csec principles of business study guide

8/9/2019 Csec Principles of Business Study Guide

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for self-study and distance learning

Caribbean Examinations Council®

for CSEC®

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for self-study and distance learning


for CSEC®

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Contents 2

Introduction 3

T

1 The nature of business 5

T2 Internal organisationalenvironment 47

T3 Establishing a business 85

T4 The school-basedassessment 99

T5 Legal aspects of business 123

T6 Production 141

T7 Marketing 185

T8 Business finance 243

T9 The role of government inan economy 251

T10 Social accounting andinternational trade 263

T

11 Regional and global businessenvironment 278

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5

Purpose

The Caribbean Examinations Council (CXC®

), incollaboration with the Commonwealth of Learning(COL), has developed self-study guides for a numberof Caribbean Secondary Education Certificate (CSEC®)and Caribbean Advanced Proficiency Examination(CAPE®) subjects. The main purpose of the guidesis to provide both in-school and out-of-schoolcandidates with resource materials to help themprepare for CXC examinations. Each study guide isstudent-centred and its language is student-friendly.

Course aimsThis course aims to:

1 promote understanding of theories, conceptsand practices that are applicable to theculturally diversified economic environment ofthe Caribbean;

2 provide knowledge of business and of its rolein a rapidly changing Caribbean and globaleconomic environment;

3 provide the opportunity for informed decision-

making through the development of skills incritical thinking, problem-solving, research andcommunication;

4 nurture students’ creative and entrepreneurialabilities to enable them to participate fully in thelocal, regional and global economy;

5 sensitise students to the need for responsiblesocial and ethical behaviour in their pursuit ofbusiness goals;

6 enable students to access and apply appropriatetechnology in pursuing opportunities and solving

problems in business.

Course structureThe course consists of 11 sections based on thePrinciples of Business syllabus. Each sectionaddresses the skills and content of a specificmodule of the syllabus. However, the sequenceof the section does not mirror that of the syllabusmodules since the syllabus modules are not boundby a rigid sequence. The sequence of topics in thiscourse is designed to facilitate study by leading you

through topics in a way that enables you to build onpreviously learned skills.

What resources will you need?

Remember that this study guide will not be all that you need to complete the syllabus and prepare for your examination. You are expected to make use ofthe resources listed at the end of the course book as

well as engage in other wide, general reading, which will improve your general knowledge, vocabularyand structural competence.

You will also need basic study equipment, forexample, paper, pens, pencils and highlighters formarking important parts of the text. A good dictionaryand a thesaurus are also essential to this programme.

Managing your timeRemember to put aside a special time each day forgeneral reading in addition to your study time.

Study guide structure You will be exploring 11 sections in order tocomplete the Principles of Business syllabus. Eachsection starts with the following items:

Section introduction This gives you a briefoverview of the entire section, and places it inthe context of the Principles of Business syllabus.

Objectives These show you the main things thatthe writers want you to learn, and the specificskills that you should have acquired by the endof the section. You should read these carefully toacquaint yourself with what you are meant to belearning.

Topics This lists the topics that are to be coveredin the section.

The topics in each section are structured as follows:

Introduction This places what you are about tostudy in the context of your everyday life andrelates it to what you have done in previoussections.

Contents This is the information that formseach lesson and is meant to guide you to anunderstanding of each concept being taught.Read carefully before you attempt any activitiesthat follow.

Activities Instructions are provided at the startof each activity. Read all instructions carefully

Introduction 3

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before you attempt the activity. Some activitiesrequire you to think about something before youread any further. You should take the necessary

time to do so. The thinking activity is designedto help you focus your thoughts in the rightdirection and facilitate your ability to completethe activities that follow.

Feedback Each activity has feedback that allows you to determine how you have done in theactivity. If you have not completed the activitysuccessfully, you should reread the precedingexamples or information carefully.

Examples These are meant to guide you to anunderstanding of the concept being taught. All

examples should be read carefully before youattempt any activities that follow.

At the end of each section, you must pay specialattention to the following:

End test This comes at the end of each sectionof the study guide and is designed to ensurethat you have acquired those skills identifiedin the objectives. There is a feedback sectionfollowing the test which allows you to measurethe accuracy of your answers, so that you willknow whether or not you have acquired thecompetencies. If there are questions in thetest that you have not answered satisfactorily,ensure that you return to the relevant sectionof the study guide and review those areas until

you are satisfied that you have understood theconcept.

Key points These summarise important conceptsthat you need to remember and pay specialattention to in the future.

AssignmentsCourse assignments are included in order to allow

you to check your progress through the course. Theassignments enable you to determine your areas of

weakness and to check your understanding of theconcepts.

ExaminationsPlease refer to the latest syllabus for guidance onthe structure of the exam, the number of papers, thelength of each paper, what marks are allocated toeach question and the structure of the school-basedassessment.

School-based assessmentThe school-based assessment component of thePrinciples of Business syllabus is a single guidedresearch project for school candidates. Candidatesare required to write a business plan for a specificfunctional area of a business. The project shouldbe based on the theme of establishing a business.Students should apply the knowledge and skillsincorporated in Profile Dimension 2: Production,marketing and finance. The business plan should

be on one of production, marketing or finance.The report should be between 1,000 and 1,200

words (not including appendices).

Private candidates, or those candidates who arenot under the direct supervision of a recognisededucational institution, are required to write Paper03/2 in lieu of the project. Please refer to a copy ofthe latest syllabus for guidance on the structure andlength of this paper.

4 Introduction

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General objectives

On completion of this section, you should:

appreciate the stages in thedevelopment of businessactivities

develop an understandingof the underlying businessprinciples that form the basisfor business decisions.

The nature of business1Welcome to the wonderful and exciting world of business! Anexcellent way to start is by understanding the jargon, or main

words and concepts of the business world. The topics that youlearn in this section will give you a framework or foundationthat you will use for all the other sections. You will be usingthese new words as your own business vocabulary, so studycarefully. It is very important that you understand the topics,because this information is used to make business decisions.

Chapter 1 introduces you to the principles used by businessorganisations to guide their operations. You will learn howhumans conducted business activity long before the ‘invention’of money. We will examine the different types of businesses, as

well as the main types of arrangements that countries use for alltheir business activities. You will also learn about stakeholdersin a business, and the main functions and responsibilities ofbusinesses in a country. On completion of this chapter, youshould have a good understanding of the general features ofbusinesses.

Contents Important business terms and concepts

From barter to the use of money and e-commerce

Types of businesses in the private and public sectors

Forms of business organisation and arrangement

Economic systems

Stakeholders

Responsibilities of a business

Important business terms and conceptsHave you ever tried to learn a new language or dialect? Maybe as achild you played the game of creating your own language. This topicis your introduction to the study of business. It helps you to form yournew business language or vocabulary. Before you can think and act likea businessperson, you must first learn how to use the words that theyuse every day. Let’s get familiar with the words below.

Enterprise

The word enterprise could simply mean ‘a business’. Generally, itis used to describe an undertaking or activity with some degree ofdifficulty or risk. This undertaking has a specific purpose. A businessenterprise has a monetary purpose or goal. Enterprise could alsomean ‘initiative’, which is daring to do something new or different,challenging or risky.

Specific objectives

You should be able to:

explain terms and conceptsrelated to business

describe the transition ofbusiness activity from barterto the use of exchangeinstruments

differentiate among typesof private and public sectorbusiness organisations

distinguish among theeconomic systems

discuss the role of stakeholdersinvolved in business activities

outline the role and functionsof a business.

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Entrepreneurship

Entrepreneurship is the practice of identifying a new innovationor opportunity, organising the financing and other resources, andtaking the risk in the hope of creating wealth. The entrepreneur isthe individual who identifies the opportunity and risks the time andmoney to start to organise this new adventure. You could use theinternet and talk to your parents or guardians to learn about manyinteresting entrepreneurs in your country.

Barter

This means the exchange of goods for other goods. This was the first

type of trade. Did you know that some businesses today still carry outbarter? We will examine barter in the next topic.

Profit

This is the money remaining or left over after the costs of production,distribution and taxes have been paid. It is the financial gain for thebusiness or entrepreneur. It can be represented in the following way:

Profit is the outcome or result when:

Total revenue (TR) is greater than total cost (TC)

which is the same as writing:

TR > TC

Revenue is the money earned from the enterprise or business.

Loss

A loss is the opposite of profit. When the costs of production and otherexpenses are greater than the revenue, this is called ‘making a loss’. Itmeans that the business is not making enough money.

A loss is the outcome or result when:

Total revenue (TR) is less than total cost (TC)

which is the same as writing:TR < TC

Example

‘Tommy has started a small restaurant. This enterprise should be verysuccessful because he is such a great chef!’

E

x a m p l e TR is $600 and TC is $400,

therefore:

TR − TC = profit

$600 − $400 = $200 profit

E x a m p l e TR is $300 and TC is $500,

therefore:

TR − TC = loss

$300 − $500 = ($200) loss

Let’s see whether you understand the concepts ofprofit and loss. Imagine that Peter makes fruit juices in your neighbourhood; below are his costs and revenuesfor September and October in 2010:

September

Total sales revenue is $50,000Total cost for all expenses is $55,000

October

Total sales revenue is $60,000

Total cost for all expenses is $52,000

a In which month did Peter make a profit?

b What was the amount of the profit?

c How much was the amount of the loss?

Activity 1.1

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The nature of business 7

Feedback

If you understood how we calculated the profit and lossin the examples given, this activity should have beeneasy. Your answer should be:

a Peter made a profit in October.

b TR $60,000 − TC $52,000 = $8,000 profit

c TR $50,000 − TC $55,000 = ($5,000) loss

In part (c), the loss is written as a negative value byusing brackets ( ).You could also have used a minus sign to show that it isa negative value.

E x a m p

l e Whenever you purchase a book,

you are purchasing a ‘good’ or aproduct.

E x a m p l e When you pay the dentist for

checking your teeth, you arepaying for a service.

Trade

This means buying and selling. A business will engage in trade in orderto make a profit.

Organisation

This means a group of persons using resources or things that are

arranged in a certain way to carry out specific activities in order toachieve a goal or objective. A business is an organisation. The word‘organisation’ is used for many other institutions, such as churches.

Economy

This is a system that allocates or shares scarce resources by deciding what should be produced, how and for whom. Different countries maymake different decisions about these things, so we would say that theyhave different types of economies.

Producer

This is a person or business that makes or creates goods or services.

Usually, the goal of the producer is to make a profit.

Consumer

This is the person (or group) that buys goods and services to satisfy wants. The goal of a consumer is to maximise satisfaction. Think of thethings that you buy. You are a consumer, and you buy things that give

you satisfaction. What are some of the things that you buy?

Exchange

This is the giving of one thing and the receiving of another. The thingsexchanged are usually of similar value.

