System

The private and public sector are both involved in the production of goods and services.

The economic resources are owned by government and private individuals.

Advantages

-Consumer protection through the regulation of businesses by government.

21
-Economic benefits of competition coupled with goods and services provided by government
for those who cannot afford to access these through the market system.

Disadvantage

-Public sector companies tend to be inefficient as they are supported by taxpayer’s money.

-Government regulatory policies may reduce the enthusiasm of the private sector e.g. the
setting of prices of goods and services resulting in the closure of businesses.

Stakeholders and their Role in Business Activities

Business owners must be aware of the various groups that they interact with for the
successful running of the business.

Owners

A business may be owned by a single individual (a sole trader), partners or by a group of

shareholders forming a company.

Role of Owners

They must provide the resources that are required for the business to operate efficiently.
These include the employment of workers, identifying suitable premise and procuring
machinery, equipment and raw materials. They must make timely decisions to ensure that the
business remains profitable.  They must motivate employees to perform well.

Employees

22
They are employed to carry out assigned tasks to achieve the company’s objectives.

Role of Employees

Employees must work efficiently to accomplish tasks assigned.  Accomplishing tasks may
require teamwork and therefore employees must have good interpersonal skills. Employees
must adhere to the rules and relations of the company.

Customers

They are the supporters of businesses in the economy. They purchase goods and services to
satisfy their needs and wants.

Role of Customers

They assist businesses in indentifying the goods and services to be produced based on their
demands. They also help business to identify changing trends in the market and so prepare
business operators for future demands.

Society

Businesses must be aware of the society as a whole, how its activities affect it and not only
those who are customers.

Role of Society

The production process may cause air pollution and discharge of harmful waste into rivers
and seas.  The society keeps businesses in check by making them aware of their impact on
society. They write letters to the company and the media and speak on talk shows.

Government

They are the managers of the economy within which the business operates.

Role of Government

Regulate business activities to protect consumers. Government agencies ensure product

standards as well as that various legislations are adhered to ensure the protection of
consumers’ rights.

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 Functions of a Business

The functions of a business are:

1. To produce high quality goods and services that will satisfy needs and wants.

Entrepreneurs enter business to make profits. They must be very keen in identifying those
goods and services that will create high demand make profits.

2.To create employment

Business will need all categories of workers to carry out the various tasks required to achieve
its goals. If the business is profitable and expands then more workers will be needed for its
operations.

3.To make a profit

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The reason for the establishment of a business is to make profits. If businesses are not
profitable, its owners will not be encouraged to continue operating.  Profits are used to
reinvest in the business for its expansion.

Role of a Business within a Community

Corporate citizen is the term used to describe the responsibilities that businesses have within
their environment. As a good corporate citizen business must strive to have a good
relationship with their community.

Good corporate citizenship includes:

-Support for the community through community projects, sports and youth clubs.

-Being environmentally aware by reducing pollution

-Providing job opportunities for community members e.g. a holiday work programme

The roles of businesses

The roles of a business fall under four main headings:

1. Economic roles

These include:

 To sell goods and services of a high quality at prices so the majority wishing to
purchase them can do so
 To give export orders priority and to try to increase these order
 To make a profit
 To improve the good or service
 To contribute towards the improvement of the community
 To create employment

2. Financial roles

These include:

 To make a profit
 To be in a good financial standing with its bankers
 To plough back profit into the business for expansion
 To pay shareholders
 To invest in other productive areas

3. Political roles

These include:

 To lobby and vote for parties whose policies coincide with their own wishes
 To donate to the funds of political parties they favour

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  To influence government into establishing policies which will benefit their businesses
as well as their country

4. Social roles

These include:

 To develop a good community spirit by donating to charities and sponsoring

educational, health and sporting events
 To promote the well-being of employees
 To take part in community clean-up campaigns
 To maintain homes and community centres

5. Ethical roles

These include:

*To have proper health, safety and environmental standards

Ethical issues and society - examples

 Involvement in the community

 Honesty, truthfulness and fairness in marketing
 Use of animals in product testing
 Agricultural practices e.g. intensive faming
 The degree of safety built into product design
 Donation to good causes
 The extent to which a business accepts its alleged responsibilities for mishaps,
spillages and
 leaks
 The selling of addictive products e.g. tobacco
 Involvement in the arms trade
 Trading with repressive regimes

Ethical issues arising from internal and industry practices - examples

 Treatment of customers - e.g. honouring the spirit as well as the letter of the law in
respect to warranties and after sales service
 The number and proportion of women and ethnic minority people in senior positions
 The organisation’s loyalty to employees when it is in difficult economic conditions
 Employment of disabled people
 Working conditions and treatment of workers
 Bribes to secure contracts
 Child labour in the developing world
 Business practices of supply firms

Unethical practices in marketing - examples

 Pricing lack of clarity in pricing

26
  Dumping – selling at a loss to increase market share and destroy competition in order
to subsequently raise prices
 Price fixing cartels
 Encouraging people to claim prizes when they phoning premium rate numbers
 “Bait and switch” selling - attracting customers and then subjecting them to high
pressure selling techniques to switch to an more expensive alternative
 High pressure selling - especially in relation to groups such as the elderly
 Counterfeit goods and brand piracy
 Copying the style of packaging in an attempt to mislead consumers
 Deceptive advertising
 Irresponsible issue of credit cards and the irresponsible raising of credit limits
 Unethical practices in market research and competitor intelligence

Unethical practices relating to products - examples

 Selling goods abroad which are banned at home

 Omitting to provide information on side effects
 Unsafe products
 Built in obsolescence
 Wasteful and unnecessary packaging
 Deception on size and content
 Inaccurate and incomplete testing of products
 Treatment of animals in product testing
 The use of child labour and forced labour
 Production in sweatshops
 Violation of the basic rights of workers

The Institute recommends that organisations issue statements of ethical practice in respect of:

 Relations with customers

 Relations with shareholders and other investors
 Relations with employees
 Relations with suppliers
 Relations with the government and the local community
 Relations with competitors
 Issues relating to international business
 Behaviour in relations to mergers and takeovers
 Compliance and verification

To ensure bribery is non-existent

27
Quiz

Question 1

Explain two ways in which the barter system limited trade in early economies.

Answer

A common measure of value did not exist. It was difficult to ascertain the value of goods
exchanged. It therefore would hinder trade as sometimes persons would not want to feel
cheated.

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A double coincidence of wants must exist for trade to take place. An individual who wishes
to trade must have what other persons want to trade his goods. If this does not exist then trade
cannot take place.

Question 2

State one advantage and one disadvantage of specialization.

Answer

An advantage of specialization is that it increases output.

A disadvantage of specialization is that it discourages quality work because of monotony.

Question 3

Show how two functions of money facilitate trade.

Answer

Money is a common measure of value. Persons can therefore determine the value of
commodities and know how much to accept in exchange for goods and services.

Money is a medium of exchange and therefore accepted by everyone. Persons will not have
difficulties to buy or sell goods and services.

Question 4

Starting a business is a lot of hard work and very costly. Why would an individual want to
start a business?

Answer

An individual may wish to gain financial independence. A successful business can earn high
levels of profits.

Using the skills and knowledge acquired to operate a profitable business.

Question 5

State the form of business organization that you believe is most advantageous to form.  Give
two reasons why.

Answer

Choose one of the following:

Sole trader – Decisions are made quickly and there is little legal requirement to start the
business.

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Partnership – more capital can be raised, specialization of functions is more efficient

Limited liability Company – shareholders are not liable for the company’s debts beyond their
level of investment, continuity of existence is assured.

Question 6

State two differences between the Free Market and the Planned economic systems.

Answer

In the free market economy the consumer is king i.e. the consumer determines what goods
and services are to be produced based on their demand.  In a planned economy the
government makes decision concerning the distribution of goods and service.

Competition in a free market economy leads to efficiency and innovation.

However, in a planned economy, the lack of competition reduces innovation and the
motivation to produce quality output.

Question 7

Explain the roles of two stakeholders in business activities.

Answer

The role of the government is to monitor and regulate business activity to ensure that the
consumer is treated fairly.

Employees must work efficiently to create quality goods and services.

Employees must adhere to the rules and relations of the company.

Question 8

Identify a business activity within your community and discuss two contributions of this
business to your community.

Answer

Sally’s bakery produces good quality bread in various sizes to meet the requirements of
customers. The prices are also very affordable. The bakery makes it convenient for
community members as they do not have to travel a far distance to obtain this product.

Sally’s bakery also employs persons from the community. The bakery is very popular, and so
workers are paid an adequate salary to support their family.

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Internal Organizational Environment

Functional Areas of Business

Departments in a business organization are structured according to certain functions.  The

departments of various organizations will differ depending on the type of business. Below are
four main functions that tend to be general to most organizations.

Production

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The production department is responsible for transforming raw materials into finished
products. They are also responsible for quality control to ensure that required standards are
met.

Finance/Accounts

The accounts department makes and receives all payments on behalf of the business and
records all financial transactions

Marketing

This department creates awareness for the firm products and motivates consumers to buy.
They also carry out market research to identify customer’s needs

Human Resources/Personnel

The human resource department recruits and selects staff for the business organization.  
They are also responsible for staff training and welfare.

Functions of Management

Planning  

All managers must plan, that is, setting out steps for the attainment of future organizational
objectives.  It involves formulating the policies and programmes for the firm.

 Organizing 

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Organization reduces cost, time, chaos and conflicts.  Managers must obtain all the necessary
tools, machinery and personnel for each task and arrange all tasks so that they are done in the
most efficient manner.

 Directing 

Managers must guide subordinates by giving them instructions to perform the tasks assigned.

 Delegating 

Delegating duties involves giving others (e.g. supervisors) the authority to have specific tasks
completed through the management of others. Therefore, supervisors will ensure that workers
complete tasks assigned. Delegation reduces the workload of the manager.

 Controlling

Managers must continually measure the activities of subordinates, ensuring that all activities
conform to plan.

 Coordinating

Managers must bring together all the various organizational tasks so that the organization
may function harmoniously.

 Motivating

Managers must inspire workers to perform their tasks well.

Responsibilities of Management

Management must be aware of their responsibilities to the various groups that they interact
with for the successful running of the business.

 1. To the owners of the business (this also includes shareholders)

Managers are expected to ensure efficiency in all areas of the business.

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 2. To employees – Managers must pay adequate wages and provide good working conditions.

 3. To customers – Managers must ensure that products are of good quality and are
reasonably priced.

 4. To the society – Managers must find ways to reduce harmful air pollution and the
discharge     of harmful waste created by the production process into rivers and seas.

 5. To the government – Management should adhere to various government legislation and
regulation.

Organizational Charts

An organizational chart is a diagram of the organization of an enterprise. Its pyramid shape

illustrates the hierarchy system that exists in the organization. The most senior position in the
organization is placed by itself at the apex. The pyramid gets wider towards the bottom
depicting the greater number of workers at its base.

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Those who have the power to issue commands have authority in an organization. In the
organization chart above the sales manager has the authority in the Sales department.  All
persons with the same level of authority are placed at the same level on the chart. For
example the sales manager and the accounts manager have the same level of authority in their
various departments.

Responsibility is the capacity to accept duties and to carry out their tasks. Both sales
supervisors are responsible to the sales manager.

The chart shows the following:

-each person’s position

-the number of levels of managers

-to whom each employee is responsible (reports) to

-the span of or (area) of control for senior staff members.

Types of Organizational Charts

Line or Direct

The line organizational chart depicts a straight line of command. Authority is said to flow
downwards only in the line organization. The line organizational structure is found in schools
or in the military.

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Functional Organizational Chart

The Functional organization chart is a diagram of an organization that is arranged by its

functions. For example, there is a manager in charge of marketing, and another in charge of
production.  This type of organization has an advantage over the Line as experts are
appointed to run each department. All managers report to the General Manager.

The Functional organizational chart combines the straight line of command of the line
organization with horizontal dotted diagonal lines representing functional authority. The
dotted diagonal lines in the figure above show the authority that the Human Resource
Manager has over other departments. The Human Resource Manager is allowed authority in
36
these department over human resource matters only e.g. to hire and fire workers. He therefore
cannot give directives on production or marketing matters.

Line and Staff Organizational Chart

The Line and Staff organizational chart combines the line and functional organization with
the addition of staff personnel. Staff workers assist and advise line workers. Staff workers
include consultants, advisors, company lawyers, executive secretary, auxiliary workers etc.
Staff officers do not have authority, that is, the power to delegate tasks to subordinates in the
organization. Their main role is to advise and assist line officers. This is why there are no
vertical lines connecting staff officers to any other member of staff on the chart. They are
therefore, placed at the side directly below the line officer whom they assist or advise.

Committee Organizational Chart

Committees are advisory bodies. They are usually appointed to advise organizations.  
Examples of committees include; parent teachers associations and student councils which are
committees within a school organization. Committees usually delegate certain duties to sub-
committees. For example, an executive committee may appoint a finance committee to advise
it on financial matters. Note that an element of the line organization exists in the committee
organization as all sub-committees are responsible to the executive committee.

37
 Characteristics of a Good Leader

A leader is someone who has been given authority over a group of individuals. His job is to
motivate the group to achieve the goals set out for it.  Leadership is therefore about
influencing or inspiring an organized group towards the accomplishment of goals. Below are
the characteristics of a good leader.

 Integrity

It is important for a leader to possess this quality as it makes them trustworthy. They are
perceived as honest and therefore command the respect of their subordinates.

 Good communication skills

Leaders should be able to communicate effectively with persons at all levels of the
organization. Manager must pass down directives as well as listen to workers opinions
complaints and ideas. This will foster good working relations among leader and followers.

 Intelligent   

This is a very important characteristic for leaders. It refers to being rational and having good
judgment when making decisions. Leaders are decision makers and therefore need to be

38
intelligent.  This characteristic also refers to shrewdness and therefore describes someone
who is smart, perceptive and wise.

 Devoted and Committed

A leader must be a role model for others.  He/she should therefore believe in the goals of the
group and motivate others to achieve it. His/her continuous hard work will portray dedication
and loyalty to duty.

Leadership Styles

Autocratic

This type of leader makes all decisions and asks members only to be obedient in following
orders.  He will give detailed instructions and closely supervise subordinates.

Advantage

Time is not wasted consulting with others to reach a decision.

Disadvantage

Workers must comply with directives given by the leader and therefore the organization will
not benefit from workers initiative and innovative ideas

Democratic

A democratic leader allows the participation of subordinates in decision making.  The leader
asks for progress reports at intervals instead of continuous close supervision.

Advantage
39
Discussion between management and workers leads an improved relationship.

Disadvantage

The variety of opinions to consider may slow down the decision making process.

Laissez-Faire

This type of leader will give minimum directives and allow maximum freedom for workers to
make decisions about completing their tasks.

Advantage

The firm will benefit from the initiative and innovation of workers.

Disadvantage

It may lead to chaos in the organization. This type of style can only be used with persons that
are very self- motivated and disciplined.

Sources of Conflict within an Organization

Unfair treatment of workers

Unfair dismissal

Discrimination

Health related issues

The need for protective clothing

Poor ventilation

Harmful fumes from chemicals

Wages and fringe benefits

Nonpayment of allowances

Underpayment

40
 Methods used to gain an upper hand during Periods of Conflict

Workers organize themselves to collectively deal with conflicts. This is done through the
trade union. A Trade Union is an organization of persons employed in an industry who have
joined together in order to improve their wages and working conditions.

Methods used by Trade Unions 

1. Strikes

2. Sick-out

3. Work-to-rule

4. Go slow

5. Picketing

Methods used by employers during conflicts

Union busting

41
Union busting is the prevention by management of the formation of a trade union within its
organization. The employer may explicitly state this to workers or covertly discourage its
formation.

Lock out

A lockout refers to the refusal by an employer to allow workers into the business place during
an industrial dispute. This is a means of coercing workers to comply with management.

Scab labour

This is a derogatory term used to refer to workers hired to replace workers on strike.

Strategies used to resolve Conflicts

Collective Bargaining  

Collective bargaining is the process whereby the union representative on behalf of the
employees and management, negotiate the terms of their agreement which are incorporated in
the employees’ contract of employment.  It is a means to reach an agreement between trade
unions and employers.

The Role/Function of the Trade Union

1. To ensure better wages and working conditions for workers

2. To protect workers against arbitrary disciplinary actions.

3. To deal with grievances in accordance with the grievance procedures

The Grievance Procedure

A grievance is a complaint of a worker.  A worker will have a complaint when:

a. he is treated unfairly. (e.g. cases of discrimination)

42
b. his health or safety is threatened  (e.g. chemicals and dust at work etc)

c. there is a violation of the collective agreement or work rules. (e.g. if employers have not
abided by the agreement between management and the trade union.)

The grievance procedure is a set of steps which employees can use to solve any grievance
that may arise.

STEP 1  -   The employee discusses the complaint with his or her supervisor.  If the
complaint is not satisfactorily dealt with by the supervisor the employee may take the matter
further.

STEP 2  -   The employee will discuss the matter with the head of department.

STEP 3  -   The employee, along with the union delegate, will discuss the matter with top
management.

STEP 4 -    If the grievance still exists, the union official will seek conciliation or mediation
from the Ministry of Labour or any independent body, i.e. the friendly intervention of these
bodies into the dispute for the purpose of adjusting the differences.

STEP 5 -   The matter is sent to arbitration, i.e. before the court where the judge will make
the final decision.  Therefore both parties; employer and employee must accept the judges
decision.

Guidelines: Good Management & Staff Relations

Good management worker relationship is important for efficiency, productivity and the
retention of staff.

