Principles of Business for CSEC® Examinations PDF

Principles of Business for CSEC® Examinations Principles of for CSEC® Examinations...

Principles of Business for CSEC® Examinations Principles of for CSEC® Examinations Principles of for CSEC® Examinations 2013–2015 CSEC® Past Papers 2013–2015 CSEC® Past Paper booklets are available for the following subjects: Agricultural Science 9781786321916 Biology 9781786321756 Principles Caribbean History 9781786321879 Chemistry 9781786321855 Economics 9781786321817 Electronic Document Preparation & Management 9781786321985 of Business English A 9781786321824 English B 9781786321930 French 9781786321862 Geography 9781786321909 PRINCIPLES OF BUSINESS Home Economics 9781786321831 Human and Social Biology 9781786321954 Industrial Technology 9781786321770 Information Technology 9781786321947 Integrated Science 9781786321787 Mathematics and Additional Mathematics 9781786321923 Office Administration 9781786321992 Physical Education 9781786321893 Physics 9781786321794 Principles of Accounts 9781786321961 Written in conjunction with subject specialists, Caribbean teachers, Principles of Business 9781786321763 Religious Education 9781786321800 Social Studies 9781786321848 Spanish 9781786321978 Technical Drawing 9781786322005 Theatre Arts, Visual Arts and Music 9781786321886 and globally successful businesspeople, this is a Principles of Business Other examinations offered by the Caribbean Examinations Council: Caribbean Primary Exit Assessment (CPEA®), Caribbean Certificate of Secondary Level Competence (CCSLC®), Caribbean Advanced Proficiency Examination (CAPE®) and Caribbean Vocational Qualification (CVQ®). textbook that does so much more than just cover the syllabus. Find us on Facebook Find us on Twitter I S B N 978-1-786-32176-3 2013–2015 A completely new text designed to reflect modern business trends, /macmillancaribbean @MacCaribbean www.macmillan-caribbean.com 9 781786 321763 CSEC® PAST PAPERS concerns and practices as well as providing complete coverage of the 9781786321763_cover_PRESS.indd 1 08/12/2015 10:16 CXC Principles of Business syllabus, Macmillan’s Principles of Business o f B u s i for CSEC® Examinations: r i n c i p es nciples of lPrinciples P neofsBusiness ri usi CSEC ® encourages students to take concepts they have learned and i s P Bus ciples ofB ples apply them to their own experiences, through research projects, Prin essPrinci critical thinking exercises, and discussion topics inspires entrepreneurship through case studies and profiles of successful businesspeople from across the region and beyond Busipnles ofBusi inci provides unrivalled support for examination success, with SYLLABUS SPECIMEN PAPER scaffolded exam practice questions, model answers and MARK SCHEME SUBJECT REPORTS detailed insight into exam rubrics This comprehensive package is completed with a wealth of digital resources for teachers and students, from video case studies to additional resources emphasising the soft skills students need to maximise their exam success now and employability in the future. Series editor: Martin Lisboa Author and advisor team: Expert Contributors: Riana Balliram Paul Anderson Pete Budd Wayne Dass Edith Emmanuel Kamla Mungal Marsha Guiness Margaret Latchman-Nicholson Richell Husbands Carlisle Pemberton James McCloskey Emma Sue Prince Rachael Raghoo Bitu Nadia Salamat-Ali Kevin James Jacqueline Peters-Richardson Nisa Suepaul Conrad Valentine Find us on Facebook Find us on Twitter I S B N 978-0-230-44417-1 /macmillancaribbean @MacCaribbean www.macmillan-caribbean.com 9 780230 444171 CSEC PoB cover.indd 1 18/02/2016 13:38 Principles of Business for CSEC® Examinations Riana Balliram; Pete Budd; Edith Emmanuel; Marsha Guiness; Richell Husbands; James McCloskey; Rachael Raghoo Bitu Series Editor: Martin Lisboa Contributors: Paul Anderson, Wayne Dass, Margaret Latchman-Nicholson, Kamla Mungal, Carlisle Pemberton, Emma Sue Prince, Nadia Salamat-Ali Macmillan Education The author and publishers would like to thank the following for permission 4 Crinan Street to reproduce their photographs: London N1 9XW A division of Macmillan Publishers Limited Faraaz Abdool pp43, 313(t), (t); Alamy/Kevin Britland p111(tl), Alamy/ Michael Burrell p271(tr), Alamy/C and M History Pictures p284(tr), Alamy/ Companies and representatives throughout the world Tony Cordoza p212(br), Alamy/Cultura Creative p173(cr), Alamy/Cultura RM p198(tl), Alamy/Jolanta Dąbrowska p271(tr), Alamy/Howard Davies p181(b), ISBN 978-0-230-49467-1 AER Alamy/dbimages p339(t), Alamy/Danita Delimont p111(tr), Alamy/GAVIN DICKSON p118(b), Alamy/Peter Donaldson p195(2), Alamy/Michael Dwyer Text © R. 