GoodsThese are things that are made to be sold, otherwise called products.Goods are used in exchange or trade, along with services. Goods aretangible (can be seen and touched), unlike services.

Services

This means work that is done for another; assistance or benefit given.Services are intangible, unlike goods.

Market

A market is any situation in which buyers and sellers meet or

communicate in order to exchange goods and services. The buyers andsellers do not have to meet face-to-face. Have you been to a producemarket in your country? Well, this is only one example of a market,

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8 Chapter 1

where the buyers and sellers meet face-to-face. Buyers and sellers cancommunicate and do business online or over the phone.

Commodity

This is an item that is traded, usually raw materials such as copper orcoffee.

Capital

This word has different meanings. It can mean the money and otherresources or things that are used to start a business. It can also meanthe money, machines and man-made materials that are used every dayin business.

Labour

This is the physical or mental work of a person. It also means ‘the worker’. Labour is another name for human resource.

Before we examine the final word, let’s carry out a revision activity.How much do you think you remember?

Carefully read each of the following statements orquestions. This is a multiple-choice exercise. You mustselect the best option among (a), (b), (c) and (d) beloweach statement or question.

1 Another word for a business is

a building

b capital

c enterprised economy

2 Persons who own and operate their own businessare called

a executives

b operators

c economisers

d entrepreneurs

3 A person who creates goods and services is called a

a consumerb producer

c businessperson

d trader

4 An intangible benefit is called a

a service

b good

c commodity

d market

5 When coffee is traded between countries it iscalled a

a loss

b profit

c good

d commodity

6 Which of the following words could meanman-made resources?

a labour

b capital

c organisation

d market

Activity 1.2

Feedback

Your answers should be:

1 c 2 d 3 b 4 a 5 d 6 b

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Specialisation

Specialisation of labour refers to the division of a task into a numberof related parts. Adam Smith (1776) noted that the pin-maker,before division of labour, could make perhaps one pin in a day.With division of labour, this same job was divided into 18 distinctoperations, which included one person who drew out the wire,

another who straightened it, a third who cut it, and a fourth whopointed it and so on. Since all of these processes were performed bydistinct hands, there was an increase in output to 48,000 pins in asingle day.

Specialisation is a form of division of labour in which each individualor firm concentrates its productive efforts on a single or limitednumber of activities. Specialisation can:

occur at the product or occupational level, for example, theproduction of cows’ milk;

be a process, for example, the making of butter;

be by firm, for example, Jamaica Cement Limited specialises in theproduction of cement;

be industry-related, for example, it could be confined to the bauxiteindustry;

be regional or international in scope, for example, the Caribbeanarea is known for tourism.

Let us now explore the advantages and disadvantages of division oflabour and specialisation.

Advantages It increases the skills of workers since the same task is repeated and

workers learn from repetition.

It increases productivity. Less time is used to change from oneactivity to another.

The cost of production is reduced since a greater number of itemsare made.

The quality of the product can also improve since workers are moreskilled and the use of machines means that quality control can beobserved.

Less time is spent on training of workers because only a small partof the skill is necessary.

Disadvantages The work is monotonous. The work becomes boring and

tiresome.

The work environment is impersonal since specialisation leads tolarge-scale industries in which workers are no longer close familymembers.

Workers may lose pride in their job since they are not completingthe entire job and, therefore, cannot fully appreciate the making ofthe product.

Some processes require a large amount of capital to purchase the

machinery.

Here is your opportunity to testwhether you understand divisionof labour. List five areas ofspecialisation for conducting the:

a building of a house

b manufacture of a motor car

c production of a movie.

Activity 1.3

Feedback

Your answer could include thefollowing activities:

a The building of a house –architect or draughtsman; mason;plumber; electrician; carpenter.

b The manufacture of a motorcar – designer; engineer;upholsterer; painter; autoelectrician.

c The production of a movie –scriptwriter; set designer; actor;musician; director.

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10 Chapter 1

From barter to the use of money ande-commerceBusiness activities change over time. You must now examine thehistory of business activity in order to understand why changes werenecessary. This topic explains these stages, which started with directsatisfaction or self-sufficiency through to the use of money. You willalso examine why people found it necessary to establish businesses.

You should be able to use the words and terms from the previous topic. Are you ready for our history lesson?

How our ancestors satisfied their needs and wants

Our early ancestors satisfied their primary needs for food, clothing,shelter and protection directly from nature. Food came from animals,trees, the seas and the earth. For example, they hunted animals fortheir meat and skins, which provided food and clothing, respectively.They gathered berries, and scoured the shrubs and grasses for wildpeas and beans. Fishing in rivers and watercourses provided fish andseaweeds.

This activity will help to reinforce your knowledge. The advantages anddisadvantages of the division of labour and specialisation. State whetherthe following statements are true (T) or false (F).

1 Specialisation increases efficiency.

2 Division of labour develops an individual’s creativity.

3 Specialisation can be applied to all productive activities.

4 Cost per unit is reduced with specialisation.

5 Specialisation produces sameness of products.

6 Workers feel alienated from their produce because of division oflabour.

Activity 1.4

Feedback

1 T 3 F 5 T

2 F 4 T 6 T

Feedback

If you listed any item that is used directly from nature without anyprocessing, you are correct. Below is a list of some of these items.

Food such as fruits, peas, beans and berries were obtained from trees. Groundprovisions such as cassava and dasheen were dug out of the earth. Smallanimals, including birds, and produce of animals such as milk and honey, wereobtained from animal life. Fish and seaweeds were sourced from the sea.

Imagine you were living in a primitive society; list five items you would use

as food, and the source for each item.

Activity 1.5

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Feedback

You should list items from the earth,seas, animals and trees. You couldinclude stones, grass, bones andsimilar answers.

Now let us examine how our early ancestors equipped themselves withclothing, shelter, tools and utensils. Clothing was provided from animalskins, for example, wool from sheep. Branches and leaves from trees,and mud and stones from the earth, were used to build huts. Tools and

weapons were made of animal teeth and bones, branches and smallstones. Spears, for example, were made from tree branches. Utensils such

as bowls for storing water were made from clay and stones or providedfrom the cleaned-out insides of seeds such as the coconut. Grass was usedto make baskets. Animal bones, horns and items such as elephant tusks

were used to make eating and drinking utensils. Wood and stones wereused to make firesides for the cooking of food and provision of warmth.

The development of the barter system You have seen that our early ancestors satisfied their needs directlyfrom nature, hardly altering the original state of the goods by cookingor applying any form of processing. Economists refer to this type ofexistence as the direct satisfaction of wants. An economic system where

needs and wants are satisfied directly from nature is referred to byeconomists as a subsistence economy.

A subsistence economy continued for thousands of years, until groupsof hunters and gatherers found it convenient to abandon their nomadic

way of life and settle down on the embankments of rivers, streamsand waterways. Here, they could obtain a steady supply of water;locations such as these provided fertile soils and both plant and animallife could be found in abundance. This act of settling down createdthe conditions for a more orderly and peaceful existence, in whichfamily units could thrive by gathering food, caring for plants that theyfound in the immediate environment and even, through trial and error,

learning to cultivate and tend crops for themselves.

The problem, however, was that no one area provided all the goods tosatisfy the needs of families, who were forced to specialise in whatevercrops were native to the area they inhabited. For instance, a Tainofamily producing corn on the banks of a river in Guyana still relishedthe meat and skins that Kalinago hunters from the interior possessedin large quantities. It will be obvious to you by now that, in time, there

would develop a system whereby tribes would begin to exchange theirgoods for those they were unable to acquire themselves. This system

whereby goods are exchanged for other goods is called bartering.

Limitations of the barter systemWhile bartering solved some problems, there were many drawbacks.For bartering to be successful, one person must have what the otherperson wants and be prepared to exchange. This condition is referredto as a double coincidence of wants. For example, Jim must need thebananas that Tom has, and Tom must need the peas that Jim has. Onlythen is the exchange possible. The process became very complicated

when more than two persons were involved in the exchange, sincepersons would have to keep exchanging items until individual wantsand needs were met.

Another problem was deciding the rate of exchange or the right quantityacceptable in exchange for the other item. For example, how many

From the information you have just read, identify the itemsof nature used by our earlyancestors.

Activity 1.6

From your reading of the above,define the term ‘barter’, giving anexample in your answer.

Activity 1.7

Feedback

If your answer indicates thatbartering is the exchange of goodsand services without the use ofmoney, for example, the exchange

of gold bits for sheepskins, you areindeed correct.

E x a m p l e Bartering

The exchange of fish for greenpeas, or bananas for yams, orpearls for a stone axe.

These exchanges all involve thegiving of one item for another,and money is not used.

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12 Chapter 1

pounds of peas would be acceptable in exchange for a certain quantity ofbananas? For instance, are 10 lbs of peas equal to 2 lbs of bananas?

Another problem was the indivisibility of certain commodities. Onecould not exchange part of a cow for peas, since refrigeration was not

yet invented. It therefore meant that the entire cow had to be tradedas a single item of trade. If the recipient did not require the whole cow,

then a problem of divisibility would arise.

Yet another problem was the store of wealth and store of value. Someitems lost value with the passing of time, while others gained value

with time. For example, perishable goods lost value with the passingof time, whereas precious stones such as gold gained value with time.It became very difficult, therefore, to settle on trading principles andpractices that guaranteed a fair price for goods that were exchanged.

The history of moneyMoney is considered a financial wonder since it solved many of theproblems associated with the barter system. In this section, we willexamine the functions and characteristics of money and show thatits introduction facilitated trade and led to the development of themodern financial system that is in operation today.

Our early ancestors progressed from using peas, stones and shellsto using precious metals for trading. The Egyptians were among thefirst to use metal rings as money. The Lydians introduced coins to theWestern world. Coins were more acceptable since they werehard-wearing, easy to carry and contained valuable metals. These coins

were referred to as commodity money. The value of the coin dependedon the quantity of gold or silver it contained.

Read the following case and identify the problems of

the barter system experienced by Ancient Tim andZion.

Case study

Ancient Tim, who cultivated peas and corn for himselfand his wife, wished to have fish to complement hispeas and corn for dinner. He approached Harry, butHarry had only mutton and did not require peas orcorn. He approached Jane, Frank and Mary, but still was

unsuccessful. After five days, Ancient Tim met Zion,

who had some very large fish. They both had difficultyin deciding how many of Ancient Tim’s peas couldbe exchanged for one of Zion’s large fish. Also, Zionneeded animal bones to make spears for fishing thenext day. He approached Mary, Harry and Jack, but bylate evening he was unable to find a suitable personwith whom to exchange his remaining fish for thebones of animals.