Communication

Managers should not only give directives but encourage feedback from workers. Regular
scheduled meetings should allow workers the opportunity to voice their concerns and views.
Some managers have an open door policy making them available to all employees.

Motivation

Money is not a motivator for everyone and therefore managers must find ways of
encouraging workers to give their best performance. Other forms of motivation include
recognition for a job well done. High performing employees can be motivated by promotion,
and being named employee of the month. Allowing employees to be creative and bringing
their innovative ideas to goods and services is also a motivator.

Fairness

43
It is very important to handle all workers fairly without showing favouritism. If workers
perceive that they are not being fairly treated or that there is favouritism conflicts may arise
among workers and well as between management and workers.

Compassionate

Managers must show care when dealing with workers daily.  Workers are not machines and
cannot be treated as such. Managers should try to understand each worker and their various
issues. Workers may have challenges with illnesses, family, financial etc. which may affect
their performance on the job.

Role of Teamwork

Many firms adopt a teamwork approach to complete tasks more efficiently. For example a
major Caribbean airline encourages its workers to work as a team to achieve the main task of
having each flight leave on time. Workers therefore move to various positions if needed, to
have each flight leave on time.

Benefits of Teamwork

1. It improves the working relationship among workers

2. It increases communication

3. Skills and knowledge are passed on through the interaction

4. It satisfies the social needs of workers

Groups are formed naturally by persons with similar interest, common goals and similar past
experiences in an organization. The establishment of various clubs, work socials and outings

44
will encourage greater interaction among workers, better relationships and a teamwork
approach to completing tasks.

Strategies for Effective Communication

Communication is defined as a two-way process which involves the conveying of

information from (sender) to (receiver).  The need for effective communication is very
important when dealing with the human factor from recruitment to retirement in the
organization.

For communication to be effective there must be feedback.

Means of Communication
1. Oral – This includes all types of spoken communication, e.g. interviews and meetings.

2. Written – This includes all things that are written, e.g. reports and letters.

3. Visual – This includes all things which can be seen, e.g., posters and films.

The primary objective of communication in any organization is to get work done.

Types of communication

45
  Formal Communication -These are official methods approved by management.

These includes meetings, announcement on notices boards, memoranda, messages over

public address systems, interviews,  performance appraisals, company magazines. etc.

  Informal Communication -These are unofficial methods of communication.

These include: rumours and the grapevine, secret signs and gestures as well as casual
conversation between employees.

Barriers to Communication

1. Distortion of messages e.g. rumours or the grapevine can easily distort messages.

2. Inappropriate forms of transmission e.g. a notice of a formal meeting must be conveyed in

writing and not by word of mouth.  If this type of meeting is not conveyed in writing it may
seem casual and unimportant.

3. Physical barriers e.g. faulty telephone connections, defects in mechanical or electronic

equipment, and poor postal services.

Management Information System

Managers need information to assist them in making important timely decisions and
predictions for future plans. Management information system is a computer based business
information system designed to produce information needed for the successful management
of a department or business (Before MIS managers had to rely on manually prepared reports
at intervals). However, with increased global competition firms must be more proactive in the
market place. Information must therefore be at the manager’s disposal at any point in time
when needed.

The manager of a retail store may require at any point in time information on sales volume
for particular items so that decisions on future purchases can be made. A computer
programme is then designed to meet the specifications of the report which the manager will
need. The format and the content of each report required will be used to design the
programme. The manager will then be able to receive the information required by requesting
the specific report. The necessary data will be retrieved from the data base, processed and
automatically presented in the format specified.

Benefits

46
MIS is very cost effective as it reduces the need for labour to compile and analyze data. 
Once information enters a company’s database, MIS will compile and analyze the data to
give managers meaningful information to make decisions. Data e.g. items sold or stock
entering the stock room will be inputted by the various department staff. MIS will have
required reports available in a much shorter time than manual preparation of reports.

MIS is a decision support system used to analyze business activities. MIS at anytime can
provide information required for decision making. This can be used to assess present
performance and therefore assist managers to improve the company’s performance so that the
firm is more competitive.

Challenges

Although very beneficial and is therefore desirable for businesses MIS is an expensive
venture and small firms will be challenged to set up this system. In addition to the set up cost
for MIS business will have to consider the continuous maintenance costs. The cost of training
present employees to interact with the new system must also be factored in to the total cost.

Personal Needs Satisfied Through Employment

Managers must be aware of the various needs of workers. If these needs are adequately
satisfied through work, then workers will be motivated to improve performance.

Basic Needs

Employment is very important for the economic survival of individuals. If employees receive
adequate pay then these needs will be satisfied. Some employees may also receive allowances
and fringe benefits. Once the basic needs of survival (food, clothing and shelter) are met,
employees will be aware of higher level needs.

Security Needs

A job should not only provide adequate pay to satisfy basic needs but it should also give
workers security. This need can be satisfied through the provision of health benefits,
insurance and pensions.

  Social Needs 

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The employee spends on average eight hours each day at work. We are social beings and
therefore need human interaction. This need can be satisfied by the establishment of after
work activities and through a teamwork approach to accomplishing tasks.

Self-Esteem Needs

Managers can satisfy this need through promotion and ways of recognizing those who have
performed well.

Self-actualizing Needs

This need is satisfied by giving subordinates opportunities to create and pursue innovative
ideas so that they can realize their capacities to the fullest.

Quiz

Question 1

Explain two important activities carried out by one functional area of a business.

Answer

The marketing department promotes the firms products to encourage sales. Consumers must
be made aware of what is being offered and encouraged to buy. They also conduct market
research to identify the needs and wants of consumers. Companies depend on consumers
support for their success, and so ascertaining consumers taste is very important.

Question 2

Outline two functions of management and say how each is important to the efficient
operation of a business.

Answer

48
Controlling involves the continuous assessment of the work done by subordinates.  Poor
quality work is a reflection of the company and so managers must ensure that quality work is
done.

Planning involves outlining all future activities that are required to achieve the organizations
objectives. Planning activities involve all the programmes and policies that will guide the
firm’s path to success.

Question 3

Give two examples to show how managers can fulfill their responsibilities to one group of
business stakeholders.

Answer

Managers can full their responsibility to customers by proving quality goods and services. A
system that ensures standards should be implemented. Prices must also be affordable. All
measures must be taken to operate as efficiently as possible so that production cost are kept
low resulting in affordable selling prices.

Question 4

(a) Draw an organizational chart of your school or business organization.

(b) Identify the type of organizational chart drawn

(c) Identify the span of control of one person in authority on the chart

(d) Identify two persons at the same level of authority.

Answer

(a)

(b)   Line organizational chart

(c)   The span of control of Vice principal is the head of departments for arts and science.

(d)   Two persons at the same level of authority are the heads of department for arts and
science.

Question 5

49
Show how two important characteristics of a good leader can improve the efficiency of a
group.

Answer

Good communication skills will foster good working relationships between workers and
managers. Workers are more effective in a comfortable environment. This also encourages
feedback from workers.

A devoted and committed manager will lead by example. His commitment to the tasks that
are required to achieve the organizations objectives will inspire subordinates to work hard.

Question 6

Give two differences between the autocratic and the democratic leadership styles.

Answer

An autocratic manager makes all decisions concerning the tasks to be performed by

subordinates. All directives handed down by him must be closely followed. He makes
frequent checks on output of workers. The democratic leader allows the participation of
others in decision making. He allows workers some latitude to work on their own initiative
and periodically checks output from workers.

Question 7

Outline the steps for handling grievances in the organization.

Answer

The worker lodges a complaint with his or her immediate supervisor. If worker feels that the
complaint was not adequately dealt with then he may discuss the matter with the head of
department. If the worker is still not satisfied with how the matter is being dealt with, he
along with the union representative may discuss the matter with management. It may need to
go a further stage where there is mediation from Ministry of Labour or any independent body.
The final stage is when the matter has to be taken to court.

Question 8

Explain the purpose of the collective bargaining process.

Answer

The purpose of collective bargaining is a means to reach an amicable agreement between

management and workers. Workers bargain collectively through their union representative
with management until an agreement is reached.

Question 9

Discuss two ways in which teamwork can improve the efficiency of an organization.

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Answer

Teamwork gives workers the opportunity to make collaborative decisions and support each
other to accomplish tasks more effectively.

Teamwork allows for specialization in various parts of a task based on the skill of each team
member. Specialization increases output.

Question 10

Discuss two benefits that a business will derive from using Management Information
Systems.

Answer

It reduces labour costs as the computer compiles and analyses all the data. This increases the
efficiency of employees and reduces production costs. It provides timely information that
helps the business. This allows for better decision making as information is available when
needed.

Establishing a Business

Role of an Entrepreneur

An entrepreneur is one who undertakes the risk of investment to create and market a good or
service for financial gains. He is very perceptive and takes advantage of business
opportunities that will generate high profits.  Entrepreneurs can be sole traders, partners in a
business or a group of shareholders.

Entrepreneurs are of vital importance to an economy. They are motivated by their own self-
interest to make profits and in so doing provide employment, create goods and services and
generate revenue impacting on the economy’s level of national income and hence potential
for economic growth.

The entrepreneur is a shrewd investor and takes calculated risks i.e. ones that minimize loss
when choosing investment opportunities. The entrepreneur is the conceptualizer of the initial
business idea. He must identify the best resources that suit the business operation and ensure
the efficiency of each resource employed. For example, training workers, using machinery to
increase labour productivity, maximizing the use of factory and shop space and borrowing
money at low interest rates. The entrepreneur must continuously evaluate the performance of

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his ventures. Information can be garnered from the balance sheets and Management
Information Systems.

Personal Qualities of an Entrepreneur

Entrepreneurship requires the following characteristics for success:

1. The creativity to innovate new product and ideas.

2. The drive and determination to be successful.

3. The ability to take calculated risks.

4. The flexibility to adapt to changes in the market and industry.

5. Very goal- oriented to purposely and aggressively accomplish task and meet objectives.

Reasons Persons Establish their own Businesses

1.Financial Independence

Some persons feel restricted financially with the income received from their job. Starting a
business would give them the opportunity to be a successful business person and achieve
financial independence.

2. Being your own boss

You are able to make decisions about the direction and operation of the business.

3. To use your skills and knowledge for yourself

The skills, knowledge and experience that you have acquired can be put to work for you.

4. Self-actualization/fulfilment

Owning and operating a successful business will give a feeling of accomplishment.

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6. To create employment for relatives, friends and community members

Businesses can assist in providing jobs for persons in communities with high levels of
unemployment.

Steps in Establishing a Business

1. Conceptualization

All business ventures begin with the conceptualization of an idea. At this initial stage the
product or service idea is envisioned.  Most Entrepreneurs identify a need in the market i.e. a
service that is not being provided or a product that does not exist. If the product or service
already exists then ideas to make improvements may be conceptualized.

2. Research

The entrepreneur is a shrewd investor and takes calculated risks. Before investing money in a
business venture a market research must therefore be done to ascertain the extent of the need
for the product or service. This helps to minimize losses. A market research involves
gathering information about a potential market to help an investor make decisions about
entering that market.

3. Identification of resources

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What resources are needed to start the business?

If the market research is favourable the entrepreneur must now identify the necessary
resources to operate business.  The resources required are land, labour and capital. Land
refers to location or place used to set up a business. This may be bought, rented or family
home. Labour employed must be qualified and skilled to efficiently carry out their duties.
Capital includes money, raw material and assets such as machinery and equipment.

4. Creation of a business plan

Preparing a business plan is very important before the start of a business. This will help the
business to ascertain whether or not the business will be profitable. A business plan outlines
the goals of a business and the strategies that will be employed to achieve them. Usually
financial institutions require that a business plan be presented when a loan is requested for
business investment.

5. Acquisition of funds

There are several ways of acquiring funds to start a business.  There are a myriad of financial
institutions that are willing to assist small businesses once their business plans are deemed
workable. The investor must weigh the advantages and disadvantages of acquiring funds
from the various financial institutions.  The cost of borrowing i.e. the interest rate charged
and the length of the repayment period are factors to consider.

Funds may be borrowed from friends and relatives that may attract a lower or no repayment
cost and a more flexible repayment schedule. Funds can also be acquired from personal
savings. Encouraging partners or selling shares are ways of avoiding high costs of capital.

6. Operation of a business

A business must be efficiently operated to ensure high quality goods and service. This is
important to keep existing customers and for business growth. Many companies employ an
operation manager to design and oversee its operations. This person develops and manages
the various processes used to create goods and services efficiently to ensure customer
satisfaction.

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 Functional Areas in the Operation of Businesses

Departments in a business organization are structured according to certain functions.  The

departments of various organizations will differ depending on the type of business.

Production

The production department is responsible for transforming raw materials into finished
products. They are also responsible for quality control to ensure that required standards are
met.

Finance/Accounts

The accounts department makes and receives all payments on behalf of the business and
records all financial transactions.

Marketing

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This department creates awareness for the firm products and motivates consumers to buy.
They also carry out market research to identify customer’s needs.

Human Resources/Personnel

The human resource department recruits and selects staff for the business organization. They
are also responsible for staff training and welfare.

The Purchasing Department

This department is responsible for the purchasing of the firms raw material, stationery and
goods for re-sale.

Customer Service/ Customer Relations Department

This Department bridges the gap between a business and its customers. it deals with
customers’ queries, advising and assisting customers to place orders and handling customers’
complaints.

Legal Department
This department is concerned with legal problems that might arise for the company.  For
example, compensation for employees and customers, who have brought lawsuits against the
company.

Research and Development (R&D)

This department is involved with research to explore ways of improving the company’s
existing products, developing new ones and identifying efficient processes to increase
production. This department works closely with the marketing department as products
developed must satisfy consumers’ needs.

Sources of Research in Establishing a Business

Firms embark on research to uncover information about consumer preferences, the level of
competition in the market, responses to advertisement etc.

Sources of Information

Data may be collected from primary or secondary sources.

(a)Primary Data

Primary data is originally collected data. This data will be obtained by interviewing,
observing or distributing questionnaires to the sample population.

(b) Secondary Data

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Secondary data is information that has already been collected by someone else originally.
This data will be therefore obtained from books, newspapers, magazines, libraries and
publications of various institutions.

Process between Planning and the Operation of a Business

Managers must continue to plan in order to ensure that its operations meet all long – term,
medium- term and short- term goals.

Long- term plans are made for 3 to 5 year periods. Long-term plans determine the direction
of the company. These plans set out the firm’s overall strategy to move from its present
position to where it intends to be. Long-term plans include expansion plans and plans to
create new products and services.  Long-term plans are made by the directors or persons in
senior management positions of a company.

Medium-term plans range from 1 to 2 years. They are made by department managers or
persons in middle management positions. Medium term plans include increasing the
efficiency of a department in order to increase the quality and quantity of output. This would
involve implementing training programmes for staff and identifying equipment that would
increase efficiency.

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Short-term plans are made daily, weekly and monthly by supervisors or persons in lower
level management positions. These plans are centred on meeting daily, weekly and monthly
production targets.

Regulatory Practices Instituted by Governments

A business is not considered a legal entity if it is not registered as business in the country
where it operates. All persons desirous of starting a business must first be registered with the
government agency authorized to carry out registration of business in their country.

A sole trader only needs to register his business by meeting the requirements outlined for sole
traders by the registering office and filling out the required documents.

Partnerships are also registered by the completion of a registration document. The names of
all the partners must be listed on the document. Partners in a business are advised to draft a
Deed of Partnership. This document sets out all the rules that govern the partnership and will
thus help to prevent conflict among partners.

The formation of public and private limited liability companies involves the preparation of a
number of documents.

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The Companies Act contains the laws relating to companies. To comply with certain
requirements which were laid down by the Companies Act, the promoters of the company
must present the following documents:

1. The Memorandum of Association – this document governs the company’s relationship

with the outside world. It contains:

(a) The name of the company

(b) The address of the registered office

(c) The objectives of the A statement of limited liability to members

(d) The amount of capital to be raised by the selling of shares and the types of shares to be
issued

(e) The number of shares to be taken by the directors

(f) Statement of intent to form a limited liability

2. Articles of Association – this document contain the internal rules and regulations which
govern the company. It contains:

(a) The rights and obligations of the directors

(b) The procedures for calling an annual general meeting

(c) Procedures for electing directors

(d) The borrowing powers of the company

In order to effect the registration of a company, the Memorandum and Articles of Association
must be prepared by a lawyer or any person named in the articles as a director or company
secretary and sent to the companies registering office.

3. Statutory Declaration – this document states that the promoters of the company have
compiled with the Companies Act. It is a signed statement from each director certifying their
willingness to serve.

4. Certificate of Incorporation

Once all three documents above have been submitted and the Registrar of Companies is
satisfied that all is in order, it will enter the name of the company on the register, and issue a
certificate of incorporation. The certificate of incorporation is proof that all requirements of
the Companies Act have been complied with. The certificate of incorporation establishes the
firm as a legal body.

5. The Incorporated Company

A company always means an incorporated company. If a company is not incorporated, it is
really a large partnership. Every business that has more than twenty shareholders must be

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registered as an incorporated company. The advantage of incorporation is that each member’s
liability is limited. At this stage it is only the private limited company that may begin trading.

6. The Prospectus
The public limited liability company must first publish its prospects inviting the public to
subscribe for shares. This may be a publication in the newspaper or in another public media.
The prospectus will contain information on the assets, liabilities and profit levels of the
company.

7. Certificate of Trading
Once the public limited liability company has collected the total amount of share capital
stated in the memorandum, the company will then be issued with a Certificate of Trading.
This will allow the company to start trading.

Advantages & Disadvantages: Types of Businesses

Sole Traders

Advantages

Benefits of operating alone are: all profits are taken by the owner. Consultations are not
necessary for decision making and the legal requirements for start-up is very simple as the
proprietor only needs to submit the registration documents for the business.