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However, understanding Principles of Business is so much EXPERT more than learning for your examination – success in the exam and in the future depends on applying CONTRIBUTORS those concepts to real life. The following leading businesspersons have written introductions to key concepts in each unit, reflecting current business trends, concerns and practices as well as providing an accurate Caribbean context: Paul Anderson, CEO, Trinidad and Tobago at Global Medical Response Paul Anderson is an American expatriate healthcare executive and has practised in the Caribbean for 10 of his 25-year management career. His portfolio includes foreign market business development in the healthcare industry, including involvement in emergency medicine enterprise. At the time of publication, he is a Doctorate in Business Administration candidate at the University of Liverpool (UK). Mr. Anderson is an adjunct faculty member at the Arthur Lok Jack Graduate School of Business at the University of the West Indies, where he primarily lectures in business strategy. Wayne Dass, CEO, CariCRIS Wayne Dass is the Chief Executive Officer of Caribbean Information and Credit Rating Services Limited (CariCRIS). CariCRIS is the Caribbean’s first credit rating agency. Wayne holds BSc. and MSc. degrees in Engineering and is a Chartered Financial Analyst (CFA) charter-holder. He has garnered over 20 years of credit market experience, technical expertise in credit risk assessment, financial risk management, investment management, and a wide knowledge of the Caribbean region. Prior to joining CariCRIS, Wayne held senior leadership positions in prominent regional financial institutions. Wayne is also a member of the board of the Trinidad & Tobago International Financial Centre and lectures part-time on Caribbean Capital Markets and Financial Institutions at the Arthur Lok Jack Graduate School of Business.  iii  Dr. Kamla Mungal, Director of the Leadership Institute, Arthur Lok Jack Graduate School of Business Dr. Kamla Mungal is the Director of the Leadership Institute at the Arthur Lok Jack Graduate School of Business, UWI, in Trinidad and Tobago. She also lectures in the areas of Leadership and Organisational Behaviour and Development. Dr. Mungal has participated in several global leadership development programmes. Her specialisations include curriculum design, development and implementation, and leadership of educational organisations. Dr. Mungal won the Teacher of the Year award in 2004 for her leadership of an at-risk school and she has worked with principals across the country to develop and implement their School Improvement Plans. Dr. Mungal continues to lead her staff to attain accreditation and recognition of the business school. Dr. Margaret Latchman-Nicholson, Programme Manager, Arthur Lok Jack School of Business, UWI Dr. Margaret Latchman-Nicholson worked in the UK for a number of years as a Business Studies and Economics Teacher, and as a Teacher Training Mentor (Secondary Schools) for the University of Hull (UK). Margaret completed her MBA and PhD at the University of Lincoln where she became a member of the Corporate and Professional Programmes Unit, where she has facilitated organisational change and development for a variety of public and private sector organisations. She is also experienced in managing academic and professional programmes in the Caribbean and in the UK. Dr. Carlisle Pemberton, President of the Caribbean Agro-Economic Society (CAES) Dr. Carlisle Pemberton recently retired as Professor of Agricultural Economics at the University of the West Indies. His teaching and research has spanned Production and Marketing, particularly with respect to the cocoa industry and also non-market valuation of wetlands. He is the President of the Caribbean Agro-Economic Society (CAES) and served for many years as the Chairman of the Cocoa and Coffee Industry Board of Trinidad and Tobago. Professor Pemberton has received a number of awards, including the Lifetime Achievement Award of the Caribbean Agro-Economic Society, a Senior Fulbright Fellowship and a World Bank Institute Award and Scholarship (Development Marketplace). iv   Emma Sue Prince, Director, Unimenta Emma Sue Prince is a qualified teacher and management development trainer, author and business consultant. Her expertise lies in soft skills, trainer training, materials design, qualification development and management development. She provides