Activity 1.8

Feedback

The problems of Ancient Tim and Zion were derived fromtwo problems associated with bartering:

the need for a double coincidence of wants, that is,Ancient Tim had to find someone who had fish andrequired peas and corn; later, Zion faced the sameproblem when he could not find someone who hadbones and required fish

indivisibility of the commodity, that is, Tim did notwant all the fish Zion had, and, therefore, there was aproblem deciding on the exchange rate of the itemsand their value, especially in light of the fact thatthey were both perishable items.

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This exercise will help you to understand the contribution money hasmade to economic progress.

Indicate which of the following statements are true (T) or false (F).

1 In early civilisation traders used ‘commodity money’.

2 Coins were introduced because they were durable.

3 ‘Commodity money’ was regarded as token money.

4 ‘Representative money’ was accepted because the emperor’s seal andsignature were placed on it.

5 ‘Representative money’ can be exchanged for a commodity.

6 In today’s trading, representative money is used.

Activity 1.9

Feedback

1 T 3 F 5 T

2 T 4 T 6 T

The Chinese introduced paper currency. The Emperor’s seal andsignature were placed on the paper in order to authenticate thecurrency. Paper currency is not intrinsically valuable since the paperonly represents wealth and promises that it would be exchanged at alater date for other commodities. ‘Representative money’, therefore,is accepted in the exchange for goods and services since it has been

authorised by the government.

Features of moneyMoney is any commodity that is accepted as a measure of value and amedium of exchange. To be accepted as money, the commodity must

have the following features:

the commodity must be acceptable – everyone must be willing toaccept it;

it must be relatively scarce. In other words, the item must onlybe available in small quantities. In this way, the value will bemaintained;

the commodity must be capable of being divided easily into smallerfractions;

it must be homogeneous. It must be identical in look, size and weight;

since the item must pass from hand to hand, it must be durable;

it must be portable. One must be able to carry it around easily.

Today, paper money (‘fiat money’) and coins are the most commonforms of money.

Functions of moneyNow let us consider the functions of money. In order for money toeffectively solve the problems of the barter system it must serve as a:

medium of exchange – everyone must be willing to accept it in theexchange for goods and services;

standard of value – the worth of the goods or service is measuredin money, which sets the price of the item. For instance, a ring witha price of $60.00 is worth twice as much as a ring for $30.00;

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store of value – money can be saved and used in the future. Itmakes saving possible and hence brings about investment;

means of deferred payment – money is used to pay for goodsbought on credit;

facilitator of the price mechanism – it is the price one is willing topay to satisfy effective demand.

This activity will help you to recall the functions of money. Match thestatements on the left with the functions listed on the right.

1 Trade is facilitated because money is acceptable. means of deferred payment

2 A pair of shoes for $10 is worth four times as much as a cap.This function deals with the price of items.

medium of exchange

3 It can be accumulated and used to purchase a car in three years’ time.

price mechanism

4 My stereo system can be purchased on hire purchase. store of value

5 It makes easy the exchange of currency for purchasing goodsand services.

standard of value

Activity 1.10

Feedback

1 medium of exchange 3 store of value 5 price mechanism

2 standard of value 4 means of deferred payment

Mr Chung Foo in China is sellingtwo cars to Mr Davis in Grenada.The cars will be shipped off to

Grenada as soon as Mr Davisaccepts the bill of exchangethat Mr Chung Foo has sent. Thecars will take 27 days to reachGrenada, and the bill of exchangeis due to be paid in 28 days.

E x a m p l e

Bills of exchangeThe previous section described how and why people developed a‘money economy’. In the business world today, people use money as

well as different forms of ‘near money’, that is, other acceptable forms ofpayment. One example is a cheque, which is a signed order for paymentfrom a person’s bank account. Another example is a bill of exchange.

It is possible that bills of exchange were being used before paper money was created. A bill of exchange is a written order from one person toanother. The person who sends it is instructing the person receiving it

to pay a specific sum of money at a specific time in the future. Theperson who is sending it is called the ‘drawer’, the person receiving it iscalled the ‘drawee’ (who owes money to the drawer). The drawer maygive instructions for the money to be paid to another person.

Bills of exchange are usually used by persons who are selling goods toothers in another country.

Credit cards At this stage all business students should understand the concept of credit,that is, making payment after a person has received the item or benefit

being purchased. A credit card is a card given by a financial institution toits customer which authorises that customer to purchase ‘on credit’. Thiscard enables the electronic transfer of information and money.

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Electronic transferPreviously we used the word ‘electronic’. One meaning of the wordelectronic is ‘via the use of a computer network’. This should help youto understand how money is transferred electronically.

Electronic funds transfer is a very fast and safe way of making paymentsduring trade. The payment can be transferred electronically from one bankaccount to another. A cardholder can insert his or her automatic bankingcard (also called a debit card) into a machine which is electronically linkedto his or her bank accounts. By keying in a special code, the cardholderauthorises the transfer of money from his or her bank account.

Telebanking and e-commerceE-commerce refers to any business transaction that is done throughthe internet. This may include the transfer of money as well asinformation. Many Caribbean businesses are able to compete withother businesses all over the world by engaging in e-commerce. Theyadvertise, purchase materials and sell their products over the internet.

Telebanking is a system for conducting banking transactions overtelephone lines.

Customer Bob presents his credit card to the grocery store instead ofmaking a cash payment. The grocery store’s cashier accepts the credit cardand inserts it in a machine which is electronically linked to the financialinstitution. It will reveal whether the card is valid and the amount of moneyis authorised. If the transaction receives an approval message, the machineprints copies of a receipt. The cashier gives Bob one copy of the receipt. Thecashier will send another copy of the receipt to Bob’s financial institution,which will make the necessary payment. Bob will then have a specifiedperiod of time to pay the financial institution.

E x a m p l e

This activity will help you to understand when thedifferent instruments of exchange are used. Answer thefollowing questions by indicating which of the instrumentswould be most appropriate: a bill of exchange, credit cardor electronic transfer, or telebanking.

1 Marie lives in Jamaica. She is buying an expensivemachine from Japan. She has to show that she iswilling to pay before the machine leaves Japan.However, she does not want to release the actualmoney from her bank account until she is sure

that the machine has arrived in Jamaica. Whichinstrument should she use?

2 Paul wants to sell his guava jam in England. Itis produced in Guyana, but English buyers wantto buy many cases in England. Paul can send the jams on a plane, but he wants payment first.What is the fastest payment method for Paul’scustomers?

3 Oliver wants to travel to another part of thecountry to purchase some supplies. It will costa lot of money, but Oliver does not want to travelwith a large amount of cash. What would be

a more convenient payment method forOliver?

Activity 1.11

In order to receive a credit card, persons must first qualify, that is,satisfy the financial institution that they will make the necessarypayments when they are due. If the payments are not paid on time,then the cardholder must pay interest charges.

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Reasons for establishing a business A business organisation is formed when a person or group of personsuses resources to provide goods or services with the view of making aprofit. There may be other goals, such as maximising sales, the growth ofthe firm’s assets or simply satisfying the owners’ desire to be in business. 1

The profit-making motive distinguishes businesses from non-profit-making organisations. The purpose of business is to make aprofit, whereas the purpose of non-profit-making organisations ishumanitarian, that is, providing services or goods for the benefit ofmankind. Non-profit-making organisations may, at the end of theirfinancial year, generate a surplus.

Examples of non-profit-making organisations are social clubs andorganisations that provide support for disadvantaged persons insociety, for example, a home for abused women.

Classify each of the following businesses as eitherprofit-making or non-profit-making. The first one hasbeen done for you.

Profit-makingbusiness Non-profit-makingorganisation

Tom repairs shoes for people in the community. ✔

Rodney sells food items to the neighbourhood.

Mary prepares meals for the homeless.

John provides a taxi service.

A rehabilitation center for alcoholics and drug addicts.

UN home for abused women.

Mrs Jones charges $150 for Principles of Business tutorials.

The farmer sells his produce in the wholesale market.

The neighbourhood community group sells sweets and cakes in order tooffset the expenses of the group.

The farmers’ cooperative sells seedlings to the farmers in theneighbourhood.

Activity 1.12

Feedback

1 Bill of exchange 2 Telebanking or electronic transfer 3 Credit card

1 Layyne, W. Armanand , Samuel, Wendell and Anthony Kenny, CXC Principles of Business,

Cambridge University Press, 1994.

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Feedback

Profit-making

business

Non-profit-making

organisation

Tom repairs shoes for people in the community. ✔

Rodney sells food items to the neighbourhood. ✔

Mary prepares meals for the homeless. ✔

John provides a taxi service. ✔

A rehabilitation center for alcoholics and drug addicts. ✔

UN home for abused women. ✔

Mrs Jones charges $150.00 for Principles of Business tutorials. ✔

The farmer sells his produce in the wholesale market. ✔

The neighbourhood community group sells sweets and cakes in order tooffset the expenses of the group.

✔

The farmers’ cooperative sells seedlings to the farmers in theneighbourhood.

✔

The main functions of a businessThe functions are listed below.

The production of goods or services. Goods are tangible itemsused to satisfy human wants and needs, whereas services areintangibles that are used to satisfy human wants and needs.

The creation of jobs. In order to produce goods or services, labourmust be used. The amount of labour used will depend on whetherthe firm is labour-intensive or capital-intensive. Labour-intensivefirms employ a large number of people, whereas capital-intensivefirms use a lot of machinery.

In the case of private investments, the aim is to make a profit. Allbusinesses aim to make the highest possible returns on investmentso that the shareholders (owners) of the business receive anadequate dividend.

The aim of non-profit-making organisations is to fulfill a need inthe provision of goods or services that will be of benefit to thecommunity. In society, there are those who are unable to satisfytheir basic needs through their own efforts, and others who mayneed financial or social support.

To contribute to economic growth. Economic growth is theincrease in the total real output of goods and services in aneconomy over time. Business adds to economic growth. Each newbusiness adds to output, and creates growth and employment.

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Types of businesses in the private andpublic sectorsIn mixed economies like ours in the English-speaking Caribbean,businesses are classified into two types, depending on ownership.These are the private sector and the public sector. These two groups

have some differences, and knowing these differences will help you tounderstand the decisions of different businesspersons.

Private sectorThe private sector is that part of the economy that is funded by privateindividuals and is therefore owned and controlled by private firms.The objective of the private sector is to make a profit. The privatesector includes the self-employed, the manufacturing industries, firmsin the construction industry, joint ventures, multinational firms andcooperatives. In most countries, it also includes ‘hawkers’, that is, those

who are engaged in purchasing items from abroad to be sold locally on

the streets or in homes.Firms in the private sector have the following common features:

the aim is to make a profit;

profits are shared among shareholders or those who invest in thecompany;

the business is funded by the owners;

there is little or no government intervention or control;

the business is funded by private individuals;

owners are free to make their own decisions as long as thesedecisions are not contrary to the laws of the land.