Disadvantages

The sole proprietor must work for long hours resulting in little time for family. There is also
limited capital to inject into the business and he alone bears all the risk of the business. He
does not have limited liability and therefore if the business goes bankrupt he may lose his
personal assets e.g. house and car. There is a lack of expertise in areas of business where he is
not knowledgeable which may limit its success.

Partnership

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Advantages

Since more than one person is involved, more capital can be raised to inject into the business.
There is more expertise and work load is shared. The risk of the business operation is also
shared.

Disadvantages

All partners will be affected by the action of each partner since each person represents the
business. Decision making may be very slow if partners are not in agreement. There are high
risks for partners who do not have limited liability.

Private Limited Liability Company

Advantage

A main advantage of limited liability companies is that their shareholders enjoy limited
liability. This type of business is assured continuity of existence as it has several members.
Unlike the sole trading business that comes to an end if the owner dies or is very ill.  This
firm can access capital for expansion by selling shares.  This business also has privacy as its
balance sheet does not have to be published.

Disadvantage

The disadvantage is that they are not easy to start due to the number of legal procedures
required.  For the private limited liability company, shares are not easily transferable as other
members must agree to have persons join the company. However, shareholders in public
liability companies are not restricted to sell their shares to whomever they wish to.

Public Limited Liability Company

Advantages

A main advantage of limited liability companies is that their shareholders enjoy limited
liability. This type of business is assured continuity of existence as it has several members.
Unlike the sole trading business that comes to an end if the owner dies or is very ill.  This
firm can access capital for expansion by selling shares.  Note that these advantages are
similar to the private limited company. However, added advantages are that shares are easily
transferrable as they may be sold to anyone on the stock market and it provides a means of
investment for shareholders who buy shares at low prices and sell when stock prices rise.

Disadvantage

The disadvantage however, are that they are not easy to start due to the number of legal
procedures required and that the large size of these businesses tend to be difficult to manage.

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 Sources of Capital in Setting up a Business

Capital is one of the resources required to set up a business establishment.

Capital mainly refers to those assets that are used to start and continuously operate a business.

Fixed capital includes machinery, equipment and vehicles owned by the company. These
assets are so called because they cannot easily be turned into cash.

Circulating capital includes raw materials, finished and semi-finished, goods, bank and cash
balances. These assets can easily be converted into cash.

Sources of Capital

- Personal savings of the owner or owners

- Assistance from friends and family

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- Loan from a financial institution

- Selling shares

The significance of collateral in accessing capital to establish a business

Collateral is anything of value that is used to secure a loan.  It is required by financial

institutions for the approval of loans. If the loan is not repaid then the financial institution has
the authority to seize the borrower’s collateral.  Forms of collateral include: bank balances,
motor vehicle, dwelling house, land, machinery and equipment

Features of a Business Plan

A business plan is a document outlining the goals of a business and the strategies to achieve
these goals. It is mainly prepared by new businesses or by ones making major changes.

Executive Summary

The Executive Summary is a synopsis of the full business plan. It presents the salient points
of the plan.  It contains information on the purpose of the business, its methods of operation
and future expectations.

History of the business

This section gives full details on previous operations of a business. For a new business it will
explain where the idea came from and the reasons for starting the business.

Mission Statement

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The Mission Statement gives the overall goal of a business as well as its values. It serves as a
guide to the operation o the business.  For example: providing the highest quality goods and
services.

Business goals and objectives

The firms’ short-term, medium-term and long-term goals and the time in which these are to
be achieved is outlined in this section.

Organization

The business must state the ownership structure and give details of the  management team.

SWOT Analysis

Looks at the strength and weaknesses of the business

E.g. Strengths – strategic location, years of experience

Weakness – Loans at affordable interest rates,

Industry Analysis

How has the industry changed in the past few years and who are the other firms in the
industry.

Product /Service Description

Describe clearly the product or service that you will be offering.

Market Analysis

Describe your target market and your competitors.

Marketing Strategy

Explain the various promotional, pricing and distribution strategies.

Operations

Explain how the business will function on a day-to-day basis. For example: Procurement of
raw materials, the use of technology and operating methods.

Sales Forecast

What amount of sales the business expects to make on a monthly basis.

Start –up Cost

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The total amount needed to start the new business, giving a detailed description of what the
money will be used for.

Operating costs

E.g. fixed Costs (rent, insurance and salary) and variable costs (utilities and wages)

Projected Cash Flow

An estimate of how much you expect to earn periodically once you start operating.

Acquisition of Funds

Information on how funds will be obtained e.g. personal savings, borrowing from friends and
family, borrowing from financial institutions or by selling shares

Purpose of a Feasibility Study

It is research done to ascertain the viability/feasibility of a business idea or any other venture.
It asses the business idea in terms of its operational costs, expected revenue flows, level of
competition etc. Its main purpose is to find out if the business idea will be workable. If the
business idea is found to be feasible a business plan is may drafted to obtain financial
support.

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 Ethical and Legal Issues

Business owners are required to obey all legislation concerning the operations of a business.
These include, paying taxes, business registration, obtaining licenses when required etc.
Business owners should also operate their business based on integrity. This involves:

- Environmental awareness – reducing pollution and harmful effluents in the rivers and seas.

- Avoiding  tied selling (marrying of goods)

- Misleading advertising (untruths about goods advertised)

- Untrue sale price – For example, writing the word sale on items for which the price remains
the same.

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- The use of market dominance to squeeze firms out of the industry- For example large firms
may drop the price of their goods so low that small firms are unable to compete with them.

Consequences of Unethical and Illegal Practices

Illegal business practices will result in legal consequence for business. This may include large
fines the loss of the business.  Legislation also protects consumers, competitors and society
from unethical practices of a business.

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Quiz

Question 1

Explain the importance of encouraging entrepreneurial skills and abilities in Caribbean

schools.

Answer

Entrepreneurship is important to Caribbean economies. Businesses create jobs, add to GDP

and foreign exchange earnings. They also provide revenue for government in the form of
taxes.  Therefore, entrepreneurship skills must be taught in schools. Our students should be
prepared to enter the workplace and to also start businesses. An investment in a programme
that prepares students for entrepreneurship will have long–term impact on a country’s
economic growth and development.

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Question 2

Outline and explain the importance of two characteristics required for a successful
entrepreneur.

Answer

Creativity is an important characteristic of an entrepreneur. Creativity helps entrepreneurs to

innovate new products and ideas for the success of the business. Entrepreneurs must have the
drive and determination to be successful. Operating a business requires a lot of effort and will
to succeed.

Question 3

Three of your past high school friends request your assistance in starting a small business.
Advise them on three important steps that they must take.

Answer

Do a feasibility study to ascertain the viability/feasibility of a business idea. It assesses the

operational costs, expected revenue flows, level of competition etc. Its main purpose is to
find out if the business idea is practical. The business must be registered. This is a legal
requirement. Decisions must be taken on the type of business that you wish to form i.e. either
a partnership or a private limited liability company. Identify sources of capital to purchase
machinery, equipment, fixtures and raw materials.

Question 4

‘James & Sons’ has been operating as a partnership for five years. They have decided to
expand through offering shares to the public. Outline the steps that must be taken by the
owners of ‘James & Sons’ to establish a public limited liability company.

Answer

Documents that must be submitted to the registrar of companies are the memorandum and
articles of association and statutory declaration. A prospectus must then be published inviting
the public to subscribe for shares. Collecting the capital required as outlined in the
memorandum of association, to be issued with a certificate of trading allowing the company
to start trading as a public limited liability company.

Question 5

Compare two advantages and two disadvantages of a sole trading business and a public
liability company.

Answer

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One advantage of a sole trading business is that the owner receives all the profits made.
However, profits are shared among members of a public limited liability company.

The sole trader can also implement new ideas quickly as he does not have to consult anyone
else concerning business decisions. However, new ideas must be ratified by the board of
public limited entities and therefore may take much longer to implement.

One disadvantage is that the sole trader must find all the capital to invest into a business.

A public limited liability company raises capital from shareholders. The sole trader will lose
all his personal assets if the business goes bankrupt. Shareholders in a public limited liability
company have limited liability and therefore will not lose their personal assets if the company
goes bankrupt.

Question 6

Outline three features of a business plan.

Answer

The executive summary is a synopsis of the full business plan. It outlines information on the
purpose of the business, its methods of operation and future expectations.

The mission statement conveys the overall goals and value of a business. It speaks to how a
company operates. For example: providing the highest quality goods and services.

A SWOT Analysis outlines the strengths and weaknesses of the business.  For example,

Strengths –low overhead costs and large market share

Weakness – difficulty in sourcing raw materials and sourcing skilled workers.

Question 7

Differentiate between primary and secondary data and give two examples of each.

Answer

Primary data is originally collected data. This data will be obtained by interviewing,
observing or distributing questionnaires to the sample population.

Secondary data is information that has already been collected by someone else originally.
This data will be therefore obtained from books, newspapers, magazines, libraries and
publications of various institutions.

Question 8

Explain how government may intervene to curtail unethical and illegal practices of business.

Answer

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Government uses legislation to guide business practice thus protecting consumers. Laws
outlining accepted standard for manufactured goods and packaging and storing of goods
protect consumers. Taxes are also charged to curb activities such as pollution as a result of
production.

Question 9

Explain the importance of a feasibility study to the start up of a business.

Answer

A feasibility study helps individuals to ascertain whether or not a business will be profitable,
it also assesses the possibilities of future income earnings and overall operational costs.

Question 10

List two forms of collateral and explain their importance to the acquisition of funds for a
business.

Answer

Collateral is anything of value that is used to secure a loan. It is required by financial

institutions for the approval of loans. If the loan is not repaid then the financial institution has
the authority to seize the borrower’s collateral. Forms of collateral include: bank balances,
motor vehicle, dwelling house, land, machinery and equipment

The Legal Aspects of Business

Concept of a Contract

A contract is an agreement that is enforceable by law. A contract therefore has legal

implications for the parties who enter into a contract.  A mere agreement is not legally
binding and therefore neither of the parties is liable if anyone breaks the agreement.

What makes a contract different from an agreement?

A contract requires not only an agreement between parties but also something of value must
be passed from one party to the next to make the contract binding. For example, you offer to
sell a friend your used text books for $1000.00. After inspecting your textbooks the friend
agrees and pays $1000.00. The $1000.00 paid here is the consideration i.e. something of
value that is passed from one party to the next.  Consideration is the price paid for a promise. 

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You promised to let your friend have your textbooks if he paid $1000.00. This $1000.00
makes the agreement binding.  You are therefore obligated to deliver the books to your friend
and cannot decide to sell the books to someone else or to ask for a higher price.

Your neighbour asks you to mow his lawn after which he will pay you $200.00. You accept
this offer and mow the lawn. The work done here is an act of forbearance. You are giving
something of value to your neighbour to receive payment for the job. The consideration in
this case is the work done by you. It is the price that you have paid for the promise to be paid
money for the job.  Consideration passes from promise to promise.

Characteristics of a Simple Contract

There must be offer and acceptance. The offerer is the party that makes the offer and the
offeree is the person that the offer is being made to. There must a clear offer and clear
acceptance for a contract to be binding.

Consideration is the price paid by one party for the promise of the other. Thus if one party
promises to provide goods or services, something of value must be given in exchange. This
may be in the form of money, goods, services or it may be an act of forbearance.

The capacity to contract – Parties to the contract must be over 18 years, of sound mind, not
under the influence of drugs or incarcerated.

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There must be no force, misrepresentation or fraud. Persons should not be forced to sign a
contract e.g. blackmail. They should not be lied to e.g. giving the wrong year of a car. Fraud
may involve forging someone’s signature.

There must be an obvious intention to create legal relations.This is based on the actions of
the parties e.g. offer, acceptance and consideration.

A contract must be legal- thus, agreements made between parties concerning illegal drugs and
any other illegal activity is not a contract.

Differences between a Simple & a Speciality Contract

A simple contract can be made orally, in writing or by the implications deemed from the
actions of the parties.  A specialty contract must be signed by the parties sealed, for example
with a company seal and finally it must be delivered.

Examples of specialty contracts include:

1. Mortgages and leases for over three years

2. Sale of land

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3. Contracts of insurance

4. Hire purchase agreements

5. Transfer of company shares

6. Assignments of copyright

Difference between an Offer & an Invitation to Treat

An invitation to treat is not an offer but an invitation to bid or bargain for an item. For
example, at an auction persons may bid on various items presented.  An invitation to treat
also occurs also when goods are advertised for sale in the media or in shop windows. Goods
in a shop window or goods advertised are not an offer by the owners of the goods but are
technically an invitation for interested persons to make an offer.

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 Conditions under which Offer and Acceptance are Communicated

An offer must be very clearly made. An offer can be made to one person, a group or to the
whole world. For example, offering a reward for a lost wallet is an offer to anyone finding the
wallet.  In cases where there is a counter-offer the original offer is no longer valid.  A counter
offer is an implied rejection of the original offer. Foe example: John offers to sell Paula a
laptop for $10,000. Paula subsequently offers him $8000.00 as she thought $10,000 was too
expensive. Paula has rejected John’s original offer and has made a counter-offer of $8,000.

Acceptance must also be clear. In the case of a counter offer a clear acceptance to the new
offer must be identified.

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Contracts may be made orally, in writing or they may be implied.

Oral Contracts

Are based on what the parties said. For example, asking someone to wash your car for
payment

Written Contracts

Both offerer and offeree must sign the contract document

Implied Contracts

Implied Contracts are made by the observed actions of the parties involved. For example,
someone who sits at a table in a restaurant and places an order has implied that he will pay
for the food that will be served.

Ways in which Contracts may be Terminated

Contracts may be brought to an end:

(a) By performance of the parties i.e. each party completing his obligations as stipulated by
the contract.

(b) By frustration i.e. an event through no fault of the parties that make one party unable to
perform the contract. For example:  if one party suffers a prolonged illness which makes him
unable to perform the contract.

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(c) By lapse of time i.e. if the time limit set for the contract to be executed  by both parties
has been passed. For example, sellers of real estate usually require that the buyers pay the full
balance on the property within a certain time period after the initial down payment has been
made.

(d) By the mutual agreement of all parties.

(e)If one of the parties become bankrupt after the contract has been signed.

(f) By changes in law i.e. where a legal contract is rendered illegal through changes in law.

(g) By notice e.g. some firms require that employees give at least one month notice when
resigning their positions.

(h) If one party dies.

(i) By breach of contract-When one party defaults on his part of the agreement i.e. he does
not perform his part of the contract.

Validity of Contracts

Mr. Larry was delighted to see a 50% discount on his favourite brand of shoes at a shoe store
15 miles away. He took sometime off from work to travel to the store. When he arrived at the
store he was told that that the brand advertised was sold out but he could choose from other
brands available.  Mr. Larry was very angry and requested that he be refunded his travelling
expenses.

Is the owner of the store obligated to refund Mr. Larry his travelling expenses?

Answer

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The advertisement appearing in the newspaper is not an offer by the store but an invitation to
treat. Therefore readers were being invited to make an offer for items advertised.  The owners
of the store are therefore in no way obligated to Mr. Larry.

Hope stopped at a convenience store on her way home to purchase a few items.  She handed
the cashier he credit card and was surprised when she was told that it declined. She
apologized and explained that she did not know why her card declined but she will call the
bank in the morning. Susan further explained that she had just enough cash with her to get
home and so she could not pay for the goods. The cashier was very angry and asked the
manager to intervene. The manager insisted that she pay for the goods.

Is Sandra obligated to pay for the goods?

Answer

Sandra has entered into a contract with the convenience store. She made the offer at the
cashier counter when she presented the goods to be cashed. The cashier accepted the offer by
cashing the goods.  In this situation it is up to the manager of the convenience store to accept
Hope’s apology.

Why Documentation is Necessary in Business Transactions

Business documents provide information needed for the business to function efficiently.
Information is required for accounting purposes to ascertain whether profits or losses are
being made. Documents are also needed as evidence for example orders placed for goods and
payments made. Documents also provide information on commodities in stock and prices.

Business Documents for Various Purposes

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(a) Letter of Enquiry is sent by persons who wish to be informed of what goods and services
and the prices of these that a company offers for sale.

(b)  The company may resend either a quotation or a catalogue

A catalogue is a booklet with a brief description and pictures of articles for sale.   Since a
catalogue is costly, some companies opt to send a quotation instead.  A quotation lists all the
goods in stock along with their prices.

(c) If there is an interest to purchase an item in the catalogue then an order letter is sent
requesting goods to be supplied.

The following three documents (items d, e & f) accompany goods delivered.

(d) Delivery Note must be signed by the person receiving the items ordered. This is proof
that goods were delivered. A copy of the delivery note is given to the buyer.

(e) Consignment noteis sent when the firm does not have its own transportation. A transport
company is paid to deliver the goods.  A consignment note will be prepared by the consignor
(the sender) and given to the transport company.  It contains information about the
destination of goods and the name of the consignee (the receiver).

(f)An Invoice is a bill sent with goods delivered.  Invoices may also be sent after goods have
been delivered.

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Terms 5% 30 days – A Discount of 5% will be given if the customer pays within 30 days.  E
& OE – means errors and omissions, i.e. if any mistakes were made on the invoice the
company will make the correction.

(g) Pro forma Invoice is a temporary invoice. It is used in cases where funds are being
borrowed from financial institutions to purchase items. The institution may request a pro
forma invoice as proof of items to be purchased when the loan is disbursed.  It may also be
sent with goods not ordered and in this instance is a form of advertising.  If the customer is
interested in the items sent, an actual invoice is sent.