employability, soft skills and education consultancy in emerging economies all over the world and is currently working on large-scale projects in India, Malaysia, Tanzania and Bangladesh, in partnership with the Department of International Development and the British Council. Emma Sue is director of a free membership site for teachers and practitioners who deliver soft skills and personal development. You can join for free at www.unimenta.com. Nadia Salamat-Ali, Programme Director, Arthur Lok Jack Graduate School of Business Nadia Salamat-Ali is a lecturer and Programme Director for the International Master of Strategic Marketing Programme at the Arthur Lok Jack Graduate School of Business. She is also its subject group leader for Marketing. Nadia has been trained in writing and teaching using real-life cases from the Richard Ivey School of Business and has undergone specialised training in Business Etiquette and Protocol. She is also certified in teaching with the authentic business education model. Conrad Valentine, Business Education Officer, Jamaican Ministry of Education Mr. Conrad Valentine is currently employed at the Jamaican Ministry of Education as the Business Education Officer in the Technical & Vocational Unit. He is a graduate of the University of Technology and holds a Bachelor’s Degree in Business. Mr. Valentine has served the Ministry in various capacities and on various committees, and is an educator with over twenty years’ experience in the profession, who has taught at various levels of the education system.  v  CONTENTS Expert Contributors iii How to Use This Book ix Introduction to the Exam xi UNIT 1 The Nature of Business Overview 12 1.1 Forms of Exchange and Economic Systems 14 1.2 Types of Business Organisation 26 (UNITS 1–4) 1.3 Business Stakeholders 43 Unit 1 Revision & Exam Practice 48 UNIT 2 The Internal Organisational Environment Overview 52 PROFILE DIMENSION 1 – ORGANISATIONAL PRINCIPLES 2.1 Management of Organisations 54 2.2 Leadership 69 2.3 Working Environment 75 2.4 Resolving Conflict at Work 84 2.5 Management Information Systems 89 Unit 2 Revision & Exam Practice 94 UNIT 3 Establishing a Business Overview 98 3.1 Starting a Business 100 3.2 The Entrepreneur 104 3.3 Business Functions & Operations 112 3.4 Financing the Business 113 3.5 Conducting Market Research 115 3.6 Writing a Business Plan 117 3.7 Ethical and Legal Issues 120 Unit 3 Revision & Exam Practice 124 UNIT 4 Legal Aspects of Business Overview 128 4.1 Legal Principles and Contracts 130 4.2 Business Documents 142 4.3 Insurance 157 Unit 4 Revision & Exam Practice 164 vi   UNIT 5 Production PROFILE DIMENSION 2 – THE BUSINESS ENVIRONMENT (UNITS 5-7) Overview 168 5.1 Factors of Production 170 5.2 Production and Productivity 177 5.3 Small Businesses 183 5.4 Business Location, Technology and Industry Links 193 Unit 5 Revision & Exam Practice 200 UNIT 6 Marketing Overview 204 6.1 Marketing Strategy: The Marketing Mix 206 6.2 Market Research 219 6.3 Market Structures 225 6.4 Pricing and Consumer Behaviour 230 6.5 Promotion and Sales 237 6.6 Distribution Channels 249 6.7 Transportation 254 6.8 Consumer Protection and Intellectual Property 259 Unit 6 Revision & Exam Practice 262 UNIT 7 Business Finance Overview 266 7.1 Commercial Banking Sector 268 7.2 Central Bank Role and Functions 276 7.3 Business Finance and Personal Finance 282 Unit 7 Revision & Exam Practice 292  vii  UNIT 8 The Role of Government in an Economy Overview 296 8.1 Government and Business 298 PROFILE DIMENSION 3 – THE BUSINESS 8.2 Taxation 304 ENVIRONMENT (UNITS 8-10) 8.3 Government and Society 309 Unit 8 Revision & Exam Practice 318 UNIT 9 Social Accounting and Global Trade Overview 322 9.1 Standard of Living and Quality of Life 324 9.2 National Income and Economic Growth and Development 330 9.3 Trade 339 Unit 9 Revision & Exam Practice 348 UNIT 10 Regional and Global Business Environment Overview 352 10.1 Regional and Global Economic Institutions and Systems 354 10.2 Caribbean Business Environment 360 Unit 10 Revision & Exam Practice 372 The School-Based Assessment (SBA) 376 The Alternative to School-Based Assessment (SBA): Paper 03/2 390 Glossary 394 Index 398 viii   HOW TO USE THIS BOOK Macmillan’s Principles of Business for CSEC® Expert View Examinations Student’s Book brings students Each of the ten units opens with a double-page thought-provoking and relevant learning materials Expert View section which is written by academic that fully engage them at every step. The material subject specialists (see the Expert View page for is written in accessible