Public sectorThe public sector is that part of the economy that is financed by thegovernment through taxpayers, and is controlled and operated by thegovernment or its agents. The surplus or profit is used for the benefitof the entire population. The public sector includes government-controlled companies, companies incorporated by the governmentthrough legislation, companies that are essential for the developmentof the economy, and companies in which the private sector has littleor no interest until they are sufficiently developed or if profits are to

be made in the future, for example, communication companies orproduction of water and energy.

Firms in the public sector share the following features. This sector:

aims to provide a service at the lowest possible price;

uses profits to improve the efficiency of the firm or to benefit allcitizens;

usually participates in ventures that provide basic necessities;

is funded by the government through taxation;

is driven by the need to provide goods and services to thepopulation so as to improve their quality of life.

E x a m p l e Public sector organisation

Organisations in the public sectorare government-controlledagencies, such as those that supplywater and sewerage services, orthose in communication, such asThe Telecommunication Servicesof Trinidad and Tobago (TSTT),the Jamaica TelecommunicationServices and governmentagencies such as the Ministries

of Health, Education and SocialServices.

E x a m p l e Firms in the private sector

One-owner businesses, such asthe small shop on the street,family-owned businesses, a largebusiness with several investors,or multinational companies.

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This activity will help you to identify businesses in theprivate sector and the public sector. The knowledgewill assist you in understanding why businessesoperate in a particular manner. Read the instructionsof the various businesses and indicate whether thesebusinesses are in the private or public sector.

1 Jim maintains his family by using his private vehiclefor hire.

2 Mary goes to Florida every three months to shop. Onher return she sells her goods in the vendors’ mall.

3 State Co. is a company of which the governmenthas 60 per cent ownership; it supplies water to anAsian country.

4 Agri. Co., an agricultural company that grants loans

to farmers, is controlled by the state.5 Power Supply Inc. is a joint venture firm which

supplies energy to the country.

6 The postal agency is a statutory body that iscontrolled by an government-appointed boardof directors.

7 A public transport company that is funded by

taxpayers. 8 A group of designers and seamstresses formed

themselves into a company, Jamaica Garments,which supplies uniforms and a variety of cloths forthe government.

9 A multinational firm that has been servingfood and related beverages to the Caribbeanarea.

10 Samson’s Housing Development builds homesthroughout the Caribbean and Latin American

countries.

Activity 1.13

Feedback

1 private 3 public 5 private 7 public 9 private

2 private 4 public 6 public 8 private 10 private

Forms of business organisation and arrangement

The sole trader/sole proprietorship

Definition

A sole trader is a person who has total ownership of and responsibilityfor managing his or her business. The owner is the boss. As owner,there is no obligation to share the profits with others and all the debtsincurred by the business are the responsibility of the owner alone.This responsibility for the debts may even extend to personal assets. Inother words, one may lose one’s home or personal car in the settlement

of the debt of the business.

Characteristics of a sole trader

He or she manages the business, but may have the services of familyand friends.

He or she enjoys all the profit and bears all the risks.

Capital is limited since the savings of the owner fund thebusiness.

He or she has personal contact with the client.

He or she performs a large variety of tasks related to the operationsof the business.

This type of business is not incorporated (not given a separateidentity) and is therefore easy to set up.

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This type of business can easily be found in the service industry.Sole traders are employed as decorators, electricians, plumbers,hairdressers, small building contractors and small farmers, or forprofessional services, such as doctors, lawyers and surveyors.

Formation

There are no legal formalities involved in setting up business as a soletrader, except that a trade name must be registered and some tradersmust acquire special licenses. For example, the sale of alcohol requiresa license from the local magistrate, and the sale of food items requiresprior approval from the local health authority.

Legally, the business and its sole proprietor are inseparable, andtherefore the owner is responsible for all debts, including taxes(income tax) and National Insurance contributions as a self-employedperson.

Management and advantages of the sole trader

The sole trader manages the business personally, and this has manyadvantages, as listed below.

Ease of formation: As mentioned before, there are no legalrequirements, except in a minority of trades.

Independence: Many persons find personal satisfaction in workingfor themselves.

Simple organisational structure: The organisational structure issimple, usually the owner and one or two employees, who may berelatives or friends.

Personal control: The proprietor has personal control, with noobligation to consult, thus decision-making is quick.

Personal service: The proprietor knows his staff and customersindividually and can vary the hours of work to suit the customers.

Secrecy : There is no need to disclose business affairs, except tothe tax authorities and to creditors when seeking loans. Minimumaccounting is necessary only to satisfy the income tax office.

Personal commitment to succeed: When working for oneself,there is a greater commitment to succeed.

Disadvantages of the sole trader

Limited source of finance: The sole proprietor’s capital dependson personal savings or profits, and on loans made on the security

of personal property. As a result, the amount of capital available isoften not enough for much expansion.

Lack of specialised staff : The owner may not be in a position toemploy specialised staff, and therefore the business may not expandas quickly.

Over-reliance upon one’s personal health and vigour: Illness orold age can cause difficulties. There is therefore a lack of securityfor family, employees and clients.

Unlimited liability : If the business fails, even the personalpossessions of the owner will be sold in order to pay off the debts ofthe business (if necessary).

Lack of leisure time: The sole trader has to work long hours andmay not be able to take a vacation.

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Lack of technology : The sole proprietor can seldom afford theheavy capital outlay required, and therefore may not be able tobenefit from economies of scale.

Partnerships

Definition A partnership is an association of 2 to 20 partners operatinga business for the common goal of making a profit. The owners sharethe responsibility for the running of the business and any subsequentprofit or losses that may be generated. Partnerships are not legalentities in their own right. Consequently, a partnership cannot sueor be sued in its own name; instead, each of the partners has to benamed.

There are two kinds: ordinary partnerships and limited partnerships.In ordinary partnerships, losses are shared equally, or as agreed bypartners. In the limited partnership, limited partners will lose only

what they have invested. If the business goes bankrupt, however,unlimited partners may lose even their personal assets.

Characteristics of partnerships

The minimum number of members is 2 and the maximum is20 members, except in the case of banking, in which the minimumnumber is 10. Among professions such as stockbrokers, stockjobbers,lawyers and accountants, membership is unlimited since thePartnership Act prevents professionals from forming companies.

There are two main types of partners: limited and general/ordinarypartners. In the ordinary partnership, each partner may take anactive role in the management of the business. Each partner acts asan agent of the partnership, and therefore the action of one partneris binding on all partners.

There must be at least one ordinary partner in the limitedpartnership. The ordinary partner’s liability for debts andobligations is unlimited.

The limited partner cannot take part in management. He or shehas no power to bind the firm.

Profits are shared equally or as stated in the Partnership Deed.

Capital is provided by the partners as agreed.

The retirement or death of one partner may require the

reorganisation or dissolution of the partnership.

Formation

When a number of persons want to form a partnership, a writtenagreement should be drawn up. This is called the Partnership Deed.The written agreement, although not necessary, helps to settledisputes. In the absence of such agreements, the partnership will begoverned by the Partnership Act.

The Partnership Deed or Articles of the Partnership sets out in writingthe terms of the partnership. The agreement should deal with:

the name of the partners;

the nature of the business and the date of its commencement;

the amount of capital put into the business by each partner;

E x a m p l e Partnership

Partnerships are popular amongprofessions like stockbrokersand stockjobbers, accountants,solicitors, and among specialistslike decorators.

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arrangements for division of profits or apportionment of losses;

the amount of interest (if any) to be allowed on the capital;

the amount each partner is allowed to withdraw each year inanticipation of profit, and the amount of interest, if any, to becharged on these drawings;

the role of each partner;

salaries, if any, to be paid to certain partners for the performance ofspecial duties;

voting rights;

methods of determining goodwill;

arbitration procedures if partners cannot reach an agreement;

the duration of the partnership and method of dissolving thepartnership.

In the absence of a Deed, the Partnership Act is enforced. It states that:

profits and losses are shared equally;

no salaries are paid to partners; no interest is paid on capital.

Management

The ordinary partners manage partnerships. Payment for specialisedskills must be included in the Partnership Deed.

Advantages of partnerships

More capital: More capital can be obtained than as a sole trader.

Specialisation: Partners can specialise and manage different sectionsof the business according to their ability, experience and training.

This allows for greater efficiency and therefore lower costs. Simple organisation: Like the sole trader, a partnership is easy to

form, with little or no legal formalities.

Continuity : There is more continuity than in the case of thesole trader. The business may not be dissolved at the death orbankruptcy of a partner.

Limited liability : It is possible to have limited liability by being alimited partner.

Workload shared: The workload is shared among partners, thuspartners may be able to take vacations and enjoy more leisure time.

Decision-making: There is better decision-making due to shared

knowledge and expertise.

Disadvantages of partnerships

Unlimited liability : All ordinary partners are fully liable.

Binding: All partners stand to lose if one partner makes a badmistake.

Limited capital: Capital is still limited and may be insufficient forfull expansion.

Disagreement: There can be difficulty of management whenpartners disagree.

Concentrated risk : The risk is still concentrated on a few.

Decision-making: Decision-making may take longer and argumentsmay arise.

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Capital: Capital is limited to 20 partners.

Continuity : Continuity of the partnership may be broken on thedeath of a partner or if someone leaves.

In the absence of a partnership agreement, profits are shared,irrespective of effort.

Cooperatives

Definition

Cooperatives are businesses that are formed and operated by theirmembers. The cooperative society must be registered. Shares are soldto its constituents, that is, the community that the society is serving.The principles that govern cooperatives are listed below.

There is democratic control, that is, one person one vote.

Membership is open to constituents.

There is limited interest on capital investments.

The surpluses of cooperative societies are distributed according tothe shares/purchases of the members.

Characteristics

Cooperatives share the characteristics listed below.

They are voluntary, non-profit-making organisations engaged inretail or other financial activities.

They are managed and controlled by their members.

The members are also the clients.

Members have a common bond, for example, all are teachers orpublic servants or belong to a particular community.

There is the pooling of capital among the membership.

Types of cooperatives

There are at least four types of cooperatives as listed below.

Financial cooperatives, for example, credit unions.

Agricultural cooperatives, for example, the farmers’ cooperatives which supply agricultural products and equipment to farmers.

Consumer cooperatives involved in the retail trade, for example, theEl Dorado Cooperative, which retails foodstuff.

Service cooperatives such as the St Christopher’s Taxi

Cooperatives.

Advantages of cooperatives

There are many advantages to be gained from being a member of acooperative. Listed below are some of these advantages.

Members pool their resources.

Members are the owners.

There is shared decision-making.

All profits are shared among the membership.

The community bond is strengthened.

Products are much lower in price since administrative expenses arelower.

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Disadvantages of cooperatives

The following can be considered disadvantages of cooperatives.

The membership may not have the expertise necessary to build theorganisation.

Decision-making is slow and therefore clients may lose out on

opportunities.

This activity will help reinforce your knowledge in defining and stating theformation and management of sole traders, partnerships and cooperatives.Fill in the blanks in the table.