(h)  Credit note is issued to a customer when there has been an overcharge on an invoice due
to faulty arithmetic, when goods have been returned because of damage or refunds  requested
for goods not received.  A credit note is printed in red.

(i) Debit note is sent to a customer whenever there is an undercharge or omission on the
invoice.

(j)  Statement of Account is a document from a supplier to a customer outlining all the
transactions carried out over a particular period.  A statement is usually sent monthly.

(k)A receipt is given for cash payment.

(l) Stock cards are used to keep a record of all stocks entering and leaving the stockroom.
This procedure ensures that stock level do not fall below a minimum resulting in the
depletion of stocks.

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 Information on Transport Documents

a. Import License

This document gives a business permission to import goods into a county. It is used by
governments to restrict the importation or to limit the amount of certain goods imported.
Quotas are sometimes used to protect local industries as they specify the quantity of certain
goods importers are allowed to import.

b. Certificate of Origin

This document states the country in which the goods were manufactured. This is important
for Caribbean countries as goods from other Caribbean countries enter duty free. Goods
imported from outside the region are taxed.

c. Shipping Note

This document provides details about the goods to be shipped, e.g. type and number of items
and the destination of the goods.

d. Bill of Lading

The Bill of Lading is a contract of carriage between the seller of the goods (exporter) and the
shipping company transporting the goods. It is also a document of title as a copy must be
presented by the importer before he can claim the goods.

It includes the following information: The number of packages, the weight of each piece, the
contents, the port of departure and destination, the name of the ship, the senders name and
address and receivers name and address

e. Dirty Bill

If the words dirty are added to the bill of lading, then the goods delivered are damaged.

f. The Airway Bill

This document is used when goods are transported by air. It contains similar information as
the bill of lading.  It is not a document of title and the consignee named need not have a copy
to collect the goods.

g. Insurance Certificate – (Marine Insurance)

This document provides protection for the goods being shipped against loss or damage at sea.

h. Bill of Sight

This document is completed if for any reason the documents required for importing goods are
not available.  It is completed giving details of the consignment and method of transportation.

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 Instruments of Payment

The instrument used to make payments will depend on the sum of money being paid and
whether the transaction is a local or an external one.

Cheques

A cheque is an order to the bank to transfer payments from an individual’s account (the

payer’s/drawer’s account) to credit another individual’s account (the payee’s account) or to

pay the payee on presentation of that cheque.

Credit Transfer 

A customer of a bank may use this system by instructing the bank to transfer money from his
account to an account at any other bank.

Standing Order/Banker’s Order

This allows regular monthly payments to be made from a customer’s bank account to a
named payee. The customer must complete and sign a standing order form instructing the
bank to make payments.

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Credit Cards/Debit Cards

This allows the card holder to make payments by simply presenting the card to the seller. A
credit card facility is actually a loan given to a customer and thus it is repaid at an interest. A
debit card is issued against a customer’s account balance and is therefore not a loan.

Postal Order

Postal orders are cheques issued in specific values by a post office. The value of each postal
order is printed on it and a price depending on its value is paid for each. The postal order will
be sent to the post office of the payee as designated by the payer.

Money Order

These can be purchased from a bank or a post office. They can be used to make payments
locally or overseas, as they are made out in the currency in which they are to be paid.  The
payee will cash the money order at his bank.

Telegraphic Money Order

The sender must first pay the sum to be sent over the counter of the post office. A telegram is
sent to the payee informing him to collect money at his local post office. He must present
proof of his identity.

Bank Draft

This is a cheque that is used to make payments overseas. Bank drafts are obtained for a fee
from a bank and are made out to a named payee in foreign currency.

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Bill of Exchange

This is used to pay for goods bought overseas on credit. It is an order in writing from an
exporter to an importer requiring payments of a certain sum of money at a fixed future date. 
The time period allowed is normally three months.

Letters of Credit/ Documentary Credit

This is a sent from an importer’s bank to an exporter guaranteeing payment to the exporter
for goods to be supplied. The exporter must present a clean bill of lading, certificate of origin
and a certificate of insurance to the importers bank.

Irrevocable Letter of Credit

Once an exporter receives this letter of credit the importer cannot cancel payments for goods
to be supplied without the exporter’s permission.

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 Insurance and Assurance

Insurance is a means of protection from financial loss.  Insurance is generic for all types of
insurance and assurance.  However, insurance differs from assurance in that insurance covers
risks that may occur e.g. theft, fire, accident etc., and assurance covers events that will occur
such as death.

The parties to the insurance contract are the insurer (the company offering protection) and the
insured (the person seeking protection). Payments are made by the insured for this service. 
The price charged for insurance is called a premium. The contract is known as the policy.

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 Insurance Principles

The purpose of insurance is to compensate persons insured who suffer loss. It is based on the
principle of indemnity, that is, to restore the insured to his original position before he suffered
loss.  Insurance therefore as a principle neither makes the insured worse off or better off than
before loss was incurred.  For example, if Mr. Green suffered damages valuing $500,000
subsequent to a fire at his home, he will be compensated exactly $500,000 to repair his house.

Principles of Insurance

Indemnity-Restoring the insured to his original position

Insurable interest–The insured must have a vested interest in what is being insured. For
example, someone is not allowed to insure his neighbour’s house.

Utmost Good Faith -The insured must be truthful concerning the information pertaining to
the policy contract.

Proximate Cause -   The damage caused must be close or proximate to the event insured
against.  For example, if someone has an accident policy that includes death occurring as a
result of an accident, this person will not be compensated if death is caused by disease.

Contribution –    This principle prevents persons insuring identical risks on the same property
with several companies and thus profiting if they suffer loss.  For example, an individual may
insure his car with three insurance companies hoping to be compensated by all three. He will
not succeed as the insurance companies will each only pay a portion of the claim.

Average Clause – This clause sets a limit to the size of the compensation, which  depends on
the proportion of the true value of the asset paid up by the insured. For example, a
homeowner insures his home for $100,000 which is half the true value of $200,000. His
house was partially destroyed by fire on the insurance company for $50,000 worth of
damage.  The insurance company only paid him $25,000 as he was only insured for 50% of
the true value of the house presently.

Subrogation -This is an extension of the principle of indemnity, that is, the insured should be
reinstated to his exact position before the loss. For example, if a vehicle is totally wrecked
and the insurance company pays the insured the value of the car, the wrecked vehicle will be
claimed by insurance company.

How does insurance Work?

How are insurance companies able to pay its clients large sums of money to compensate them
for loss? They operate on the basis of risk pooling. Premiums from large numbers of persons
with the same risks are pooled and only those who suffer loss are compensated.  The
insurance company can predict the percentage of losses based on past data. The premiums
charged are based on the number of losses predicted plus the cost to operate the business and
profits to be realized.  For example, a particular insurance company may insure one thousand
persons for risk against car theft. Only two percent of those insured may suffer lass and
therefore the insurance company can afford to assist those persons.

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 Types of Insurance Policies

1.Life Assurance
(a)Whole Life Assurance
Payment will be made upon the death of the insured. The beneficiaries of the insured will be
paid.

(b) Endowed Assurance

Payments are made at the end of specific periods. The Endowment policies may be paid at
the end of twenty or thirty years or at the age of retirement. If death occurs before the end of
the endowment period insured, then the beneficiaries of the insured will be paid.

2.Term and Business Insurance

(a) Fire Insurance
Covers loss or damages to assets by fire

(b) Burglary Insurance

Covers loss due to goods stolen and damages to property caused by theft

(c) Bad Debts Insurance

Covers debts that cannot be collected

(d) Plate & Glass Insurance

Covers the replacement of shop windows as well as any injury to staff and customers that
may be caused by its breakage

(e) Fidelity Guarantee Insurance

This protects a firm against loss due to the misappropriation of funds by employee, customers
or other persons.

(f) Employers’ Liability Insurance and Public Liability

Covers injury incurred by staff or visitors on a business location due to the negligence of the
firm, e.g., customers slipping on a wet floor.

(g) Motor Insurance

Third party – Only third parties e.g. passengers are covered.  The driver and car is not
covered.
Comprehensive – Covers loss due to damages to the driver and third parties.

(h) Marine Insurance

This policy covers loss due to damages of ships and cargo at sea.

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 Importance of Insurance to Businesses

Entrepreneurs invest a wealth of resources into the start-up and continuous operation of a
business.  If the entrepreneur suffers any form of loss such as fire or burglary etc. the
business may take a long time to recover. Insurance is therefore very important to the
business community. The principle of indemnity ensures that an entrepreneur receives
enough compensation to continue the business with minimum effects.

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Quiz

Martha offered to sell her prized orchid for $1000. Joseph telephoned her and expressed his
great interest in that variety of orchid.  He however could not pay the $1000 she asked but
could manage to pay $800. Joseph then promised that he will visit her later to pay for and
collect the orchid.

Later that day Joseph visited Martha with the money to pay for the orchid. Martha informed
him that she had already sold the orchid for $1000. Joseph was furious and told Martha that it
was not only unethical for her to sell the orchid to someone else but it was also illegal.

Question 1

Did a valid contract exist between Martha and Joseph? Explain the reason for your answer.

Answer

A valid contract did not exist between Martha and Joseph.

An offer was initially made by Martha. Joseph wished to obtain the orchid but could not pay
the amount asked by Martha. He therefore made a counter offer of $800.

Martha did not clearly accept his offer and therefore a contract did not exist. Since a contract
did not exist, Martha is allowed to sell the orchid to whomever she chooses.

Question 2

Differentiate between a simple and a specialty contract.

Answer

A simple contract is legally binding if there are an offer, acceptance and consideration. A
specialty contract must have all these in addition to it being documented, signed sealed and
delivered.

Question 3

Outline three reasons for the discharge of a contract.

Answer

If the time for which the contract must be executed is passed, then the contract can be brought
to an end because of lapse of time.

If there is a mutual agreement between the parties of a contract to bring the contract to an
end.

A contract may also be discharged if one of the parties to the contract dies.

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Question 4

You purchased an item from a variety store and were not given a receipt. The owner
explained that he never usually gives a receipt. Explain to him the importance of not only a
receipt but two other business documents to the operation of his business.

Answer

A receipt is proof of payment for goods or services bought. It not only provides protection for
the purchaser but also is a record of money received by the business. Two other important
business documents are an invoice and a statement of account.

An invoice is a bill outlining the total amount owed by customers for goods or services. It
also informs the customer of deadline dates for payments and any discounts offered. A
statement of account informs customers of all payments made within a specific time period
and outstanding balances at the end of that period.

Question 5

Outline two ways of making payments overseas.

Answer

A bank draft is a cheque which guarantees payment to the receiver from the issuing bank.
Bank drafts can be made out to a payee in foreign currency and thus used for making
overseas payments.

Letters of credit are used in international trade to make payments for imports. Payments to
exporters are guaranteed through the bank.

Question 6

Explain the importance of the following documents in international trade:

- Certificate of origin

- Import license

- Bill of lading

- Certificate of insurance

Answer

Certificate of Origin

A certificate of origin states the country in which goods imported were manufactured.  It
informs importing countries if goods are to be accepted in the case of a ban and if tariffs to be
charged.

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Import license

Ensures that approved goods and quantities are imported

Bill of lading  

Ensures the safety of goods in transit and delivery to receiver

Certificate of insurance      

This ensures that there is financial protection for goods during transit       

Question 7

You are a business owner in a Caribbean country and wish to export. Explain how you would
ensure that payments are received for items exported.

Answer

Request from the importer an irrevocable letter of credit. This ensures receipt of payments
once an order is filled.

Question 8

Explain the purpose of insurance and identify four fundamental principles.

Answer

The purpose of insurance is to indemnify the insured who suffers loss. It ensures that the
insured is returned to the exact position he was financially before the loss occurred.

Four principles of insurance are:

- Utmost Good Faith

- Proximate Cause

- Contribution

- Average Cause

Question 9

Differentiate between Insurance and assurance and give four types of Insurance.

Answer

Insurance refers to the coverage of events that may occur e.g. an accident. Assurance on the
other hand covers events that are inevitable such as death.

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Four types of insurance are Bad debt, Plate glass, marine, and employers’ liability.

Question 10

Show how three types of insurance is beneficial to businesses.

Answer

Bad debt insurance covers any loss that a business might incur if customers do not make
payments on outstanding balances.

Plate glass insurance covers any damage to customers or anyone else due to the accidental
breakage of a shop window. The cost of the window is also covered by the insurance
company.

Employers’ Liability covers injury to staff or visitors on a business location due to the
negligence of the company.

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Production

Factors of Production

The term ‘factors of production’ refers to the resources that are combined in the production
process to create goods and services.

These are:

Land -     natural resource: reward for land: rent

Labour – human resource: reward for labour: wages/ salaries

Capital – man-made resource: reward for capital: interest

Technology – physical resource: reward for technology: interest

Entrepreneur – human resource: reward for entrepreneur: profit

Land includes all natural resources such as soil, seas, rivers, forests, minerals, vegetation.

Labour is categorized as human resources, such as skilled, semi-skilled, unskilled or

professional workers

Capital includes physical resources like assets such as machinery, equipment and vehicle
owned by the company. Capital also includes raw materials, finished and semi-finished,
goods, bank and cash balances.

Technology includes any asset that makes the business operations more efficient and
effective. This includes internet, websites and specialised software.

The entrepreneur is the owner and risk taker in a business venture. He is responsible for
combining all the factors of production.

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 Industries Developed from Natural Resources in the Caribbean

Caribbean countries have been blessed with a plethora of natural resources. The industries
developed from these natural resources have created employment as well as foreign exchange
earnings from exports.

Examples:

Crude oil is a natural resource of Trinidad. The petroleum industry employs nationals and
earns foreign exchange for the country.

Clay is found in abundance in Barbados. Pottery making is a large industry in Barbados.

Bauxite is found in abundance in both Jamaica and Guyana. The Alumina industry is an
important foreign exchange earner. Alumina is exported to be further processed to make
aluminium products.

Guyana also has very large forest areas and has developed a very vibrant lumber and timber
industry. Lumber is used in the construction industry.

Limestone is processed to make cement in Jamaica.

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 Difference between Production and Productivity

Production is the process of combining units of inputs (natural, man-made and human
resources) to create output (goods and services) capable of satisfying human needs and wants.

Productivity is the increase of output from each unit in the production process.  There are
several ways of achieving productivity. These include the training of workers and the
introduction of machinery and equipment into the production process.

Importance of Productivity
Productivity increases output. High productivity results in lower cost per unit of output
resulting in higher levels of profit for a business. For example, a factory worker can produce
10 items in an hour and he subsequently produces 20 units in the same hour after some
training. His productivity has doubled and the business will benefit from a fall in unit cost as
more units are being produces at the same costs of production.

Higher profits for the firm will mean more funds available for its expansion, new business
ventures and community support. It may also wish to pass on the benefits of lower costs to
consumers in the form of lower prices.

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 Effects of Migration

Migration is the permanent movement of workers from one location to the next in search of
better opportunities.

Internal Migration

Migration within a country e.g  rural –urban migration. This is migration of persons from
rural communities to the city areas.

External Migration

Migration of persons from one country to another – For example, the migration of Caribbean
people to developed countries such as the United States and England.

Effects of Migration

Internal (Rural –Urban migration)

-The loss of persons from rural areas impacts on the level of output and development of these
areas.

-It also impacts negatively on the level of commodities available for export form these
regions.

-The influx of workers in urban areas increases competition for jobs, houses, health facilities,
schools etc.

External Migration (Caribbean to developed countries)

-Professional and skilled workers who migrate reduce the level of skills available in their
countries resulting in a brain drain effect.  This will impact on growth and development. 

-They increase competition for jobs, houses, health facilities and schools in their new
territory.

-Money earned by Caribbean nations in foreign countries is sent home to support their
families reducing poverty and making foreign exchange available for their respective
countries.

-Caribbean professional and skilled workers contribute to the growth of developed countries

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 Role of the Entrepreneur : Decision Making Process

The entrepreneur organizes the factors of production to create goods and services. The most
suitable location, qualified workers, and the right equipment and machinery will ensure
efficient production. It is therefore important for him to make the right decisions concerning
the employment of the required resources for his business. He must also make decisions on
systems and processes to be applied in the production process.

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 Role of Capital in Production

Capital refers to assets such as machinery, equipment, inventory and cash that are used to
start and continuously operate a business.

Fixed capital includes machinery, equipment and vehicles owned by the company. These
assets are so called because they cannot easily be turned into cash.

Circulating capital includes raw materials, finished and semi-finished, goods, bank and cash
balances. These assets can easily be converted into cash.

Tools and machinery are necessary for products to be fashioned from raw material e.g. 
mineral mining,  oil  drilling and lumbering. These assets also increase productivity for
example sewing with a machine as opposed to sewing by hand. Venture capital is needed for
business start-up. The business owner will need equipment, funds for promotion etc. to start
the business. Working capital is the cash available for the daily operation of the business. It
is used to pay workers, utilities and purchase raw materials.

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 Levels of Production

Subsistence

This is the lowest level of production. Subsistence productions refers to output from the
production process that is just enough for the survival. This amount of production is therefore
not adequate to meet all needs and wants of a family, community or a country. For example,
subsistence farming involves the production of crops to feed the family and for survival.
Wealth is not created as whatever is produced is consumed.

Domestic Production

Domestic production refers to production that is more than survival level. It provides output
that is enough to satisfy domestic needs and wants. Excess is not available for export.
However, production is adequate to supply local demand.

Surplus or Export 

This level of production is adequate to supply local demand and for export.  Large industries
can produce large quantities of output to satisfy local consumption and earn foreign exchange
from export, for example, the sugar and banana industries.