language for all learning more information). This feature provides students with levels, and uses a task-based approach to learning credible insight into the subject area, showing how where mini-case studies, critical thinking tasks, the business theory relates to the Caribbean context. comprehension questions and mini-research projects are continuously interwoven into the core Comprehension Check syllabus content. The result is students who actively participate in their own learning. Through this Throughout the material, students will pause to process, students can retain and recall what they have consider and digest what they have read by learnt far more effectively and efficiently and so will completing comprehension questions to check their be more likely to achieve exam success. Integral to understanding. Questions are varied in format this approach is that students are also far more likely to keep students engaged. The questions are to enjoy the learning experience. designed not to simply replicate what students have learnt but ask them to cognitively process the How is the course organised? information presented. The structure of the course mirrors the CXC syllabus Critical Thinking with comprehensive coverage of all the Specific Objectives and an extensive SBA section at the back These Critical Thinking questions are integrated into of the book. The key business concepts and terms the material. Their aim is to go beyond comprehension covered in the syllabus are highlighted within each by getting students to think more deeply about the unit and are listed alphabetically in the Glossary at issues raised in the text. These questions are designed the back. Each of the 10 main Units is divided into to provoke discussion and to allow students to question sub-topics which group together related Specific and challenge some of the points made. These Objectives from the syllabus, encouraging students questions regularly encourage students to decentre: to link topics and ideas. Students undertake a to move them beyond their own opinion to view thorough revision of the material at the end of every issues from someone else’s perspective and to apply Unit in a four-page Exam Practice & Revision section. learning from the Student’s Book to new contexts. What is included in each unit? Student Research Projects Each sub-unit starts with a double page spread that These short sections prompt students to deepen orientates students to the topic. This is done in an their knowledge of the issues presented by doing accessible way through personalisation which frames their own research in a structured format and then the academic content in a way that is relevant to presenting their findings back to the class. This may students’ own lives – they are encouraged to think involve doing research online or speaking to friends about, discuss and apply some of the big wider issues and family which helps students ground the issues in to their own local context. their own experience. How to Use This Book ix Case Studies provide successive levels of temporary support that help students reach higher levels of comprehension and The case studies cover a broad range of industry skill acquisition. These supportive strategies are then sectors with a particular focus on the service sector: incrementally removed when they are no longer needed, in particular small micro-enterprises that are more and responsibility for the learning process shifts to accessible to students in this age group. Cases are the student. After completing the tasks, students will written in a narrative style designed to tell the be prepared to face a blank exam paper, equipped personal stories that capture the wider business issues not only with syllabus knowledge, but the skills to and bring them to life. Through these case studies, interpret rubrics and to write a proper exam answer. students are able to understand how business theory, principles and models work in practice. Digital Resources Fun with Business Throughout the book you will see QR codes like this one: Each unit finishes with a short Fun with Business puzzle that targets key terms and concepts presented These are unique Scan-Me codes which you can use to in the unit. These will especially benefit visual and access additional content. This includes extra case active learners and can be used as extension tasks. study videos to change the pace of the lesson and bring the topic to life, and worksheets for use at home Exam Practice & Revision or in the classroom. Answers are also provided online. At the end of each