Form of business Definition Formation Management

Sole trader

PartnershipCooperative

Activity 1.14

Feedback


Sole trader – A person who owns,controls, manages and

has total responsibility for his or her business.

– No legal requirements,however, trade names

must be registered.

– Managed by the owner.

Partnership – An association of 2 to20 partners operating abusiness for the common

goal of making a profit.

– No formal requirement,but it is best if aPartnership Deed isdrawn up.

– Management by ordinary partners.

Cooperative – A business that is formedby individuals with acommon bond.

– Each member purchases shares to form thecapital base of thebusiness.

– Governed bymembership through amanagement board.

– Board of managementelected annually by the

membership.

List the advantages and disadvantages of sole proprietorships,partnerships, and cooperatives.

Activity 1.15

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Feedback

Form of business Advantages Disadvantages

Sole trader 1 Easy to form.2 The owner has great flexibility.

3 There is a simple organisation structure –usually the owner and one or twoworkers.

4 Personal service is provided to clients.5 The owner has personal incentive to

succeed since all profits belong to him orher.

6 There is no need to disclose profits.

1 Source of finance is limited.2 Lack of specialised staff.

3 Over-reliance on one’s personal health andvigour.4 The owner has unlimited liability.5 The owner has limited leisure time.6 Simple technology is used because of the

lack of finance.

Partnerships 1 More capital is obtained.2 Specialisation is possible since partners

may bring their expertise to the business.3 There is continuity of the business.

4 Some partners enjoy limited liability.5 The workload can be shared.6 Partners share in the decision-making.

1 Ordinary partners have unlimited liability.2 The actions of ordinary partners are binding

on the partnership.3 Capital is still limited.

4 Conflict may occur among the partners.5 Decision-making takes longer.6 In the absence of a partnership agreement

profits are shared equally, irrespective ofefforts.

Cooperatives 1 Members pool their resources.2 Members are the owners.3 Decision-making is shared.4 All surpluses are shared among the

membership.5 The community is strengthened socially.6 Members have a say in all decision-

making.7 Products are lower in price since

administrative expenses are lower.

1 The membership may not have the expertisenecessary to build the organisation.

2 Decision-making is slow.

Companies

Definition

A company is a business entity that has been incorporated, that is, thecompany has a separate legal identity from that of the owner(s). Thisseparate identity means that the company can enter into contracts, makeany legal claims and face any legal claims that are made against it.21

There are two types of limited liability companies:

private limited companies;

public limited companies.

These are explained below.

Formation

Certain legal requirements must be met before a company cancommence trading. Certain documents must be submitted to theRegistrar of Companies. These documents are outlined below.

2 Barratt, Michael and Mottershead, Andy, Business Studies, Pearson Education Ltd,

England, 2000, p.29.

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A private company must submit to the Registrar of Companies:

the Memorandum of Association;

the Articles of Association;

Statement of Authorised, Registered or Nominal Capital.

A public company must submit to the Registrar of Companies:

the Memorandum of Association;

the Articles of Association;

Statement of Authorised, Registered or Nominal Capital;

the Prospectus.

Memorandum of Association

This governs the company’s relationship with the outside world.It contains:

the company’s name, which must contain the word ‘Limited’;

the address of the company’s registered office;

the objectives of the company;

the statement that the liability of the shareholders is limited;

the authorised share capital and the types of shares to be issued.

Articles of Association

These control the internal running of the company. They cover suchareas as:

procedures for calling an annual general meeting;

rights and obligations of the directors;

procedures governing the election of directors;

statement concerning the borrowing power of the company;

procedures dealing with the payment of dividends.

Statements of Authorised, Registered or Nominal Capital

This is the amount stated in the Memorandum of Association, which is the maximum amount which the company is authorisedto raise.

Prospectus

This is an invitation to the public to buy shares in a public limitedcompany. It contains detailed information to enable investors to

estimate its prospects. It is important that the public should not bemisled.

Private limited companies

Definition

A private limited company is an incorporated business organisation,consisting of 2 to 50 members, whose aim it is to make profits.The membership is restricted to family and friends.

Management

The owners manage this type of business or may appoint specialised

personnel. The membership must approve any disposal of shares, andusually sales of shares are restricted to the membership.

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Characteristics of private limited companies

Capital is obtained from private individuals, financial institutions,government agencies or retained profits.

Limited liability shareholders have limited liabilities.

The company must be registered with the Registrar of Companies.

The word ‘limited’ must be included in the name. Membership is between 2 and 50 persons.

Accounting statements must be prepared and an audit undertaken, with a copy issued to the Registrar of Companies.

Advantages of private limited companies

A larger capital base than a sole trader or partnership because themembership is larger.

The company has continuity and thus can easily obtain loans fromfinancial institutions.

The company has a separate legal identity from the ownership.

Shareholders have limited liability. The financial commitment of theshareholder does not extend to his or her personal possessions.

Disadvantages of private limited companies

Capital is limited since the membership is limited to 50.

The company must file its financial reports with the Registrar ofCompanies.

Selling of shares is restricted to the private grouping.

Public limited companies

Definition

A public limited company or joint stock company is an incorporatedcompany that offers shares to the public.

Management

The board of directors, which is elected by the shareholders at theannual general meeting, manages the public limited company. Theboard of directors appoints an executive director or chief executiveofficer, who heads the company and reports to the board on theoperations of the company.

Characteristics of public limited companies

There must be at least seven shareholders, with no limit on themaximum number of shareholders.

The shares are traded openly in the stock market.

The public limited company must be incorporated.

The company can obtain capital from shareholder equity andfinancial institutions.

The company is continuous; it does not close down on the death ofa shareholder.

Greater specialisation is possible.

Advantages of public limited companies

It is easier to obtain finance. A public company is able to obtaininvestment from many small investors as well as from largeorganisations.

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Shareholders have limited liability. Ownership and control areseparated.

Shares can be quoted on the stock exchange and sold to the public.

The company is able to grow and obtain economies of scale.

It has a separate legal existence. Changes in shareholders anddirectors do not affect the continuity of the company.

Disadvantages of public limited companies

The legal requirements may be costly and time-consuming.

The accounts have to be made public.

Because of the large size, decision-making usually takes longer.

Differences of opinion may develop because the ownership andday-to-day administration of the company are divided – theshareholders are the owners and the directors run the company.

Control of the company may be lost if another company or otherpeople obtain sufficient shares in the company.

These companies lack the personal element that is a feature of thesimpler forms of business organisations.

Multinational corporations

Definition

Multinational corporations (MNCs), also called transnationalcorporations, are a network of firms which operate in multiplecountries but are owned and controlled by a single group ofshareholders.

Characteristics of multinational corporations

The following are characteristics of multinational corporations.

Multinational corporations are created through direct foreigninvestment (DFI).

Headquarters of multinational corporations are usually located ina developed country, while subsidiary companies are located indeveloping countries.

These firms usually use the latest technology and invest heavily inresearch and development.

These firms are usually capital-intensive and therefore benefit fromeconomies of scale.

Management

Expatriates with limited local inputs manage the subsidiaries oftransnational or multinational firms.

Advantages of investment by multinational corporations tothe host country

The following are some of the benefits to the host country ofmultinational corporations.

A large injection of foreign capital stimulates the economy.

Employment is provided for locals.

Transfer of skills from the foreign counterparts to the locals. Revenue increases since more taxes are paid to the government.

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Disadvantages of investment by multinational corporations tothe host country

The following are some of the disadvantages to the host country ofmultinational corporations.

Risk of abuse of workers’ rights and poor working conditions inthe factories.

Possible destruction of the environment.

Possible intimidation of trade unions, which try to improve workingconditions and to expose the poor conditions of work.

Possible abuse of consumers, for example, babies fed breastmilksubstitute or children exposed to intensive tobacco marketing.

Risk of destruction of communities, especially when the companymoves to another location.

Repatriation of profits.

Define limited liability companies (private and public), andmultinationals; then state how they are formed and managed.

Activity 1.16

Feedback


Private limited company A businessorganisation with

2–50 members.Membership isrestricted to close

friends and family.

Must be incorporated and,therefore, must give to the Registrar

of Companies the followingdocuments:

– Memorandum of Association – Articles of Association – Statements of Authorised,

Registered or Nominal Capital

Managed by the owners or persons appointed by the

owners

Public limited company An incorporatedbusiness organisationwith at least sevenmembers that offers

shares to the public

Must be incorporated and must giveto the Registrar of Companies the

following documents:

– Memorandum of Association – Articles of Association

– Statements of Authorized,Registered or Nominal Capital – Prospectus

a Managed by a board ofdirectors

b Daily operationsmanaged by anexecutive director withhelp of specialist staff

Multinational corporations Network of firmswhich operate inmultiple countries

Incorporated in a developedcountry

Managed by team ofexpatriates

List the advantages and disadvantages of limited liability companies

(private and public) and multinational corporations.

Activity 1.17

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State corporationsDefinition

State corporations are independent organisations set up by thegovernment to carry out a service. The government does not controltheir daily operations, but can fix the overall strategy for them andnominate their board of directors. These are usually non-profit-making,but in the long term they have to be self-financing. State corporationsare usually in the broadcasting field, and in the transport, power andtelecommunication industries.

Formation

State corporations are formed by legislation, that is, by the passing oflaws by Parliament.

Management

The government appoints a board of governors or directors for astipulated time frame. An executive director is also appointed to headeach organisation. The executive director reports to the board ofgovernors or directors.

Characteristics of state corporations

State corporations normally display the characteristics listed below.

Funding is mainly done by the state providing grants, althoughsome legislation allows the organisations to raise their own funds.

Feedback

Form of business Advantages Disadvantages

Private limited company 1 The capital base is larger than that of the sole trader or partnership.

2 Companies have continuity.3 The company can easily obtain loans.4 Shareholders have limited liability.

1 Although capital base is larger thanthat of the shareholder, it is still limited

since the membership is restrictedto 50.

2 The company is not as easy to form as the sole trader.

3 Membership is restricted.

Public limited company 1 Finance is easy to obtain.2 There is continuity of the business.3 Shareholders have limited liability.4 The value of shares is quoted on the stock

exchange and, therefore, members canassess the value of their shares.

5 The company has a separate legalidentity.

6 These companies enjoy economies of scale.

1 Setting-up of the company is time-consuming and costly.

2 The accounts have to be made public.3 Decision-making takes longer.4 There may be conflict between owners

and paid managers.5 The company is in a vulnerable position

since it may be taken over by mergers.

Multinationalcorporations

1 Large foreign capital injected into thecountry.

2 Creates employment.3 Transfers skills.4 Increases revenue (through taxes) for the

country.

1 Possible poor working conditions andabuse of worker’s rights.

2 Possible destruction of the environment.3 Possible intimidation of workers and

trade unions.