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 Types of Production

Primary Production

This includes all kinds of extractive industries such as agriculture, mining and fishing.

Secondary Production

This includes manufacturing such as assembling, refining and construction (building)

industries.

Tertiary Production

This includes all kinds of service industries such as transportation, communication and
tourism.

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 Cottage Industry

Cottage industry is a generic term for any type of home–based production business. The term
is specifically used to describe industries of a craft nature e.g. basket weaving, carving and
pottery. This type of home–based business is not difficult to start as it requires little capital to
purchase tools and employs family members. These small scale businesses are important to
an economy. They utilize local raw materials such as clay for pottery, wood for carving and
straw for baskets. They earn foreign exchange from selling to tourist at craft markets and
fairs.

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 Linkage Industries

This refers to industries that are connected because they depend on each other to obtain or to
sell raw materials.

Forward Linkage

If the final product or finished products of one industry is used in another industry as its raw
material then a forward linkage occurs. For example, sugar produced from a sugar factory is
used by a bakery to make pastries. Sugar is therefore the end product of one industry and
used as raw material in another.  Other examples include agriculture and canning, lumber and
construction and cattle farming and meat processing.

A backward linkage occurs when the demands of an industry leads to the establishment of
other industries to produce for the needs of this industry. For example, the establishment of
several multinational fast food restaurants in the Caribbean has led to new businesses being
established to supply these restaurants with raw materials (vegetables, ground provisions,
meats and paper based products).

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 Factors that determine Business Location

The location identified for the operation of a business will impact on its success or failure. An
unsuitable location can result in high operational costs or low sales volume. Business owners
must therefore consider the following factors when choosing a location.

The proximity to customers

It is important that business owners give customers easy access to goods and services. 
Shopping plazas in very central locations are very popular locations for businesses. Many
companies now opt for selling online and therefore do not need to be centrally located.

The proximity to raw materials

It is more cost effective for a business that uses raw materials that are heavy and or bulky to
locate close to the source of raw material. For example, bauxite processing plants are located
close to mining areas and sugar factories are located close to sugar fields.

Availability to suitable labour supply

A business will need adequate number of workers who possess the skills suitable for the
creation of its goods and services.

Adequate Infrastructure

Firms will locate where there are adequate supplies of water, lighting, airports, seaports, good
roads, transportation, and communication facilities.

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 Functions of a Small Business

Supplying goods and services that satisfy demand

Identifying a particular need in a market and developing a product that will supply that
market need improves standard of living and increases the overall revenue (GNP) earned in a
country. Small businesses have the advantage over large businesses to identify changing
market trends as they are closer to the customers. They are also able to produce unique
products to suit the needs of each customer.

Creating employment

Small businesses account for a large percentage of total employment in Caribbean

economies.

Making profits

The main purpose of starting and operating a business is to make profits.  Profit makes it
worthwhile for the entrepreneur to continue business. Profit earned may be reinvested to
expand the business.

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 Effects of Growth on a Business

Small businesses that are efficient, creative and are cognizant of changing market trends are
poised for growth.  Growth impacts on the business organizational structure and the business
operations.

The creation of new posts and departments as a result of specialization and expansion will
change the organization’s structure. More workers will also be employed resulting in greater
specialization or division of labour (more workers will mean that tasks can be subdivided into
smaller tasks).

There will also be an increase in the internal communication systems (telephone, mail etc.) to
accommodate this expansion. More factory and office space, equipment and furniture will be
required to facilitate expansion.As the business expands it can take advantage of economies
of scale. Economies of scale refers to the benefits that firms are able to enjoy because of
expansion.

Internal Economies of Scale

This refers to the benefits enjoyed by a firm because of it’s own expansion. These include:

-Technical Economies of Scale - Expanding businesses will need to purchase machinery and
equipment to supply the level of output required. With the use of machines productivity will
rise and the firm will experience technical savings as unit cost of production will decline.

-Marketing Economies – Expanding businesses can take advantage of bulk buying and
receive discounts on raw materials.

-Financial Economies -Larger firms will access loans more easily and at a cheaper interest
rate than small firms since they already have established reputations and adequate collateral.

-Managerial Economies -The employment of experts who will specialize in various

management functions such as marketing, personnel, accounting and production will increase
efficiency and thus output.

External Economies of Scale 

External economies refers to the benefits enjoyed by a business because it is part of a well-
organized industry and not because of its own expansion. Thus any businesses whether large
or small can reap these benefits as long as it is part of an industry enjoying these benefits.
Benefits include; government subsidies offered to particular industries, tax holidays and
reduced duties on items imported.

Diseconomies of Scale
A diseconomy of scale refers to the disadvantages arising from the expansion, such as:

1. High Advertising Cost: This becomes a diseconomy when the percentage increase in a
firm’s advertising cost is much greater than the percentage increase in its revenue.

2.High maintenance cost for machinery and equipment.

3.Increased difficulty in controlling the organization.

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 Economic and Social Implications of Technological Development

Technological development increases the quality and quantity of output. This results in the
lowering of unit cost of production which may be passed on to consumers in the form of
lower prices. When goods and services become more affordable the standard of living of
citizens will rise.

Developing countries employ both labour and capital intensive methods of production.
Labour intensive industries include banana and craft and capital intensive industries include
petroleum and bauxite.

There are three methods of production:

Labour Intensive Production

This method of production utilizes mainly manual labour along with a limited amount of
machinery

Capital Intensive Production

This method of production utilizes mainly machinery along with a limited number of
workers.

Automation

Automation is the further stage of mechanization. This production process is carried out
automatically with little or no human involvement.  For example, the automated teller
machine (ATM).

Computer Aided Design (CAD)

Computer aided design is a computer software used in the product design process to produce
designs with greater accuracy, speed and flexibility.  Its powerful computer graphics allow
product designers to produce 3-dimensional objects, which can be fully examined and tested
before they are implemented.

Advantages include:

-accuracy

-speed

- it is easier to make adjustments since changes are made on the computer

-reduces cost of the design process

Mechanization and automation results in increased output but reduces the amount of labour
required in the production process. This creates unemployment in Caribbean countries.
Workers must be retrained for new developing industries such as information technology.
New industries will absorb the fall out of workers from other industries.

106
Quiz

Question 1

Discuss the importance of one natural resource to the survival, economic growth and
development of your Caribbean country.

Answer

Bauxite is a natural resource found in Guyana and Jamaica. The bauxite industry provides
employment for thousands of workers. It is also a main export product and foreign exchange
earner. The growth of this industry will impact on the growth and development of these
countries.

Question 2

Explain the importance of productivity to a business organization and state two ways by
which productivity can be achieved.

Answer
Productivity is measured by the output of each worker. If workers are very productive, output
will rise and unit cost of production will decline. This will result in higher profit margins for
a business. Workers can be made more productive by training to improve skill and by the
introduction of machinery and equipment to increase output.

Question 3

State one positive and one negative effect of external migration.

Answer
External migration deprives Caribbean countries of nationals who are professionals and those
who posses a high level of skill. However, an advantage of external migration is that foreign
exchange is remitted to Caribbean countries.

Question 4

Discuss the importance of two factors of production to the production process.

Answer
Capital is very important to the production process. Machinery, tools and equipment are
needed for production as they increase the efficiency of workers.

Labour as a factor of production is also important. Labour combines raw materials and
machinery to create goods and services. Methods applied to increase the productivity of
labour will increase output.

Question 5

Differentiate between subsistence and surplus levels of production and explain the
importance of surplus level production to an economy.

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Answer
Subsistence level of production refers to a level of output that is just enough to ensure
survival. However, surplus production refers to a production level that is greater than what is
demanded locally.

Surplus production is important as it allows countries to export and earn foreign exchange.
Foreign exchange earned can be used to import goods and services that are not produced
locally.

Question 6

Give two examples of items made by cottage industries in your country and explain
how these activities contribute to your economy’s growth.

Answer

Handcraft jewellery and T-shirt are popular cottage industry products in my country. Both
these items are sold locally in many popular boutiques and therefore provide income for
producers and retailers. They are also sold to visiting tourists and thus contribute to foreign
exchange earnings. Output from cottage industries contributes to the GDP of the economy
and thus economic growth as these industries expand to meet rising demand.

Question 7

State three factors to be considered when identifying a suitable location to set up a new
business and give a reason for each.

Answer
Proximity to ones customers – A new business should be located where it will be seen by its
most likely customers.

Available supply of labour- A new business will require the best quality workers to ensure
that it makes a positive impact on the market.

Adequate infrastructure- A new business will need to be located in an area that is supported
by infrastructure such as good roads, communication and transportation services so that
customers and suppliers will have easy access.

Question 8

Differentiate between a forward and a backward linkage and give one example of each in
your country.

Answer
A forward linkage refers to the industries that are linked in such a way so that the finished
product of one becomes the raw material of another. For example, lumber from saw mills are
used in the construction of houses and furniture.

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A backward linkage refers to industries that are established to meet the needs of other already
established industries. For example, hotels will backward link to the entertainment and
transportation industries.

Question 9

Explain the importance of mechanization for the growth of small businesses in the Caribbean.

Answer

Mechanization is the use of mainly machinery in a production process. Machinery increases

output. This will mean lower cost of production and therefore higher profits. Small
businesses owners should endeavour to mechanize in order to increase output and be more
competitive with large and medium sized business.

Question 10

What are the social and economic implications of mechanization and automation on
Caribbean countries?

Answer

Mechanization increases the productivity of workers. High productivity as a result of

machinery may cause job losses as fewer workers will be needed to produce the levels of
output required. Automation also results in job losses as this process involves little human
intervention.

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Marketing

Difference between Market and Marketing

A market is any space within which trade takes place between buyers and sellers for a well
defined product. This space can be a produce market, a shop, internationally between
countries or over the internet.

Marketing is all those activities that facilitate trade. These include activities that identify
consumers’ needs such as market research and those activities that satisfy consumers needs
e.g., packaging and distribution. Marketing activities therefore support the marketing of
goods and services.

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 Marketing Activities

Market research – the process of gathering information about potential customers.

Packaging – creating a suitable package for product usage and for advertising

Branding - differentiating the product of a company from other brands and establishing loyal
customers.

Pricing - identifying the right price that will encourage sales

Advertising – methods used such as the media to inform and encourage the purchase of goods
and services

Sales promotion – short-term methods used to encourage consumers to buy during a specified
period

Distribution - methods used to make the product available to consumers. For example
wholesale, retail or internet.

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 The Marketing Mix

The marketing mix also referred to as the 4 Ps of marketing, categorizes all the various
strategies used in the marketing of goods and services.  These categories are product,
promotion, pricing and place.

(1) Product this includes product designing, packaging, labelling and branding.

(2) Promotion advertising, public relations and sales promotions.

(3) Pricing includes various pricing strategies and methods.

(4) Place distribution of products.

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 Market Research

Market research is the gathering, recording and analysing of data to address the marketing
problems of a business. Market research must be specific to the problem of a business. The
marketing problem must therefore be clearly identified so that the appropriate market
research may be conducted.

Types of Market Research

Consumer Research – garners information on consumers’ feelings, thoughts and reactions

towards a company’s good or service.

Product Research – determines customer acceptance of the product.

Distribution Research – used to identify the most suitable channel of distribution for
particular products.

Advertising Research-   Identifies the most suitable media to present the advertising message.

The Marketing Research Process

This consists of five steps:

1. Identifying or defining the problem.

2. Developing information sources.

3. Collecting the information.

4. Analysing the data by using charts and graphs

5. Presenting the findings.

Reasons for Conducting a Market Research

Market research provides managers with current, relevant, accurate and reliable information
concerning competitors, advertising, distribution and potential and loyal customers. This
information assists managers in making decisions about packaging, product design, pricing,
distribution and advertising.

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 Factors that Influence Consumer Behaviour

The following factors will cause consumers to either increase or decrease their demand for a
product.

-The price of a commodity

Consumers can afford to buy more of a good when its price falls and less when its price rises.

-The prices of other goods and services (substitutes and complements)

Substitute products are those that can be used alternatively as they satisfy the same need for a
consumer. For example, a weekly shopper may decide to purchase fish instead of chicken
because the price fish has fallen significantly less than the price of chicken. Therefore either
fish or chicken will be adequate for dinner. If by the next week the price of fish rises and
becomes more expensive than chicken then the consumer will opt for chicken.

Complements are goods that are used together e.g. bread and butter.  If the price of butter
rises then its demand will fall and so will the demand for bread. Conversely if the price of
butter falls, its demand will rise and so too will the demand for bread.

Income of consumers

As income level rises consumers will demand more goods and services

-Taste and Preferences

A change in consumers taste for goods and services will impact their demand.. For example,
changes in fashion will result in a drastic decline in demand for an out going fashion and a
rise in demand for what is trendy.

-Expectations of a future Rise in Price

If consumers expect the price of a commodity to rise in the near future, they will try to
purchase more now, before the price increases.

-Brand Loyalty

Brand loyalty will ensure a continuous demand for a product regardless of changes in its
price or the prices of other goods and services.

-Spending Patterns

Consumer spending surveys compile information on consumer spending patterns based on

income levels. This informs businesses of what goods and services are in demand.

-Changes in the size of the population

A population decline will cause demand to fall in a particular region. One reason for a
population decline in a region is migration.

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 Types of Market Structures

The term market structure refers to the level of competition experienced by businesses in an
industry.  This factor determines the nature of the product sold, how easy it for new
businesses to enter that industry and the amount of information available concerning that
industry.

Monopoly

A monopoly exists when only one supplier has control over an entire market for a particular
good or service. Examples of monopoly in Caribbean countries are a single electricity and
water supplier which may be owned by the government or a private company.. The
monopolist sells a product for which there are no close substitutes. The monopolist controls
the market because it is difficult for other firms to enter such industries. The challenges
include high start-up costs and difficulty in obtaining strategic raw materials or information
regarding business operation. The monopolist has great market power and can therefore set
the price of products sold in the market.

Oligopoly

Oligopoly describes a market structure in which there are few large firms. They offer the
same product for sale and compete aggressively for market dominance. Examples of firms in
this market structure are telecommunications and petroleum companies. Entry into this
industry is also difficult as start-up costs are very high, there is control of strategic raw
material and information is not easily available.

Perfect Competition

This market structure is characterized by many buyers and many sellers of a product. The
product is not unique as it is available from many sellers. Firms in this market structure are
price takers as they cannot sell above the price of their competitors. Firms must accept the
market’s price as there are several competitors. There is perfect knowledge about the business
and there are no barriers of high start-up cost and control of strategic raw materials.

Monopolistic Competition

Similar to perfect competition this market structure involves many sellers. However, this
market structure differs from perfect competition in that each firm sells a branded product.
Firms in this market structure are a monopolist for their brand. There is freedom of entry and
exist into the industry as there are no barriers such as strategic raw material, very high start –
up cost and lack of information.

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 How Price is Determined

The price of a good tells us the value of that product in terms of money. A rational consumer
will try to get the greatest value for money spent on goods and services. He will therefore
weigh and compare the prices of commodities before making a decision to purchase.

Prices in a market economy are determined by the level of demand and the level of supply for
each particular product.

The demand for a particular product is the amount that consumers are willing and able to buy
at a given price. The law of demand states that when prices are high demand will fall and
when prices are low demand rises ceteris paribus (meaning all other things remaining
unchanged.).

The supply of a particular commodity is the amount that firms are willing and able to supply
at a given price. When prices are high supply will rise and when prices are low supply fall.
Suppliers are willing to sell more at higher prices as profits will be high, and unwilling to sell
large quantities when prices fall because of low profit margins.

The equilibrium price in a particular market is the price at which consumers and suppliers are
willing to trade a certain quantity of a commodity. For example, consumers are willing to buy
55 litres of milk at $3 and suppliers are willing to supply 55 litres at that price. If the price
increases to $4 there will be a fall in demand to 30 litres as some consumers are not willing to
buy milk at this price.

Illustrating Price Equilibrium

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The demand and supply curves are drawn from the demand and supply schedules. Price is
measured on the vertical axis and quantity on the horizontal axis.  The demand curve slopes
downwards from left to right and the supply curve slopes upwards from left to right.  The
intersection of the two curves indicates the equilibrium price and quantity.

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 Packaging and Presentation of Goods

Packaging refers to designing and producing the container that holds the product. A good
package must identify, protect and advertise the product. It must also make the product
convenient to use. Therefore products such as toothpaste are best packaged in a tube as it has
to be squeezed out.  Milk must be poured from its container. Egg containers are so shaped to
hold them securely.

A package must also sell the product. It must first attract customer to buy. It must provide
information about the product i.e. ingredients, amount of contents, price, the name and
address of the manufacturer and instructions for usage.   The brand name is also displayed on
the package.

Branding

A brand is any identifiable feature of a product which makes it different from its competitor.
A brand may be a name, term, symbol, design or combination of these. Examples of brand
names include: Avon and Colgate.  A brand symbol e.g.

represents the Nike brand.  A branded product will increase the value of the product in the
eye of the consumer.

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 Copyright, Patent & Trademark

Copyright is a form of intellectual property right that legally protects the creators and
innovators of original works. Copyright protects creators’ expressions such as music,
painting, movie, photograph, writings etc. Individuals who wish to use works that are
copyrighted must request permission from its creator. Copyright law allows creators of
original work to be paid for them. Other forms of intellectual property rights are patents and
trademark.

Patent protects innovation. It excludes others from making and selling that invention for a
number of years.

Trademark legally protects brand names. It gives the seller exclusive rights to use a
particular brand name.

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 Methods of Promoting Sales

Promotion includes all forms of advertising, public relations and sales promotion.