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The state or state-appointed auditors monitor all accountingprocedures.

Annual accounting reports must be sent to the Auditor General.

The aim of the state is not to make a profit, but it is expected thatthese corporations may break even.

Nationalised industriesDefinition

Nationalised industries are firms which were once privately owned,but have been taken over by the government. Governments seekto nationalise key industries, that is, the industries on which thegovernment depends for the country’s economic survival, for example,the oil industry in Trinidad and Tobago or the bauxite industry inJamaica.

Formation

A company becomes nationalised when the government purchases allor the majority of shares in the company.

Management

As for state corporations, a board of governors is appointed. The boardreports to the line minister of government. Each nationalised industryhas an executive director who heads the company. The auditedaccounting reports of these companies must be laid with the auditorgeneral or a government accounting firm.

Characteristics of nationalised industries

Nationalised industries display common features, including the

following:

They are legal entities.

The state is the only shareholder.

They are managed by boards of directors that are appointed by thestate.

Advantages of nationalised industries

The following are advantages of nationalised industries.

Ownership and control are in the hands of the state, thus all profitsremain in the country.

The company is in a better position to service the needs of thecommunity, for example, the funding of community projects ineducation, sport and culture.

Nationalisation prevents private monopolies from being formed.

Disadvantages of nationalised industries

The following are disadvantages of nationalised industries.

Relatively low salaries paid to executive directors may not attractthe best expertise.

The industries may be a drain on the government’s revenue.

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Government departmentsThe system of government in the Caribbean is divided into two broadcategories – central and local government1.3 The central governmentconsists of the ministries and departments such as Education, Health,Public Housing, Water Supplies, Police and Fire Services, Finance,Culture, Foreign Affairs, Labour, Welfare and Transportation. Eachministry is headed by an elected official, the minister, and a team oftechnocrats headed by a permanent secretary.

The local government system consists of the municipal authorities,for example, the city corporations. This arm of government serves thecommunity. They are mainly responsible for local road maintenance,garbage collection, maintenance of parks and roadways, cleaning ofgullies and culverts, public cemeteries, and the consumer markets.Funding is provided by central government and the collection of ratesand taxes from the local residents. At a local government election,councillors are elected. From among these councillors, the mayor of acity or chairperson for the borough council is appointed as head.

Other forms of business Joint venture: cooperation between a domestic company and

foreign company to accomplish a specific project.

Franchise: an agreement between an established company(a franchiser) and a franchisee, in which permission is granted toconduct business in a prescribed manner set out by the franchiser.The franchisee has an obligation to pay royalty fees to the franchiserperiodically, but the franchisee in return gains from the reputationand business expertise or management of the franchiser. This business

arrangement is gaining increasing popularity in the Caribbean, forexample, in McDonalds, KFC, Pizza Hut and The Body Shop.

3Robinson, Karlene and Hamil, Sybile, CXC Principles of Business, Carlong Publishers

(Caribbean) Ltd, Kingston, 2001.

Match the statements below with the following types of organisation structure. A structure may be used morethan once. The first one has been done for you.

Organisation structures: state corporation, nationalised industry, local government, central government,franchise, joint venture.

Statement Organisation

An independent organisation set up by the state to carry out a service. state corporation

A firm once in the hands of private individuals but now owned and controlled by the government.

These organisations are formed by Acts of Parliament.

Ministries such as Education, Housing and Health fall under its purview.

An agreement to trade under the name of an established company.

City corporations and borough councils fall under its purview.

Activity 1.18

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Economic systemsWhich country do you live in? Did you know that your country usesan economic system? The term ‘economic system’ refers to the waysociety organises its scarce resources to produce goods and services tosatisfy the needs and wants of the population. Societies are organisedto answer three basic economic questions:

1 What goods and services are to be produced?

2 How will the goods and services be produced?3 For whom are the goods and services to be produced?

Economists have classified economic systems into the following types:

1 the traditional (subsistence) economy;

2 the free market or the market-driven capitalist economy;

3 the planned, command or controlled economy;

4 the mixed economy.

Traditional (subsistence) economy

The traditional economic system existed in early societies and is rarelyused today. In those early societies, people formed communities andproduced food and basic goods for a simple lifestyle. An example is

Feedback


An independent organisation set up by the state to carry out a service. state corporation

A firm once in the hands of private individuals but now owned and

controlled by the government.

nationalised industry

These organisations are formed by Acts of Parliament. state corporation

Ministries such as Education, Housing and Health fall under its purview. central government

An agreement to trade under the name of an established company. franchise

City corporations and borough councils fall under its purview. local government

A foreign company joins with a local company. joint venture

The board is appointed by the government. state corporation and nationalised industry

The aim is to provide a service, not profits. state corporations

Too much political interference. state corporation and nationalised industryProfits are returned to the people. nationalised industry and state corporation


A foreign company joins with a local company.

The board is appointed by the government.

The aim is to provide a service, not generate profits.

Too much political interference.

Profits are returned to the people.

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Taino society, where enough was produced to satisfy the needs of allpersons, and simple exchange took place if there was any surplus.There was usually a community leader, such as a cacique, who madethe decisions of what, how and for whom the goods and services

would be produced. Bartering was used to obtain the goods that thecommunity did not produce for itself. Isolated islands and remote areas

in some countries may still use this type of economic system.

Free market or capitalist economyThe free market is an economic system in which the customer drives theeconomy. The consumer influences the producers’ decisions on what toproduce since the producers will not make a profit by producing goodsthat are not in demand. Consumers exercise the right to buy whateverthey want to satisfy the needs and wants of their family.

Private individuals own the resources in a free market economyand there is little or no governmental interference. The factors ofproduction are controlled by market forces, not by the government.

These market forces refer mainly to factors of supply, demand,competition, customer satisfaction, price, quality of the product andefficiency of production and supply. The market forces, therefore,determine allocation of resources.

In a free market economy, goods and services are bought and soldon the market. The market may be a physical place, such as anagricultural market, which many persons in the Caribbean visit onSaturdays or Sundays to obtain fruit, vegetables and meat. A marketmay also be a neighborhood shop, a bank, an insurance company orthe stock market, where shares of companies are bought and sold.

Although there are no pure free market economies, the US and HongKong are examples of two economies that are closest to the theoreticalconcept of a free market economy.

Let us now explore the benefits and limitations of the market economy.

Benefits of the market economy

The benefits of market economies are listed below.

Government’s involvement is very limited. The activity of thegovernment is usually restricted to the collection of taxes.

Competition among firms forces prices down.

Producers are free to use the factors of production in any way theyconsider to be most suitable to them.

Consumers are free to spend their money in any way to give themmaximum utility.

A large variety of goods or services are made available to consumers.

Labourers are free to sell their labour to the highest bidder.

There is greater efficiency in the use of factors of production, sincemarket forces determine the allocation of resources.

Limitations of the market economy

The limitations of market economies are listed below.

The profit motive drives this economy and thus encourages unequaldistribution of wealth.

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Large sums of money are spent on advertising, which createsartificial demand and increases prices.

Monopolies develop and these can exploit consumers since they canunilaterally decide on higher prices.

Social and merit goods, for example, health, defence, education andsecurity, may not be adequately provided for.

Trade unions may be suppressed since the capitalist may seek tosuppress wages in order to minimise the cost of production.

This activity will help reinforce your knowledge of theadvantages and disadvantages of the market economy.Complete the following sentences.

1 The market economy is a more _________________type of market.

2 There is limited ______________ ________________in this type of market.

3 Consumers set the ____________ of goods andservices.

4 Prices are kept down because of ________________.

5 Consumers have a wider variety of ______________and __________.

6 Because of the profit motive there is ______________________.

7 Advertising creates ____________ _______________.

8 Market economies are not driven to produce _____and _______ goods.

9 _________________ are generally present.

10 ____________________ are low since trade unionactivities are not encouraged.

Activity 1.19

Feedback

1 efficient

2 governmentalinvolvement

3 prices

4 competition

5 goods, services

6 unequaldistributionof wealth

7 artificial demand

8 social, merit

9 monopolies

10 wages

Planned or command economy A planned economy is one in which the government assumesresponsibility for economic planning in order to achieve the best possibleuse and distribution of a country’s scare resources. Governments,therefore, influence and control key economic variables, such as income,consumption, employment, savings, investment, imports and exports.

Characteristics of the planned economy

The government plans, coordinates and controls all economicactivities.

The government decides on what to produce, how much to produceand controls the distribution of output.

Prices are set by the state.

Benefits of the planned economy

The state can direct its development since it controls all theresources.

There is likely to be less waste of resources.

Incomes are more likely to be evenly distributed.

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Limitations of the planned economy

Government planning may be more rigid and inflexible compared with the decision-making of the capitalist economy, and this maylead to scarcity of goods or services.

The government may have the responsibility of administering andimplementing the plans. This task may be too enormous for the

technocrats working with the government and hence there may beinefficiency in the delivery of goods and services.

Private sector initiatives may be blocked.

Planning may be manipulated by the more powerful groups thatmay not act in the best interests of all.

E x a m p l e Planned economies

North Korea, Cuba and theSoviet Union (before 1990).

This activity will help you to understand the features ofplanned economies.

The following sentences describe features of a plannedeconomy. State whether each statement is true (T) orfalse (F).

1 Private enterprises assume full responsibility foreconomic planning.

2 Key economic variables such as income andinvestment are under the direct control of thegovernment.

3 What to produce and how much to produce areinfluenced by the consumer.

4 Competition ensures efficiency.

5 Income is more evenly distributed.

6 Poverty is eradicated.

7 The government usually operates through largebureaucracies and hence this is a more efficientsystem.

8 The private sector usually takes a leading role.

9 Prices are controlled by the state.

10 Powerful politicians can influence governmentdecisions, which may not be in the best interestsof the population.

Activity 1.20

Feedback

1 F 2 T 3 F 4 F 5 T 6 F 7 F 8 F 9 T 10 T

Mixed economiesMixed economies are economic arrangements in which bothgovernment and private individuals make economic decisions as to

what to produce, how to produce and for whom goods and servicesshould be produced.

The mixed economy is by far the most popular form of economicorganisation existing in the world today. Most countries, including theEnglish-speaking Caribbean states, have mixed economies.

Characteristics of the mixed economy

Involvement of both state and private individuals.

Efficient use of resources.

More equitable distribution of income than free market economies.

Benefits of mixed economies Both sectors of the economy, the government and private

individuals, engage in activities that can best produce, and therefore

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there is more efficient use of resources. A wide variety of goodsare available since the government complements those goods andservices that are provided by the private sector.

Governments are free to make laws to protect natural resources andthe people.

Limitations of mixed economies

There is always a need to keep a balance between government andprivate sector involvement.

Conflict may arise between government and private investment, andthus result in long delays in the production of goods and services.

StakeholdersNow that you understand how business activities evolved and thedifferent types of businesses, you should examine the persons orgroups who make decisions. These are the stakeholders, and they areall affected by business decisions. Did you know that you are also a

stakeholder in the various business activities that take place in yourcommunity? Let us examine what we mean by this term.

Definition: Stakeholders are the various groups within and outsidean organisation that stand to potentially gain or lose as a result of theorganisation’s actions.

Examine the following list of stakeholders.

owners/employers/investors

employees

customers/consumers

suppliers government

the members of society (including the media, special interestgroups, communities)

lenders/investors and other creditors.

It is important to identify the stakeholders in a business so that theorganisation:

knows who it depends on for its survival;

also knows who has a vested interest in the business;

can take these groups into consideration when making decisions;this helps the business to meet the expectations and priorities of itsstakeholders.

The roles of stakeholders involved in business activity

Role of employers/investors/managers

These parties want to achieve:

the best return on their investments (profits);

efficient management of the resources (employees, raw materials,equipment) through planning, control and other functions andstrategies in the business;

to provide goods/services of a high quality, at a reasonable price, with necessary after-sales service;

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the best possible employees, fair payment for work, fair andrespectful treatment, good working conditions and the necessarytools and equipment;

to act ethically and be socially responsible.

Role of employees

These are: to carry out the activities stated on their job description;

to efficiently utilise the resources placed in their care;

to act ethically and be socially responsible.

Role of consumers

Consumers can:

provide feedback on product quality and design through complaintsand suggestions;

contribute to research by participating in surveys and product

testing; use the product/service provided in the way that it was intended to

be used.

Role of government

Government provides:

regulations that force the business to consider the best interests ofthe other stakeholders;

assistance to businesses in the form of loans, training, research andfinancial aid/subsidies;

information to all the stakeholders (in many cases);

protection for consumers through laws and agencies; also protectionto all the other stakeholders.

Use this exercise to assess your understanding of‘stakeholders’. Read the following situation andcomplete the table that follows.

Sandra has graduated from school and plans to keeplayer chickens in her backyard. She plans to sell the

eggs to the two corner shops in her neighbourhood.Her younger cousin, Althea, will assist her with caringfor the chickens.

As soon as Sandra started building a structure for thechickens, several persons began to voice their concerns.Phillip, who lived beside her, wanted to know howoften she would be cleaning the hen-house. Altheawanted to know if she would be paid a reasonableamount of money. Tommy, one of the corner-shop

owners, wanted to know if Sandra knew how to growhealthy chickens. Sandra is also concerned about herprofits.

Use the table below to identify the type ofstakeholders in this situation. In the space provided,

write the name of the stakeholder.

Type of stakeholder Name of the stakeholder

Owner

Employee

Customer

Community member

Activity 1.21

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Responsibilities of a business You have already learned that businesses can be formed in different ways, and that their decisions and activities are influenced bythe different stakeholders. Now you must look at the businessitself as an important participant in its community or society.Business organisations have economic, financial, political andsocial responsibilities to the society in which they operate. Theseorganisations have a responsibility to invest capital in order toincrease the wants and needs necessary for survival. In the pursuitof their economic role, business organisations should not destroy theenvironment nor add to any conflict among the various religious, ethnicor regional groups in the community. Also, business organisationsshould ensure that equality and democratic principles are adhered to atall times. The main responsibilities can be grouped as shown below.

Economic responsibilities: The business and its owners ormanagers operate within an economic system and should playtheir part in helping this system to be effective. The business doesthis by providing employment to citizens in the economy and bycontributing to the overall growth of the economy; if the businessexports goods and services, it will help to increase the overallexports of the country. Pricing policies that are too aggressive canhave a very negative effect on other businesses in the economy, andcan exploit consumers.

Financial responsibilities: Similar to the above, businesses mustcreate a reasonable financial return to the owner or investor. Thismay not always be high because of the various objectives of abusiness.

Social responsibility : Businesses should make decisions that are

in the best interests of the society in which they operate. They alsorely on this society to provide vital resources.

Political responsibility : Businesses have many obligations to thegovernment.

Ethical responsibility : The term ‘ethics’ refers to beliefs about whatis right and wrong conduct; most societies agree on the basic ethicsof honesty and fair play. Businesses should make ethical decisions.

E x a m p l e Economic responsibilities

Produce a good or service to satisfy the needs and wants of society

Stimulate economic growth

Financial responsibilities

Pay a fair wage to employees

Provide a reasonable return on investments

Political responsibilities

Act as pressure groups to lobby governments for changes that will benefitbusiness activity

Operate along democratic principles of equality and fair play

Act in accordance with the laws, for example, paying all taxes when they

are dueAssist in setting policies by giving feedback, making suggestions

Feedback

Type of

stakeholder

Name of the

stakeholder

Owner Sandra

Employee AltheaCustomer Tommy

Communitymember

Phillip

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Ethical responsibilitiesDesign ethical guidelines for their behaviour/decisions and follow theseguidelines

Encourage good business ethics of their stakeholders by refusing to dobusiness with unethical firms or persons

Social responsibilitiesProtect the environment and avoid social costs (borne by society as aresult of business operations, for example, pollution)

Develop the culture of a country

Educate consumers and community members on safety tips and properuse and disposal of products

Use some of the profits to help develop and benefit the community,as well as the culture of the country

Classify the activities listed below according to the relevantarea of responsibility. The first one has been done for you.

Economic Financial Political Social

1 paying corporationtaxes

✔

2 making pastries fortoday’s sales

3 improving the well-being of employees

4 sponsoring the sportsday of the primary

school in the area

5 disposing of garbagein a timely and fittingmanner

6 lobbying the government to providemeasures that wouldencourage savings

7 improving theenvironment

8 promoting anawareness of humanrights violations

9 reinvesting profits intothe business

10 providing a 30 per centreturn on investment to

shareholders

11 providing employment

Activity 1.22

Feedback

1 Financial 7 Social

2 Economic 8 Political

3 Social 9 Financial4 Social 10 Financial

5 Social 11 Economic

6 Political

You perhaps had difficultycategorising some items. Why nottick those that are both? This isnot a problem since the categoriesmay be a combination of two areas,for example, socio-economic or

socio-political.

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Key points Students need to familiarise themselves with key terms and

concepts used during the course of study. These include conceptsrelated to the business environment in which goods and services areproduced and traded.

Instruments of trade developed in early times through the systemof bartering have evolved today to the use of bills of exchange andelectronic banking systems using credit cards and electronic transferinstruments.

The private sector is funded by individuals who enter businessto make a profit, whereas the public sector is controlled by thegovernment for providing goods and services to the population.

Types of business include the sole trader, partnership, corporation,limited liability company and multinational corporation.

Economic systems include the traditional, free market, planned andmixed systems.

Businesses have economic, financial, political, ethical and socialresponsibilities.

End test

Answer all questions.

1 Define the term ‘barter’.

2 Give three examples of bartering.

3 List three features of bartering.

4 State two advantages and two limitations ofbartering.

5 Define the term ‘money’, giving examples ofitems used in the past instead of money.

6 List three features of money.

7 State the functions of money.

8 State four benefits derived from theintroduction of money.

9 Explain the term ‘indirect satisfaction of wants’.

10 Define the term ‘division of labour’.

11 Explain the advantages and disadvantages ofspecialisation.

12 Explain the functions of a business.

13 Describe the economic, financial, political andsocial responsibilities of a business organisation.

14 Explain the effects of the change from asubsistence to a money economy on:

a availability of goods; b access to goods;

c the quality and quantity of goods;

d job creation and job specialisation.

15 Describe the institutional characteristics of:

a free market economies;

b planned economies;c mixed economies.

16 Explain the main differences between theprivate and public sectors.

17 List the stakeholders of a business.

18 Briefly describe the five main responsibilities ofa business.

19 List the characteristics of:

a the sole trader;

b partnerships;c cooperatives.

20 Outline the advantages and disadvantages ofeach type of business listed in question 19.

21 Identify the regulatory practices institutedby governments for setting up a sole trader,partnerships and cooperatives.

22 Outline the characteristics of limited liabilitycompanies and multinational corporations.

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23 State the advantages and disadvantages oflimited liability companies and multinationalcorporations.

24 Identify the regulatory practices institutedby governments for establishing limited

liability companies and multinationalcorporations.

25 Describe the characteristics of statecorporations and nationalised industries.

26 State the advantages and disadvantages ofstate corporations and nationalised industries.

27 Describe how state corporations andnationalised industries are established.

Feedback

1 Barter is the exchange of goods and services withoutthe use of money.

2 Three examples of bartering are the exchange of:

bananas for breadfruit

fish for shrimps

wooden spears for eating utensils.

3 Features of bartering are:

direct exchange of items

immediate exchange of items

direct satisfaction of needs and wants.

4 Two advantages of bartering are:

individuals are able to enjoy more goods andservices

it encourages division of labour.

Limitations of bartering are the possible absence of(any two):

double coincidence of wants

rate of exchange

store of wealth indivisibility

store of value.

5 Money is any commodity that is accepted as ameasure of value and a medium of exchange, such as:

precious metals shells

beads

were some of the items used in the past as money.

6 Features of money are (any three):

acceptability

divisibility

homogeneity

durability

portability relative scarcity.

7 The functions of money are that money serves as a:

medium of exchange – everyone must be willingto accept it in exchange for goods and services;

standard or value – the worth of the goods or

service is measured in money, which sets theprice of the item;

store of value – money can be saved and used inthe future;

means of deferred payment – money is used forgoods bought on credit;

facilitator of the price mechanism – the price oneis willing to pay for a good or service.

8 The introduction of money (any four):

facilitated the exchange of goods and services;

encouraged the division of labour; enabled individuals to enjoy more goods and

services;

promoted investment;

facilitated credit.

9 Indirect satisfaction of wants is the system bywhich needs and wants are fulfilled with the helpof others. One satisfies one’s needs and wantsthrough the exchange of goods and services withanother individual. It involves bartering and,

currently, the use of money.10 Division of labour refers to the organisation of a job

into a number of related tasks. For example, in themaking of a shirt in a factory, the job is divided intocutting, stitching, placing of the buttonholes andsewing of the buttons.

11 Advantages of specialisation are listed below.

It increases the skills of workers since thesame task is repeated and workers learn fromcontinuous repetition.

It increases productivity since less time is neededwhen changing from one activity to another.

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As output increases, the cost of production isreduced.

Less time is spent on training since workers areonly required to master one task.

The quality of the product can also be improvedsince workers are more skilled.

Disadvantages of specialisation are listed below.

The work is monotonous. One is requiredto perform the same task repetitively.The work, therefore, becomes boring andtiresome.

Specialisation usually occurs in large-scaleindustries and therefore the work environmentis impersonal.

Workers lose pride in their work because theyare not completing the entire job.

Some specialisation processes require large capitalinvestment.