Advertising is the paid presentation of goods or services through the media for the purpose of
encouraging consumer patronage. The media refers to television, radio, magazines,
newspapers, billboards, websites etc.

The Purpose of Advertising

-to attract attention

-to inform customers

-to increase sales

Sales Promotion

Sales promotion is a marketing strategy that is used to induce customers to buy immediately.

Examples of sales promotion methods are:

a. A sale on items.

b. Bargain packs, e.g. ‘two for price of one’.

c. Coupons. These are printed in the daily newspaper or magazines. The holders of coupons

are allowed a discount on the items bought.

d. Games, e.g. guessing riddles

e. Contest. Purchasers may receive a prize if they are the winners of a contest.

f. Trading Stamps. These are given to purchases with each item bought. Booklets filled with

these stamps may be returned by customers for goods, services or money  in exchange.

g. Loss–Leader. A loss-leader is a product that is in high demand and is therefore used to

attract consumers to a business location by cutting its price very low. The business uses a loss
leader to attract large number of persons to its location so that other items will be sold. The
profits lost on this product will be made up on the high sales turnover of the other products
that will be bought along with the loss-leader.

Public Relations

Public relations activities are aimed at creating a favourable impression of a business in the
eyes of the public. Public includes its customers, its suppliers, the government and the

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surrounding community. Public Relations activities include sponsorship of local sporting
events, press conferences, and donations to charity.

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 Techniques of Selling

These are methods used to sell products more effectively by focusing on each customer’s
personal needs. Selling techniques include:

1. Personal Selling

2. After-sale services such as warranty and installation

3. Merchandising

4. Good Customer Relations

Personal Selling

This is the use of sales persons to present and sell goods and services of a firm. Sales persons
promote a firm’s goods directly to a specific consumer. They locate new customers, provide
display services, demonstrate the use of products, deliver goods, collect payments and
provide the firm with feedback

After Sales Services

Customers are entitled to these services once they have made a purchase.  They include
delivery, installation and warranty. These services are free and therefore usually encourage
consumers to buy.

Merchandizing

Merchandizing refers to self service methods of sale. This is used in supermarkets and
department stores. It allows for a better display of goods and creates a more comfortable
shopping environment.

Good Customer Relations

Building good relationships with customers ensures customer satisfaction, repeat customers
and recommendation to new customers. The sales staff must be trained in the principles of
good customer relations. This entails, listening to customers being helpful and polite.

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 Terms of Sale

A business establishment may offer its customers various terms to settle accounts.

Cash

This is preferable by most businesses and therefore customers are encouraged to make cash
payments. They are usually offered a lower payment amount for goods bought for cash.

Credit

Customers are allowed to pay at intervals over a short- term, usually one to three months to
settle outstanding balances.

Hire Purchase

Hire-purchase is a long term payment plan e.g. 24 – 36 months. Interest is charged to the
customer increasing the amount owed.

Cash Discount

A cash discount is a reduction in the price of a good that is paid for immediately or over a
short period of time by a customer. For example, if a an appliance store offers 5% discount
on items bought for cash then 5% of the sale price would be deducted from the actual bill

Trade Discount

A trade discount is the reduction in the price of a good given by a manufacturer or a

wholesaler to a retailer to allow the retailer to make a profit or to encourage bulk buying.
Thus if an appliance manufacturer offers 10% trade discount to retailers then 10% of the
catalogue price or the quoted price would be deducted from the retailers’ actual bill.

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 Consumer Organizations

Consumerism is defined as the education and the protection of consumers to prevent their
exploitation.

Consumer exploitation includes:

-overcharging

-offering poor quality goods and services

-short measurements and weights

Consumerism is practised by various groups in the economy: the government, private

nstitutions, and private firms.

Consumerism practiced by the government

This is done through various government agencies. These include:

1. The Consumer Affairs Commission – This institution was set up to disseminate information
about consumer rights and responsibilities as well as provide consumers with an avenue for
redress if they are exploited.

Consumer Rights

-The right to safety

-The right to be informed

-The right to choose

-The right to be heard

-The right to redress

-The right to consumer education

-The right to a healthy environment

Consumer Responsibility

-The responsibility to beware

-The responsibility to be aware

-The responsibility to think independently

-The responsibility to speak out

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-The responsibility to complain

-The responsibility to be an ethical consumer

-The responsibility to respect the environment and avoid waste, littering and contributing to
pollution.

2. The Fair Trading Commission – This agency was set up to administer the fair trading act.
It is concerned with matters such as; Tied selling (marrying of goods), misleading advertising
(untruths about goods and services presented for sale), untrue sale (an announced sale for
which the price of items remain the same).and the use of market dominance to squeeze firms
out of the industry (For example, large firms may drop the price of their goods so low that
small firms are unable to compete with them.)

3. The Bureau of standards -The bureau carries out regular checks on business enterprises to
ensure that goods and services offered for sale meet the standards stipulated by this
institution.

4. The Ombudsman

The Ombudsman is a government official who protects the rights of citizens who may suffer
any kind of injustice from dealing with a government agency or a government official. For
example, the Ombudsman will investigate the death of a loved one due to the negligence of a
public hospital.

Consumerism practiced by private Institution

-Local consumer groups

-Radio talk show hosts listens to consumers’ complaints

Consumerisms practiced by private firms

-Offering warranty/guarantees on items sold

-Labels carry information on ingredients, nutritional content and health risks that may be
associated with the product.

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 Links in the Distribution Chain

Manufacturers must find the most efficient ways of getting the goods manufactured into the
hands of consumers.

The channels/chains of Distribution

Channels of distribution refer to the means by which commodities reach the hands of
consumers from the plant of manufacturers. This may be done directly from the manufacturer
to the consumer or indirectly through middlemen such as wholesalers and retailers.

Types of Channels

1. Direct Channel – Manufacturer – Consumer

Goods are bought directly from the producer e.g. purchasing furniture from a manufacturer.

2. Indirect channels (a)    Manufacturer – Retailer – Consumer

Goods are bought from a middle man e.g. a retailer. Retailers display goods, sell in small
convenient quantities and offer credit. They therefore aid manufacturers in moving goods
quickly.

3. Indirect channel (b)   Manufacturer –Wholesaler – Retailer – Consumer

The wholesaler is a second muddle man/link on the chain. The wholesaler purchases in bulk
from the manufacturer and stores them in large warehouses. They therefore assists
manufacturers by moving large amounts of items from plant  Retailers purchase goods from
wholesalers and sell them in smaller quantities to consumers.

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 Methods of Retailing

There are several methods by which retailers can offer items for sale.

Community Shops and Convenient Stores

These locations tend to serve a particular community. Opening hours include all weekend
days, holidays and very late in the evenings. Costs for some commodities that are not
government controlled tend to be higher than other types of retail outlets. Community shops
in particular cut and shape products to suit customers and offer credit.

Department Stores

These stores carry a several lines of goods under one roof. A department store may feature a
clothing department, household items, stationery, hardware etc. It provides convenience to
customers who can pick up several items in one place, and allows the businessman the cost
effectiveness of operating several business entities in one location.

Mail Order

Companies that retail through mail order benefit from reduced operational cost of location
and staff. Since display areas are not required only an office and storage facility are necessary
for the operation of this business. Orders are made from catalogues and goods are delivered
by courier or mailed to customers. This saves time and effort of consumers to visit shopping
locations.

E-commerce

Orders are made by customers over the internet from the websites of businesses. Payments
are also made over the internet. Packages are delivered by mail or courier.

Tele- marketing 

Tele –marketers introduce the company’s goods and try to obtain orders via the telephone.

Vending Machines

These self-service machines are placed at various locations by their owners. Customers are
required to place the required funds inside these machines and are then instructed on how to
make their choice. The machine then dispenses the product. This type of business is very cost
effective as owners may only pay a fee for locating the vending machine.

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 Forms of Transportation

Transportation is an integral part of the daily commercial and industrial activities of a

country. Transportation moves raw materials from source to manufacturers and finished
goods to consumers. It also makes possible overseas trade and thus foreign exchange earnings
for an economy.

There are various modes/forms of transportation that can be used to transport goods.
Commodities may be transported by land, air, sea and pipeline. The mode of transportation
will depend on weight and size of the commodities being transported, as well as the urgency
for delivery and the transportation costs.

Modes/Forms of Transportation

-Land

->Road

->Rail

-Air

-Sea

-Pipeline

Land-Road

Types of transportation include trucks, vans, cars etc. It is the most popular mode of transport
as all types of goods can be transported by road. Road transport is affected by bad roads,
traffic congestion and challenging terrain. Lengthy delays can affect perishable goods such as
farm produce being transported from rural areas to cities.

Land-Rail

This is a cheap form of transportation over long distances. Trains are suitable for heavy and
bulky things such as bauxite.  Trains are a very slow mode of transportation.

Air

Types of transportation include cargo planes and helicopters. Because of the high cost
involved with air transportation it is suitable for important documents and expensive items
e.g. jewellery.

Sea

Cargo ships and barges are some of the types of transportation used for transporting goods by
sea.  Goods such as oil, bauxite and cars are transported by sea.

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Pipeline
Pipelines are used to transport commodities such as water and gas. High costs are involved in
laying pipes initially. However overtime it becomes very economical.

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 Problems of Distribution

Distribution locally is challenged by poor road conditions and difficult terrain especially in
the rural areas.  Spoilage of perishable goods is very costly and therefore types of
transportation used must be equipped to carry perishable goods.

Problems encountered in Overseas Transportation

The challenges faced in transporting goods internationally will impact foreign exchange
earnings. These challenges include:

-misdirection of goods – goods mistakenly sent to the wrong destination

-flight delays

-strikes by airport and ship port workers.

-narcotics found in containers

-pilferage- goods stolen in transit.

Measures to mitigate problems of distribution

-careful checks before loading packages for shipment

-contingency plan when strikes occur

-public awareness on the consequences of narcotics found in containers

-making persons responsible for any goods lost in their care

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Quiz

Question 1

Outline three marketing activities.

Answer

Advertising

Advertising is used to make customers aware of goods and services being offered by
suppliers. It usually involves messages that persuade consumers to buy.

Branding

Brands are created to differentiate a product from its competitors. Branded products are
created to develop a loyal following.

Distribution  

Distribution channels move goods from producers to consumers. A business can either sell
directly to consumers or sell goods and services through middlemen such as retailers and
wholesalers.

Question 2

Explain what is meant by the ‘marketing mix.’

Answer

The marketing mix refers to four categories of marketing activities.  These categories are:

-product which includes the product design, package and brand

-place which refers to the distribution channels

-promotion which includes advertising and sales promotional method

-pricing includes various methods used to suit the target market e.g. penetration pricing.

Question 3

Outline two factors that influence consumer behaviour.

Answer

Consumers purchase products to a large extent based on their prices. Consumers seek value
for money and therefore will purchase a substitute for a product if its price increases.

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Consumers taste and preferences will also determine what products they buy. Taste and
preferences will depend on culture, religion and changes in fashion.

Question 4

Differentiate between monopoly and monopolistic competition.

Answer

A market that is controlled by one supplier is a monopoly. The monopolist produces a unique
product for which there are no close substitutes. Monopolistic competition differs from
monopoly as it involves several suppliers in a market of a similar product, but each supplier
sells a particular brand. Therefore, although competition exists each supplier has a monopoly
over his own brand.

Question 5

(a) Define the term ‘demand.’

(b) Define the term ‘supply.’

(c) Explain the role these play in determining price.

Answer

(a) The demand for a particular product is the amount that consumers are willing and able to
buy at a given price.

(b) The supply of a particular commodity is the amount that firms are willing and able to
supply at a given price.

(c) In a market economy the demand and supply of particular commodities determine      their
prices. Consumer will demand increasing amounts at lower prices and decreasing amounts at
higher prices. However, producers are willing to sell more at higher prices and less at lower
market prices. The market price at which both buyers and sellers wish to trade at  is the
market equilibrium price.

Question 6

Differentiate between copyright, patent and trade mark.

Answer

Copyright is a one form of intellectual property right that protects creators’ expressions such
as music, painting, movie, photograph, writings etc.

Patent protects innovation by excluding others from making and selling an invention for a
number of years.

Trademark legally protects brand names by giving the seller exclusive rights to this name.

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Question 7

Outline three methods of sale promotion.

Answer

Loss –Leader: This form of sale promotion is used to attract customer to a location that offers
a product for sale at an extremely low cost. The business will lose profits on this loss-leader
but it is expected that this will be made up on the high sales from other products

Bargain packs offer consumers free products or discounted products if a particular item is
purchased.

Coupons allow discounts to customers on particular items when presented at a particular

business location.

Question 8

Show how two selling techniques can be used to increase sales.

Answer

Good customer relations will encourage customers to purchase a company’s goods and
services and also make recommendations to other customers.  This involves being very
helpful, efficient and polite when dealing with customers.

Offering after sales services will encourage customers to buy and they will not incur this
extra cost after buying the product.  These services include: delivery, installation and
warranty.

Question 9

(a) Outline two ways in which consumers may be exploited.

(b)  Discuss how consumers might seek redress for each way mentioned above.

Answer

(a)Consumers are exploited when they are sold poor quality goods and services. They are
also exploited when they are not given the correct weight or measure for products as
stipulated on the package or what was asked for.

(b)To seek redress consumers may contact the offending firm concerning the complaint and
require compensation. The Fair Trading Commission may be contacted if the offending firm
does not compensate the consumer. Radio talk shows have also been very effective to obtain
redress from offending firms for consumers.

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Question 10

Discuss the importance of transportation to the distribution of goods from manufacturer

through middle men to consumers.

Answer

Transportation is integral to distribution. Transportation must efficiently move goods from

manufacturers through middlemen to consumers. Goods may be transported by road rail, sea
or air. The choice of transportation is determined by the type of product, for example heavy
and bulky products are transported by rail or sea. Perishable products are transported by sea
or by road in a speedy manner.

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Business Finance

Role of Commercial Banks

-Commercial bank accepts money deposits and therefore provides a safe place for saving
money.
-Offering loans and overdraft to persons who need financial assistance.
-Assisting customers to easily make payments through standing orders, current accounts and
debit cards.

Services offered by Commercial banks

-Commercial banks provide advisory services to clients who wish to borrow a loan to make
investments and persons who wish to purchase securities.

-Safety deposit boxes at the bank are used to store safely items that individuals deem as
highly valuable.

-Selling travelers cheques.

-Credit cards allows persons to purchase items by using funds that the bank makes available.
There is a limit to how much the bank makes available to credit card holders.

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 Functions of the Central Bank

-The Central Bank has the sole authority to issue notes and coins.
-The Central Bank is a banker to the government as it keeps the government accounts.
-It manages the national debt.
-It is a banker to all banks as commercial banks must keep an account with the central bank.
-A lender of last resort-The commercial banks and all other financial institutions can count on
the central bank for financial assistance.
-It is a financial agent for government. The government uses the Central Bank to carry out its
economic policies. These policies are known as monetary policies.

Monetary policies
These are policies used to affect the level of the money supply to bring about high
employment, price stability and sustainable economic growth. The money supply is
composed of notes and coins in circulation plus deposits in commercial banks. If this supply
is too high then inflation will occur. If the supply is too low the economy may experience an
economic depression.

Decreasing the money supply

When the money supply is too high monetary policies such as high interest rates, selling
certificates of deposits and treasury bills and increasing the cash reserve ratio are used to
discourage borrowing and spending.

Increasing the money supply

To increase the money supply the opposite must be done. Monetary policies such as low
interest rates, buying securities from other financial institutions and decreasing the cash
reserve ratio are used to encourage borrowing and spending. When interest rates are lowered
citizens will borrow funds and reduce savings to purchase assets and consumption items. This
will increase the money supply in the economy.  The government may wish to increase the
money supply to boost an economy when there is an economic decline. As the money supply
rises demand for goods and services will rise resulting in the expansion of the business sector
and the level of employment.  

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 Relationship between the Central Bank and Commercial Banks

The Central Bank is the head of the financial system. All financial institutions including
commercial banks are regulated and monitored by the Central Bank.

All commercial banks must keep an account with the Central Bank. These balances are used
for cheque clearing purposes between banks.  Payments for cheques between banks are set
off at the Central Bank’s clearing house. The Central Bank can also demand commercial
banks to deposit a certain percentage of their total deposits with the central bank in order to
control the money supply.

The Central Bank is a lender of last resort and will aid commercial banks when needed. The
Central Bank dictates the interest rate that commercial banks can offer by setting the bank
rate. This is the interest rate set by the Central Bank and the rate at which commercial banks
and the Central Bank do business, e.g. loans offered by the Central Bank to commercial bank.

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 Strategies to Manage Personal Income

Subsequent to the deduction of taxes and other statutory payments the income earner must
manage his money to maximize its use. He must exercise and develop habits of careful
spending and saving techniques.  A good money manager will budget.

A budget outlines how much of an individual’s income is to be spent on his various expenses;
it disciples an individual to live within the constraints of his personal income. The process of
preparing a budget involves the record keeping of past expenditures, and making decision
based on these about future expenditures. Priorities must be set to meet basic needs and a
systematic plan for savings to achieve future goals.

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 Sources of Short & Long Term Financing

Short-term capital may be accessed through the money market. Institutions in the money
market include commercial banks, merchant banks, credit unions and discount houses.
Borrowers are required to repay within a short-term e.g. 1 to 5 years.

Long –term capital may be accessed through building societies, the stock exchange, unit trust
companies and development banks. Borrowers are given a much longer repayment periods
e.g. up to 20 years.

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 Savings and Investments

Savings is defined as money set aside or not spent from one’s personal income. Money saved
is most effective in an interest bearing facility such as a commercial bank to keep up with
inflation which reduces the value of money over time. Other forms of savings include, the
credit union and partner (meeting turn, sou sou, box hand).