12 The functions of a business are listed below.

The production of a good or service. Goodsand services are required for the satisfaction ofneeds and wants.

The creation of jobs. Business needs labour toproduce goods and services. The amount oflabour will depend on whether the firm islabour-intensive or capital-intensive.

In the case of private investments, the aim isto make a profit. All businesses aim to makethe highest possible returns on investment sothat the shareholders of the business receive anadequate dividend.

Non-profit organisations aim to fulfil a needin the provision of a good or service that willbe to the benefit of the community. In allcommunities there are those who cannotprovide for themselves and therefore rely on theservices of non-profit organisations.

To contribute to economic growth. Economicgrowth is stimulated by the increase in businessactivity, which adds to the total real output ofgoods and services.

13 Business organisations have a responsibilityto invest capital in order to increase the wantsand needs necessary for the survival of man.In the pursuit of their economic role, businessorganisations should not destroy the environmentnor add to any conflict among the various religious,ethnic or political groups in the community.

Also, equality and democratic principles must beadhered to at all times.

14 a The change from subsistence to a moneyeconomy meant that the community enjoyed abetter standard of living since more goods wereavailable. People now had more leisure time.

b Goods were easily available to all since the useof money made the exchange process easy.

c The change from subsistence to a moneyeconomy meant that the quality and quantityof goods improved and increased sincespecialisation or division of labour was possible.

d More jobs were created because of jobspecialisation.

15 a The institutional characteristics of free marketeconomies are that:

they are customer-driven – the consumerinfluences the producers’ decisions on what

to produce private individuals own the resources

there is little or no government interference

the factors of production are controlled bymarket forces – goods and services are soldon the market.

b The institutional characteristics of plannedeconomies are that:

the government plans, coordinates andcontrols all economic activities

the government decides what to produce,how much to produce and controls all theresources

prices are set by the state.

c The institutional characteristics of mixedeconomies are:

involvement of both state and privateindividuals

efficient use of resources

more equitable distribution of income than

in free market economies.16 The private sector is that part of the economy that

is funded, owned and controlled by individuals andprivate firms. The main objective of the private sectoris to make a profit. On the other hand, the publicsector is financed by the government through themoney of taxpayers and is controlled and operatedby the Government or its agent. The public sectoraims to provide a service at the lowest possible price.

17 The stakeholders of a business are:

owners

employees

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customers

suppliers

government

society.

18 The five main responsibilities of a business are

listed below. Economic responsibilities: The business and its

owners/managers operate within an economicsystem and should play their part in helpingthis system to be effective. The business doesthis by providing employment to citizens in theeconomy and by contributing to the overallgrowth of the economy; if the business exportsgoods and services, it will help to increasethe overall exports of the country. Pricingpolicies that are too aggressive can have a

very negative effect on other businesses in theeconomy, and can exploit consumers.

Financial responsibilities: Similar to the above,businesses must create a reasonable financial returnto the owner/investor. This may not always be highbecause of the various objectives of a business.

Social responsibility: Businesses must:

avoid social costs (borne by society as a resultof business operations), for example, airpollution; protect the environment;

educate consumers and community members

on safety tips and the proper use and disposalof the products;

use some of the profits to help develop andbenefit the community, as well as the cultureof the country.

Political responsibility: Businesses have anobligation to the government to:

act in accordance with the laws;

assist in setting policies by giving feedback,making suggestions, lobbying for changes.

Ethical responsibility: The term ‘ethics’ refers tobeliefs about what is right and wrong conduct;most societies agree on the basic ethics ofhonesty and fair play. Businesses must:

design ethical guidelines for their behaviour anddecisions and follow these guidelines;

encourage good business ethics of theirstakeholders by refusing to do business withunethical firms or persons.

19 a The characteristics of the sole trader are that:

it is easy to set up the owner enjoys all the profits and bears all

the risks

the owner manages the business himself orherself

the owner maintains personal contact withclients

these businesses are conveniently located inthe rural area.

b The characteristics of partnerships are that:

partners can consult each other whenmaking decisions

they are governed by a Partnership Deed orthe Partnership Act

there are 2 to 20 members

profits and losses are shared according to aPartnership Deed or the Partnership Act

partners share knowledge and skills

few formalities are required to set up thebusiness

there is no obligation to publish accounts.

c The characteristics of cooperatives are that they:

are owned and operated by members topromote their common economic interest

provide opportunities for members to poolcapital

provide limited liability

use democratic decision-making

have members who share a common bond.

20 Advantages of the sole trader:

The owner gets the personal satisfaction ofbeing his or her own boss.

The owner enjoys all the profits but bears allthe risk.

It is easy to form.

The owner enjoys personal contact with clients.

The owner is under no obligation to keep ordisclose financial statements.

The owner has a commitment to succeed.

Disadvantages of the sole trader:

There is limited funding.

They lack specialised staff.

The owner has unlimited liability.

There is limited time for leisure.

Simple and out-of date technology may be used.

The owner relies heavily on his or her goodhealth and energy.

Advantages of partnerships:

The sharing of partners’ knowledge and skills.

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Partners can consult each other when makingdecisions.

Sharing of the management of the business.

Few formalities necessary to set up.

No obligation to publish accounts.

The business has continuity. Limited partners have limited liability.

Disadvantages of partnerships:

Partners may not always work harmoniously.

Death or bankruptcy of one partner willautomatically dissolve the partnership, unlessotherwise provided for in the Partnership Deed.

The actions of partners are binding on thepartnership.

Ordinary partners have unlimited liability.

Capital is still limited. The risk is borne by a few ordinary partners.

Advantages of cooperatives:

Members are the owners.

Decision-making is shared.

All surpluses are shared among themembership.

Community bond is strengthened.

Products are much lower in price sinceadministrative expenses are lower.

Rewards are shared among all the membership.

Disadvantages of cooperatives:

The membership may lack the specialistknowledge and skills to build the organisation.

Decision-making is slow and therefore thebusiness may lose out on opportunities.

21 No requirement is necessary to set up a sole traderunless the owner is using a trade name, then thetrader must register the trade name.

Although there is no formal requirement to set uppartnerships, it is advisable that a Partnership Deedbe made. Again, if the partnership is operatingunder a name other than that of the owners, it isadvisable to register the trade name.

Cooperatives are required to be registered withthe relevant government agencies. The books ofaccounts must be prepared annually.

22 Limited liability companies are of two types –private limited or public limited liability companies.

The characteristics of a private limited company

include the rules that: membership is between 2 and 50 persons

capital is obtained from private individuals,financial institutions, government agencies orretained profits

with the exception of ordinary shareholders, allshareholders have limited liabilities

the company must be registered with the

Registrar of Companies the word ‘limited’ must be included in the name

accounting statements are prepared and a copysent to the Registrar of Companies.

The characteristics of a public limited companyinclude the features that:

there must be at least seven shareholders,with no limit on the maximum number ofshareholders

the shares are traded openly on the stock market

the public limited company is incorporated capital is obtained from shareholders’ equity

and financial institutions

the company is continuous

specialisation is possible since specialist staffcan be employed

there is a large capital base.

The characteristics of multinational corporations(MNCs) are listed below.

MNCs are created through direct foreigninvestment (DFI).

Headquarters of MNCs are usually located in adeveloped country, while subsidiary companiesare located in developing countries.

Firms usually use the latest technology.

Firms invest heavily in research and development.

Firms are usually capital-intensive and thusbenefit from economies of scale.

23 Limited liability companies have advantages thatinclude the fact that:

they are able to raise large capital, particularlyin the case of public liability companies

shareholders’ risk is limited to the value of theshares they have invested

the companies have a separate legal entity

there is continuity since the death of a share-holder does not affect the survival of the firm

shares are transferable, particularly in the publiclimited company

they can benefit from economies of scale since

they can employ specialists and engage inresearch and development

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financial statements are available for inspectionby members of the public.

The disadvantages of limited liability companiesare listed below.

Considerable legal procedures are involved insetting up this type of business.

Owners often lose touch with what ishappening in the organisation.

Management’s actions may not always be in thebest interests of the shareholders.

In private limited companies shares are notalways transferable, except with the approval ofthe membership.

In the private limited company, because ofthe family structure, entrepreneurial talent isdrawn from a restricted pool. The public liability

company is in the vulnerable position of beingtaken over by mergers.

The advantages of multinational corporations tothe host country are:

the injection of foreign capital in the economy

the creation of employment opportunities

the transfer of skills

increased revenue through taxation.

Perceived disadvantages of multinationalcorporations to the host country are:

possible poor working conditions and abuse ofworker’s rights

risk of destruction of the environment

possible intimidation of workers and tradeunions.

24 Limited liability companies must be incorporatedand therefore must submit to the Registrar ofCompanies the following:

Memorandum of Association

Articles of Association

Statement of the Authorised or Nominal Capital.

25 Characteristics of state corporations:

They are established by the governmentthrough legislation.

Their objective is to provide a service to thepopulation.

A board of directors appointed by thegovernment manages them.

Funding is mainly from the governmentand grants.

Accounting procedures are monitored by thestate.

Characteristics of nationalised industries:

Previously privately owned, they were takenover by the state.

The state is the only shareholder.

They are a separate legal entity.

A board of directors appointed by thegovernment manages them.

Accounting reports must be sent to the auditorgeneral.

26 An advantage of a state corporation is that thestate has the autonomy to act on its own.

Disadvantages of a state corporation are that thecompany may depend heavily on state funding andthere may be too much political interference.

Advantages of nationalised industries:

Profits remain in the country.

The company serves the various needs of the

community. Nationalisation prevents monopolies from

forming.

Ownership of the most profitable industries isin the hands of the state.

Disadvantages of nationalised industries:

Low salaries are paid to top executives.

The non-profitable industries may be a drain onthe government’s revenue.

27 State corporations are incorporated through an

Act of Parliament, that is, through legislation.These firms are funded by the taxpayers. Thegovernment purchases the shares of nationalisedindustries. In fact, the government is the onlyshareholder.

You are the newly promoted director of amanufacturing company producing cement in

Harbour View, Jamaica. Draw up a plan that would

satisfy the company’s social responsibilities tothe community and show how this plan would be

implemented. (40 marks)

Tutor-marked assignment

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The Caribbean Examinations Council (CXC®) has developed this self-study guide to provide

candidates both in and out of school with an additional resource to help them prepare for the

Principles of Business for CSEC® examination. The guides have been prepared by experiencededucators with expertise in the syllabus, teaching and/or examination. The content covers the

key concepts of the subject that candidates must know.

Features of the study guides include:

Introduction and Objectives setting out the key concepts to be covered in each chapter

Examples to illustrate learning points

Activities and Feedback to provide plenty of practice and help you build your understanding

and application of the concepts

End Tests with Feedback to help you evaluate your progress.

This study guide will provide you with the tools and support you need to reach your full

potential.


for CSEC®

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