Investment is defined as methods of increasing wealth.  It differs from savings as it involves

risks. Earning from capital invested is usually amuch higher than interest earned on savings.
Forms of investments include: unit trust companies, the stock exchange and starting a
business.

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 Stock Market

The stock market facilitates the trading of stocks/shares between buyers and sellers. The
Stock Exchange is the governing body that overseas and regulates the activities of the stock
market. Companies that wish to obtain capital to expand may offer shares for sale on the
stock market. It is therefore essential to the expansion of businesses in an economy. It
provides a form of investment for persons who are very speculative and will buy stocks for
resale at higher anticipated prices.

Types of speculators/stock market investors

Bears
These are speculators who sell securities because they expect the price to fall soon. A bear
market is a stock market that is slow moving i.e. investors are not keen on buying stocks.

Bulls
These are speculators who buy securities because they think the price will rise soon. A bull
market that is very active with high interest in the buying and selling shares.

Stags

Stags are short term speculators. They are also known as day traders. They carefully watch
the movement of stock prices and buy stocks with the intention of quick resale for profits.

Cross List

Cross listing occurs a company lists shares on more than one stock exchange. It not only lists
stocks for sale on the exchange in the country which it operates but also on other exchanges.

Stock Broker

This is someone who is authorized to buy and sell shares. Persons wishing to buy or sell
shares must contact a stock broker who will buy or sell shares on their behalf.

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Quiz

Question 1
Explain the importance of two functions of the commercial bank to business.

Answer
The commercial banks offer loans and overdrafts to the business sector. Loans are required
for start-up capital and for business expansion. Overdrafts assist business to bridge finance so
that liquidity may be maintained to continue operation.

Commercial banks also provide a safe place for business to keep money. A business only
needs to keep enough cash on location that is required for its daily operations.

Question 2
Explain the benefits of two services of commercial banks to customers.

Answer
It sells travelers cheques to customers who are travelling overseas. Traveler’s cheques are a
safe way of traveling with funds overseas. They give financial advice to customers. This
advice will help customers to make informed decisions concerning investment.

Question 3
Outline two functions of the central bank.

Answer
The Central Bank is a banker to other banks. All commercial banks must keep an account
with the Central Bank. These balances are used for cheque clearing purposes between banks.
The Central Bank can also demand commercial banks to deposit a certain percentage of their
total deposits with the central bank in order to control the money supply.

The Central Bank is responsible for designing printing and issuing the country’s currency. It
has the sole authority to issue notes and coins. Any other forms of printing money is
counterfeit money and illegal.

Question 4
Explain how government is able to control inflation through the Central Bank.

Answer
The government can control inflation through the Central Bank. When the money supply is
too high monetary policies such as high interest rates, selling certificates of deposits and
treasury bills and increasing the cash reserve ratio are used to discourage borrowing and
spending.

Question 5
Explain the term ‘money management.’

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Answer
Money management refers to methods used to efficiently manage ones income. Preparing a
budget will ensure that an individual lives within his means and save to achieve future goals.

Question 6
Give two reasons for drafting a budget.

Answer
A budget is outlines how much of an individuals personal income is to be allotted to various
living expenditures. It provides a record of past expenditures so that the individual can
analyze his expenditures and make more efficient spending decisions. It ensures that
priorities are taken care of and that a system for savings can be developed to meet future
goals.

Question 7
Distinguish between long and short-term financing.

Answer
Short-term financing involves loans that require repayment up to five years. Short-term loans
can be accessed through commercial and merchant banks and credit unions. Long-term
financing involves loans that allow a longer payment period. Building societies and
development banks require repayment of to 20 years.

Question 8
Distinguish between savings and investment.

Answer
Savings is defined as money set aside or not spent from ones personal income. However,
investment is defined as methods of increasing wealth. It differs from savings as it involves
risks. Examples of investments include, starting a business and purchasing shares.

Question 9
Discuss the importance of the stock market to an economy.
Answer
The stock market provides a means of financing for firms. Firms that need capital to expand
may offer shares for sale. The stock market also provides an opportunity for investment.
Individuals who buy shares may resell them when the stock prices rise.

Question 10
Differentiate between two type of investors on the stock market.

Answer
Bears are speculators who sell securities because they expect the price to fall soon. Bears
wish to prevent losses by selling their shares before prices fall. However, bulls are
speculators who buy securities because they think the price will rise soon. They purchase
shares as they expect to make profits as soon as stock prices increase.

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Role of Government in an Economy

Responsibilities of a Government in an Economy

Governments are appointed by citizens to manage the affairs of their country. Their
responsibilities include:

-Ensuring the security of a state- Government must maintain law and order internally. This
is realized through legislation, the court of justice and the police force. Externally the armed
forces protect citizens against external threats.

-Protection and general welfare of citizens   - Government is responsible for the general
health and education of citizens. Welfare programmes must be provided for those who are
very poor and vulnerable.

-Management of the economy – Governments are appointed by citizens to efficiently

manage the economy to bring about growth and development. This includes: encouraging
local and foreign investment, controlling inflation, maintaining the foreign reserve (NIR),
curbing balance of payments deficits and achieving high levels of employment.

-Protecting the environment – Sustaining the environment is important to the well-being of

citizens. Ways of protecting the environment include: legislation to prevent further
degradation, zoning to protect wildlife areas from disruption by development of factories,
shopping and residential areas and taxation to reduce the level of pollution by firms.

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 Ways in which Businesses Protect the Environment

1. Business owners must adhere to the various legislation set out by government and reduce
pollution in rivers, seas and the atmosphere.

2. Establish business in the zones legally allocated to reduce the impact of noise and air
pollution in residential areas.

3. Being part or initiating environmental projects such as beach clean-up and planting trees.

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 Ways By which Government Regulates Business Activities

Consumers must be protected from business owners who are eager to sell without taking into
consideration the well-being of customers.  Consumers must be protected from overcharging,
poor quality goods and services and short measurements and weights.

Consumers are protected by legislation delegated to various government agencies. These

agencies include:

1. The Consumer Affairs Commission- aids consumers with redress

2. The Fair Trading Commission- investigates cases of tied selling and misleading
advertising.

3. The Bureau of standards – set standards for goods and services to be sold on the market.

4. The Ombudsman- investigates injustices suffered by citizens from dealing with a

government agency or official.

Consumer Protection Laws

-The Food and drugs Act

-The Standards Act

-The public Health Act

-The weights and measures Act

-The processed food Act

-The hire purchase Act

Hire Purchase Law 

Buyers and sellers must sign the hire purchase contract. The seller must state the cash price,
down payment and monthly instalments and total to be paid. Goods cannot be repossessed by
the seller once the buyer pays up to three quarters of the hire purchase price.

Price controls

Price controls are levied on certain good and services to prevent suppliers from increasing
prices. For example basic food items such as corn meal, flour, rice and sugar.

Zoning Laws

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These laws protect the environment by identifying certain wildlife areas that should not be
disrupted by development. Therefore, areas are designated for factories, shopping centres and
residential, away from protected wildlife.

Taxation

Firms that pollute the atmosphere, rivers and seas are charged a tax for the harm caused to the
environment. This forces firms to find methods to reduce pollution to avoid this penalty.

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 Purpose of Taxation

Taxes are mainly used to finance the expenses incurred by government to manage an
economy. These expenses include: health care, education, garbage collection and operating
government business entities. Taxation is also used by government for several other purposes.

a. To reduce pollution by taxing offending firms

b. To discourage unhealthy lifestyle e.g. a tax on cigarettes

c. To protect local and infant industries by taxing imports

d. To achieve greater equality of wealth and income.  Revenue from taxation is used to help
the very poor e.g. providing food stamps.

e. To improve the balance of payments (BOP) by increasing the duties charged on imported
goods.

f. To control spending in an economy thus reduce inflation

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 Direct and Indirect Taxes

Direct taxes are paid by individuals directly from income earned or on the value assets owned
to the income tax department.

Types of Direct Taxes

Income Tax – This is a tax on earned income- individuals pay a percentage of their income.

Corporate Tax

This is a tax on the profits of companies

  Capital Gains Tax

This is a tax on the proceeds resulting from the sale of assets, e.g. houses, land etc.

Capital Transfer and Estate Duties

This is a tax on the transfer of property (gifts) and on legacies (death duties)

Other Direct Taxes

These include: stamp duties, motor vehicle duties land taxes, etc.

Indirect taxes are paid to the income tax department through the suppliers of goods and
services. These taxes are levied on consumption and therefore are paid by individuals when
purchasing commodities.

Value Added Tax (Ad Valorem Tax)

This is the tax levied on goods as each stage of production. This tax generally is known as a
General Consumption Tax (G.C.T.).

Purchase Tax

This tax is placed on specific goods at retail outlets. These include gasoline, tobacco, rum etc.

Excise Duties

A tax placed on goods manufactured within a country. This tax is paid by the manufacturer of
the product.

Customs Duties

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This is a tax on imports i.e. goods entering the country.

Regressive, Progressive and Proportional taxation

Progressive Taxation
A progressive tax system levies a higher percentage of tax on high income earners compared
to lower income earners. This ensures that higher income earners pay a larger proportion of
their income than lower income earners.

Regressive Taxes
A regressive tax system levies a smaller percentage of tax on higher income earners
compared to lower income earners. This results in higher income earners paying a smaller
proportion of their income in taxes than lower income earners. For example, a purchase tax of
10% charged on a commodity which values $100 is bought by a high income earner who
receives $10,000 weekly and also by low income earner who receives $1000 weekly.  Both
income earners will pay $10.00 in taxes. This $10 represents a much higher percentage of the
lower income earner’s pay which is .01% than the higher income earner which is only .001%
of his income

Proportional Taxation

Under this system all taxpayers pays the same proportion of their income in taxes.  The same
percentage tax is levied on both high and low income earners.  Therefore if the percentage tax
charged is 10% of income then each person will pay that proportion of their income.

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 Government Assistance Offered to Businesses

The survival and growth of the business sector will reduce unemployment, increase GDP or
National Income and foreign exchange earnings. This sector must therefore be support and
encouraged by government.

Financing

Government assists local businesses by providing loans at low interest rates.

Protecting local industries

Custom duties charged on imported goods to protect local producers

Tax concessions

Reduced tax rates or tax holidays offered to industries will encourage production.

Subsidies

The cost of production is subsidised to reduce this cost to producers. For example, a subsidy
offered on fertilizer to farmers.

Promotion

Local and international trade shows as well as general advertisements promoting business
locally and overseas, for example, advertisements encouraging tourist to visit the region.

Training 

Government agencies set up to provide technical and managerial training.

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 Social Services Provided by Governments

These services are provided by government to ensure the well-being of all citizens.

Education

An effective national education plan will ensure that the innate skills, talents and abilities of
individuals are harnessed and developed to their fullest potential. High levels of literacy and
numeracy will increase productivity.

Health

The economic development of any nation is dependent upon its population being physically
and mentally healthy.  For someone to be productive he or she must be in good health.

Roads and Transportation

Proper Infrastructure such as roads, railways, sea and airports coupled with an efficient
transportation system are important to a country’s economic activities.  Roads and
transportation facilitate trade of goods and services.

National Insurance Scheme

National Insurance Schemes protect the elderly and other categories of vulnerable persons
within a society. The elderly have contributed to the development of a nation and must be
adequately provided for when they no longer a part of the labour force.

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Quiz

Question 1

(a) Identify two responsibilities of government to an economy.

(b) Show how the government of your country carries out these two responsibilities.

Answer

(a) Protection and general welfare of citizens, and protecting the environment.

(b) The government of my country protects vulnerable citizens through welfare programms.
These include food stamps and cash grants.

The government of my country protects the environment by legislation to prevent degradation

of wetlands and the extinction of certain species.

Question 2

Give two reasons why government should be the chief guardians of the environment.

Answer

For the well-being of citizens; health issues can be a consequence of pollution. This is very
costly for the economy.

Eco-tourism is a market niche that can earn foreign exchange for an economy.

Question 3

Discuss two consequences of unregulated business activity in an economy.

Answer

If businesses are not regulated by government agencies then consumers may receive poor
quality goods and services.  Acceptable standards are outlined by government agencies which
business must abide by.

Businesses may also overcharge for goods such as basic food items. If basic food items are
unaffordable to the very poor and vulnerable, the consequence might be malnutrition.

Question 4

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List two consumer protection laws.

Answer

The Standards Act and The weights and measures Act.

Question 5

Identify two purposes of taxation and discuss the importance of each.

Answer

Taxation may be used to discourage behaviour. Taxing firms that pollute the atmosphere,
rivers and seas will reduce pollution. Also taxing the consumption of harmful goods such as
cigarettes will reduce its consumption.

Taxation can also redistribute income by providing welfare programs and cash grants to the
very poor and vulnerable in the society.

Question 6

Differentiate between direct and indirect taxes and give two examples of each.

Answer

Direct taxes are paid by individuals directly from income earned or on the value of assets
owned to the income tax department. Examples of direct taxes are: income tax, corporate tax
and capital gains tax. Indirect taxes differ from direct taxes as they are paid to the income tax
department through the suppliers of goods and services. These taxes are levied on
consumption and therefore are paid by individuals when purchasing commodities. Examples
of indirect taxes include: value added tax, purchase tax and excise and custom duties tax.

Question 7

Distinguish between progressive and regressive taxation.

Answer
A progressive tax system levies a higher percentage of tax on high income earners compared
to lower income earners. This ensures that higher income earners pay a larger proportion of
their income in taxes than lower income earners.   However, a regressive tax system allows
higher income earners to pay a smaller proportion of their income compared to low income
earners who pay a higher proportion of their income in taxes.

Question 8

The regressive tax system is unfair and places a greater burden on the lower income earners.
Discuss.

Answer

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An examples of a regressive tax is a value added tax where each persons pays a fixed
percentage on the cost of a good or service. Therefore, if $10 is the tax amount to be paid for
a particular item charged, a high income earner who receives $1000 will pay 1% of his
income in taxes while another income earner who receives $100 will pay 10% of his income
in taxes.  The regressive tax system is unfair as low income earners will pay a higher
proportion of their income in taxes than a high income earner.

Question 9

Outline two ways in which governments provide assistance for businesses.

Answer

Governments assist small businesses with soft loans. They provide loans at low interest rates
through financial institutions and government agencies.

Governments also provide information, training and advice through various agencies for
small      business.

Question 10

Discuss the importance of the provision of one social service by a government.

Answer

Education is a very important social service. High levels of literacy, numeracy, and skills will
increase productivity. A highly skilled workforce is also attractive to international investors
who seek new locations to expand their businesses.

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Social Accounting and Global Trade

Factors that determine a Country’s Standard of Living

The standard of living is defined as the level of wealth experienced by a county which is
indicated by the average disposable income of the population, ownership of capital
equipment, the level of research and access to modern technology and the quality and
quantity goods and services enjoyed by citizens.

Level of goods and services available: goods and services are needed to satisfy the needs and
wants of a society.

Average disposable income: per capita GNP reveals the average amount of earnings of each
person in an economy.

Ownership of capital equipment: Capital goods/investment goods are used to create consumer
goods and services locally and for export.

Research and technology leads to innovation and increases production.

Whereas the standard of living is measured by physical quantity, a country’s quality of life is
determined by the quality of goods and services enjoyed by citizens. These include: safety
(low crime rates), good diet and nutrition, environmental quality, quality of heath and
educational facilities, life expectancy, rate of infant mortality and the access to public utilities
such as water.

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 National Income

The national income of a country is the total income earned by that country from the
production of goods and the provision of services in a given year after deducting
depreciation. It therefore measures the level of economic activity of a country within a year.
Note depreciation of assets is taken into account when measuring national income.

Gross Domestic Product (GDP)

GDP is the total money value of all output produced within a country over a year.  The word
‘domestic’ refers to income earned from local production only.

Gross National Product (GNP)

GNP is the total money value of all output produced over one year, both within a country and
from its overseas investments.

Therefore GNP = GDP + overseas earnings by nationals

Net National Product (NNP) or National Income (NI)

NB:  The definition for national income includes adjustments for depreciation.

National Income (NI) = GNP- depreciation

Since GNP figures do not accurately measure the standard of living, the following indices
may be used.

Per capita GNP

This is calculated by dividing a country’s GNP by its total population. That is,

GNP     

Total population

Thus if a country’s GNP is $40,000,000 and its total population is 5,000, its per capita GNP
would be $8,000.

40,000,000   = 8,000

5000

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Thus each citizen enjoys on an average $8,000 worth of goods and services.

Economic Growth and Development

Economic growth is the expansion of national income.  The rate of expansion is usually
measured from one year to the next. Economic growth can be achieved if countries increase
their capacity to produce.

Economic Development is sustained economic growth accompanied by policies that bring

about structural changes such as increase in exportation, decrease in importation, lesser
dependence on foreign aid and important infrastructural development. These changes will
allow for higher levels of national income.

Investment in education is important for a country’s economic growth and development. 

Education increases productivity as individuals who are trained and knowledgeable will be
more efficient. Education is the process of imparting knowledge, skills, beliefs and cultures to
empower and influence behaviour.

The long-term returns to investments in human capital will reduce poverty.

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 International Trade

It is an advantage for countries to be self-sufficient, but there are reasons why trade must take
place between nations.

Reasons for International Trade

(a) Lack of certain natural resources to produce essential goods. Oil which is important to
economic life must be imported into countries that do not posses that natural resource.

(b)Lack of capital, technology and specialist labour to manufacture certain goods on a large
scale. For example, Caribbean countries import machinery equipment and vehicle.

(c)Differences in climatic conditions, e.g. many tropical countries import grapes and
strawberries as these produce need cool climates to survive.

(d)Differences in the cost of production between countries.  This reason is based on the
principle of comparative advantage which states that benefits will be gained from trade if
countries produce goods in which they have a relative advantage.  Therefore, if two countries
both produce cars and coffee but each is more efficient at producing or produces either at a
lower opportunity cost either car or coffee, then trade can take place. The country that is more
efficient at producing coffee should put all its resources into coffee and import cars from the
other country that is efficient in producing cars.

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 Balance of Trade & Balance of Payment

A countries balance of payments account records all the flow of money between residents of
that country and the rest of the world.  A country’s balance of payments thus shows the
difference between the receipt for goods and services exported and payments made for goods
and services imported and movements of capital in and out of the account.   The two main
parts of the balance of payments accounts are the current account and the capital account.

The current account records payments for imports and exports of goods and services. The
balance of trade or visible balance records imports and exports of physical goods only.  The
current balance includes both the balance of trade and net invisible trade balance.  A negative
balance is a deficit balance and a positive balance is a surplus balance.  In the table below
there is a balance of trade deficit for 2001 (-800) and in 2002 (-1000). There is a current
account surplus of US$200MN in 2001 but a deficit of US$300MN in 2002.

Example BOP for Country X (US$MN)

Balance of Trade/Visible balance = Export ($) – Imports ($)

Invisible balance = Net transportation +net interest & profits + net government

Net figures are arrived at by subtracting payment from the receipt for each service. For
example, subtracting the out flow of money spent by locals on trips overseas from payments
received from visiting tourist, will give a net figure for tourism.

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Current Balance = visible balance + invisible balance

The capital account

The capital account or financial account shows the flows of capital between countries i.e.
Flows of capital into a country and flows of capital leaving a country.

The Balance of Payments Accounts must balance

The sum of the current account and the capital account must be zero. A firm’s balance sheet
shows its financial position after one year of trading. The balance of payment similarly shows
the countries financial position on a yearly basis. Similar to a firm’s balance sheet the balance
of payments account must balance, since a debit or a credit balance must be covered in some
way.

Credit items are- Inflows /receipts

Debit items are- outflows /payments

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 Balance of Payment Problems

If a country continues to experience deficits in its visible and or invisible balances it will
affect its level economic activity. Deficits mean there is not enough money to purchase the
goods and services required by citizens.

Methods of Correcting Balance of Payment Problems

1. Tariffs (taxes on imports)

Taxes increase the cost of items imported and therefore will discourage imports. This may
encourage the purchase of cheaper local imports.

2. Import licences

Only holders of this licence can import particular goods and services.  Government can
restrict the importation of certain goods and services e.g. those that compete with local goods.

3. Quotas

Restrictions on the quantity of a type of commodity to be imported.

4. Total ban of certain commodities.

5. Exchange Control

This is various forms of control by government on the purchase and sale of foreign currencies
by citizens and foreigners. Example: limiting the amount of foreign exchange that residents
can leave the country with, banning the use of foreign currencies locally and having a fixed
exchange rate.

6. Encouraging export

Incentives given to exporters.

7. Devaluation – the price of foreign currency is increased against the local currency thus
discouraging its purchase.

8. Special Drawing Rights -Drawing on the resources of the International monetary fund

9. Importing on credit – Purchasing on credit delays payments in the short term

10. Accepting gifts from other countries – This reduces the need to spend foreign exchange.

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11. Borrowing from other countries – This represents inflows into the Balance of payments
accounts

Quiz

Question1

Explain the difference between a country’s ‘Gross National Product’ and ‘National Income’
statistics.

Answer

GDP is the total money value of all output produced within a country over a year.  National
Income figures includes (GDP + income from nationals abroad) – Depreciation. Therefore
net National product/NI adds overseas earnings to earnings from local production. 
Depreciation is subtracted to give final National Income figures.

Question 2

What is the standard of living?

Answer

The standard of living a country is determined by level of goods and services available,
ownership of capital equipment and access to modern technology.

Question 3

Outline two methods that can be used to achieve economic growth.

Answer 

Economic growth is the expansion of national income. Two methods to increase the
productivity of industrial and commercial activities include: a training of human resources
and the introduction of technology.

Question 4                                       
                     

Differentiate between the balance of trade and the balance of payments

Answer

The balance of trade is the difference between earnings from exports and payments for
imports. The balance of payments is a summation of the balance of trade, net invisible
earnings and capital flows.

Question 5
163
The balance of payments always balances. Explain this statement.

Answer

The balance of payments account is governed by accounting principles. For every debit entry
there is a corresponding credit entry. Outflows are matched by inflows. The summation of the
current and capital account is zero.

Question 6

State three measures used to correct balance of payments problems.

Answer

Balance of payment problems may be corrected by tariffs, quotas and export incentives to
encourage local production for export.

Question 7

Explain the term ‘per capita GNP.’

Answer

Per Capita GNP is the value of a country’s output from local production divided by its
population. Per capita GNP figures give an idea of the average income enjoyed by each
individual in a country.

Question 8

Distinguish between visible and invisible trade.

Answer

Visible trade is the export and import of physical goods and services for example, sugar,
coffee and bauxite. Invisible trade refers to the trade of services for example, tourism and
shipping.

Question 9

Explain two reasons why countries engage in international trade.

Answer

Countries engage in international trade to obtain goods that they lack the necessary raw
materials to produce.

Countries also engage in trade to obtain goods for which they do not have a comparative
advantage.

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Question 10

Differentiate between ‘economic growth’ and ‘economic development.’

Answer

Economic growth refers to an increase in national income and economic development is

sustained growth that is accompanied by policies established to ensure continuous growth.
These include an increase in exportation, decrease in importation, lesser dependence on
foreign aid and important infrastructural development.

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Regional and Global Business Environment

Economic Institutions and Systems

Caribbean Community Common Market (CARICOM)

A common market is an association of countries that have joined together to bring about the
harmonious development, continuous economic expansion and increased stability of the
countries involved. CARICOM was formed in July 1973 when Barbados, Trinidad and
Tobago, Jamaica and Guyana signed the treaty of Chaguaramas.  Since then the following
Caribbean countries have joined: Antigua and Barbuda, Belize, Dominica, Barbados,
Suriname, Grenada, Montserrat, St. Kitts & Nevis, St. Lucia, St. Vincent and the Grenadines
and Bahamas and Haiti.

Associate members of CARICOM are Anguilla, Bermuda, British Virgin Island and Turk and
Caicos.

Objectives of CARICOM

-Improved standard of living.

-Expansion of trade.

-Joint negotiations internationally.

-Co-ordination on foreign and economic policies.

-Full employment of labour and other factors of production.

-Economic integration.

Caribbean Single Market and Economy (CSME)

The CSME was established in 2006. It seeks to transform the common market into a single
market and economy. It was established to deepen the integration among Caribbean states
and to respond effectively to the challenges and opportunities globally.

Objectives of CSME:

-Deepening economic integration.

-Free trade of services.

-Free movement of capital, labour and the freedom to establish business enterprises anywhere
within CARICOM states.

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-Widening of membership.

-A common currency/single currency.

Caribbean Development Bank

The CDB is a regional financial institution. It finances regional projects that contribute to the
economic growth and development of the region. Sectors financed by the CDB includes:
infrastructure, tourism, mining and refining, agriculture, agriculture, manufacturing, heath
and education.

The objectives of the Caribbean Development Bank are:

-Supporting regional and local financial institutions

-Assisting borrowing member countries to optimize the use of their resources

-To mobilize financial resources regionally and internationally

-To support capital markets

-Stimulating growth

-Supporting business activities

The World Bank

The aim of the World Bank is to reduce poverty worldwide.  It therefore assists developing
countries by providing loans for projects such as housing, infrastructure and industry. The
World Bank provides long term loans for developmental purposes. It is used interchangeably
with the International Bank for Reconstruction and Development (IBRD).  However, the
IBRD is only one of the five agencies of the World Bank.

The five agencies of the World Bank are:

-International Bank for Reconstruction and Development (IBRD)

-International Development Association (IDA)

-International Finance Corporation

-Multilateral Investment Guarantee Agency (MIGA)

-International Centre for Settlement of Investment Disputes (ICSID)

Inter-American Development Bank (IADB)

The IADB was established in 1959 for the purpose of assisting Latin American and
Caribbean countries. It offers loans, lines of credit and technical assistance to member

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governments for social and economic development. Areas of assistance include:  agriculture,
industry, mining health, tourism and infrastructure.

The Organization of Eastern Caribbean States (OECS)

OECS was formed in 1981 for the purpose of promoting cooperation among member states. 
These countries include Montserrat, Anguilla, Antigua, Dominica, Grenada, St. Kitts and
Nevis, St. Lucia and St. Vincent, Anguilla and the British Virgin Islands are associate
members.

Eastern Caribbean Common Market (ECCM)

The objectives: Creating a single financial and economic space

Organization of American States (OAS)

The OAS was established for the main purpose of increasing interdependence and solidarity,
and promoting regional co-operation and the peaceful settlement of disputes among the
member countries.  These countries include: North and South America, Canada and the
Caribbean.

Economic Commission for Latin American Countries (ECLAC)

The ELAC was established in 1948 for the main purpose of integrating Latin American
countries for their development.  Caribbean countries were later included in the ELAC. Their
objectives include:

-Guaranteeing equal rights and opportunities

-Economic integration of Latin American and Caribbean countries.

-Reinforcing economic ties among countries of Latin America and other nations of the world

-Economic development of Latin America

Association of Caribbean States (ACS)

The ACS was established in 1994 to promote cooperation among Caribbean countries. Its
objectives include:

-The strengthening of regional cooperation and integration

-Preserving the environmental integrity of the Caribbean Sea

-Promoting the sustainable development of the Caribbean

The European Union (EU)

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The European Union is an economic and political partnership between its 27 member
countries. It is a single market economy with the euro as its common currency.

These countries include: Spain, Luxemburg, Britain, France Portugal, Italy, Greece, Belgium,
Germany, Denmark, Finland, Sweden and Switzerland.

Their objectives include:

-Free movement of people services and capital

-Removal of customs duties and quotas among members

-Establishment of common policies for agriculture and transport

-Establishment of a common tariff and common policies towards other countries

-Economic cooperation

-Promoting equal rights

-Fighting climate change

World Trade Organization (WTO)

The WTO is an international organization that monitors and regulates trade among the
nations of the world based on trade agreements by member states. The WTO replaces the
General Agreement of Tariffs and Trade (GATT).

Their main aim is to encourage the free flow of trade among nations.

Their objectives include:

-discouraging unfair trading practices e.g. export subsidies and selling products below cost to
gain market share

-settling disputes among members

-environmental protection

-monitoring and reviewing the trade policies

-reducing trade

Caribbean Basin Initiative (CBI)

CBI allows certain Caribbean and Central American products duty free entry into the United
States. Products exported include chemicals, manufactured goods, fresh fruits and vegetables.

Oil Producing Exporting Countries   (OPEC)

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OPEC is an organization of 12 oil –exporting countries. This organization was established in
1960 for the purpose of unifying the petroleum policies of member countries.

Objectives include:

-Regular supply of petroleum products on the world market

-A steady income for producers

In 1976 OPEC established a special fund to provide financial assistance to developing

countries.

OPEC countries: Kuwait, Venezuela, Iran, Iraq, Angola, Saudi Arabia, Algeria, Ecuador,
Libya, Nigeria, Qatar, United Arab Emirates

CARIBCAN

The agreement allows preferential duty free access to the Canadian market for almost all
imports from Commonwealth Caribbean Countries.

Its main objectives are:

-to enhance the Commonwealth Caribbean’s existing trade

-improve economic development prospects of the region

-promote new investment opportunities

-encourage economic integration and cooperation within the region

-to encourage long term investments through development projects.

North American Free Trade Agreements NAFTA

This agreement allows duty free entry of goods among Canada, United States and Mexico.

Free Trade Area of the Americas (FTAA)

The FTAA is an expansion of NAFTA.  It is an organization of 34 countries of the Americas

including North and South America, Canada and the Caribbean except for Cuba.  It s
objectives include economic prosperity, free market of goods and services and democracy.

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 Economic and Social Problems in the Caribbean

Unemployment

Globalization has contributed significantly to unemployment in the Caribbean. With the

removal trade barriers, some industries have not been able to compete globally. The lack
adequate skills that are required for the new industrial paradigm for example, information
technology skills have also contributed to the problem of unemployment.

A high level of unemployment among the young people of the Caribbean may   results in
various social problems, as survival may depend on illegal activities.

Reasons for unemployment

-firms e.g. multinationals closing down

-lack of investment to create new businesses

-lack of skills training

Population density

Population density Refers to the average number of people living on every square kilo meter
in a country. The formula used for calculating population density is:

Density of population
=  Total population

Area (sq. km.)

Very high population densities can indicate overpopulation.  This occurs when the facilities
in a location, are not able to serve the number of persons in that location. This will cause
heavy competition for jobs, schools, health facilities etc.

Migration

Caribbean people migrate to first world countries in search of opportunities such as

employment and education.  When skilled and professional workers migrate, Caribbean
countries may experience shortages in critical areas such as health care. Loss of skilled
workers from industry will also retard growth and development. Social problems may arise

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when children are left in the care of grandparents and other relatives who have challenges to
discipline them.

Debt burden

Many Caribbean countries have high debt- to-GDP ratios.  This ratio is the   amount of
national debt of a country as a percentage of its Gross Domestic Product.  High debt-to-GDP
can stifle an economy as a large portion of its GDP is consumed in debt payment and very
little is left for investment in the economy. A very low debt- to- GDP ratio is desirable for
economic growth and development.

Sourcing Capital and raw materials

While the Caribbean might be rich in certain natural resources such as bauxite, oil and gold
the region lacks other very important resources such as capital and entrepreneurial skills.
Capital is important as it increases production through the use of machinery, equipment and
money invested. The spirit of entrepreneurship is necessary for the creation of new business
ideas and entrepreneurship skills are important for the successful running of the businesses.

Economic dualism in the region

Economic dualism occurs in countries where there exist two opposite economic sectors. One
sector is characterized by development, capital intensive industries, large scale farming and
technological advancement, and the other sector is characterized by subsistence farming,
labour intensive industries, handicraft industries and simple trading means of survival.

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 Possible solutions to Economic and Social Problems

Access to Foreign Direct Investment (FDI)

Foreign Direct Investments refers to capital investments into factories, machinery and
equipment by a foreign company or an individual. FDI is important for the development of
Caribbean economies as they are challenged by their high debt- to-GDP ratios and increased
global competition for export earnings. Attracting foreign direct investment is a way for
Caribbean countries to obtain capital for growth and development.

Benefits of FDI include:

-Employment for nationals

-Increased access to global markets

-Introduction of advanced technologies and processes

-Improvement in human resource skills

Development of human resource

Investment in human resources is imperative for Caribbean economies to compete globally. 

Improving the value of human resources through education and training will increase the
productive capacity of Caribbean countries.

Development of manufacturing sector

The manufacturing sector creates value added products which increases export earnings for
Caribbean economies. Developing the manufacturing sector therefore will impact on the
potential economic growth of a country.

Methods of developing the manufacturing sector:

-Encouraging Foreign Direct Investment

-Retooling

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-Research and development

-Technological advancement

Quiz

Question 1

List three objectives of CARICOM.

Answer

Three objectives of CARICOM are:

-joint negotiations internationally

-economic integration of the region

-improved standard of living for the region

Question 2

Explain how the CSME differs from CARICOM.

Answer

This transforms the common market into a single market and economy. It establishes a single
currency for the region and the free movement of human and capital resources throughout the
region.

Question 3

Outline the main objective of the World Bank.

Answer

The World Bank provides long-term loan for developmental projects. Its main aim is the
reduction of poverty in worldwide. Loans are provided for purposes such as infrastructure
and industry.

Question 4

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(a) Identify two economic problems that affect Caribbean countries.

(b) Discuss one method that can be used to solve one of these problems.

Answer

(a) Two economic problems that affect Caribbean countries are unemployment and high debt
burdens.

(b)  High debt burdens can be reduced by methods that increase foreign exchange earnings
and reduce dependency on imports. Support for local industries in the form of tax holidays,
duty free imports and low interest loans will reduce cost of production and thus encourage
output. Lower market prices will encourage local consumption and increase the
competitiveness of products on the international market.

Question 5

Explain the role of the Caribbean Development bank.

Answer

The Caribbean Development bank was set up to finances regional projects that contribute to
the economic growth and development of the region. For example: providing funds for roads,
education and business development.

Question 6

Give two methods that can be used to increase FDI.

Answer

Caribbean government can encourage FDI incentives with methods such as tax holidays,
affordable operating costs (labour and utility) and availability of human and natural
resources.

Question 7

What is the role of the WTO?

Answer

The WTO was set up to monitor and regulate trade among nations of the world based on their
collective agreements.

Question 8

List three international trade agreements.

Answer

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Three international trade agreements are:

-The Caribbean Basin Initiative (CBI)

-CARIBCAN

-North American Free Trade agreement (NAFTA)

Question 9

Outline one trade agreement that involve Caribbean countries and explain the long term
benefits of these agreements to the Caribbean.

Answer

CARIBCAN gives Caribbean countries duty free access to markets in Canada. It ensures a
steady market for Caribbean products and thus long-term development of local industries.
Other benefits include: employment and linkage industries.

Question 10

Write brief notes on ECLAC.

Answer

The ELAC is an organization of Latin American and Caribbean countries. They aim to
reinforce economic ties among the countries of Latin America and the Caribbean.

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