unit there is a four-page Exam To use the Scan-Me codes, you will need to download Practice & Revision section that fully tests students on a QR code reader onto your smartphone. But don’t the material they have learnt. The revision questions worry if you don’t have one – the hyperlinks provided are presented in the same format as the exam to will also take you straight to your extra content, e.g.: ensure that students not only revise the content but http://www.macmillan-caribbean.com/pages.aspx/ are also regularly familiarised with the exam itself. secondary/principles_of_business/. The first part of this revision test mirrors the multiple choice questions in Paper 1 of the exam. The second The Author and Advisory Team part mirrors Paper 2. Riana Balliram, Pete Budd, Edith Emmanuel, Marsha Guiness, Richell Husbands, Kevin James, Martin Lisboa, Model Answer Questions James B McCloskey, Jacqueline Peters-Richardson, The questions in Paper 2 are carefully graded model Rachael Raghoo Bitu, Nisa Suepaul and Conrad answer questions where students complete blanks in Valentine are experienced educators, business persons the texts or identify errors. This scaffolded material is and curriculum specialists. designed to be progressively more challenging as students work through the questions. Model answers x How to Use This Book  INTRODUCTION TO THE EXAM The CSEC® Principles of Business exam tests your Paper 3 knowledge and understanding of the theories, Paper 3/1: SBA project. Designed for school concepts, models and practices of business especially candidates and guided by your teacher. You are as applied to the Caribbean context. The syllabus required to write a business plan on the topic of aims to equip you with knowledge to pass your Marketing or Finance or Production. The final project examination, but also to foster a ‘sense of commitment should not exceed 1000 words. (See page 376 for to the development of the community’ – you should more information). Paper 3 provides 20% of total learn to evaluate ideas and opinions and to apply marks. them to the community and country around you. OR You will need to demonstrate an ability to retain and recall knowledge learnt selectively and appropriately, Paper 3/2: Alternative SBA project. Designed interpret data and draw conclusions, identify and for private candidates. You are required to answer analyse problems and devise solutions, develop questions on a case study. See page 390 for more research skills and critical thinking skills. information. The Paper 3 exam lasts 1 hour and provides 20% of total marks. The exam consists of two papers plus a School-Based Assessment (SBA) task as follows: Paper 1 Paper 1 consists of 60 multiple choice questions. The exam lasts 1 hour 15 minutes and provides 30% of total marks. Paper 2 Paper 2 requires you to write extensive answers to questions. It is divided into two parts. Part A consists of three compulsory questions whilst Part B has a choice of questions. Paper 2 exam lasts 2 hours and provides 50% of total marks. Introduction to the Exam xi  UNIT 1 THE NATURE OF BUSINESS Specific Objectives UNIT SUMMARY After studying this unit, you will be able to: In this unit you will learn about the development of instruments of exchange as society evolved explain key terms and concepts related to from the subsistence economy to using money business; as a medium of trade. You will learn to identify trace the development of instruments of sources of finance for firms and understand exchange; the basic legal structure and responsibilities state reasons why an individual may want to that govern how business organisations are establish a business; set up. By the end of this unit you will know the documents necessary for registering the describe the various forms of business main types of business. It is important for you organisations and arrangements; to be able to identify public and private sector differentiate among the different economic businesses and appreciate the impact of various systems; factors on a business as it grows and changes. Setting up a business can be difficult but identify the stakeholders involved coping with business growth presents another discuss the role of the stakeholders involved set of challenges. Unit 1 will set the stage for in business activities; understanding the chapters that follow in this textbook. It explores the key notions that are outline the functions of a business; important in making sense of how businesses describe the role of business within a function, regionally and internationally. community.  EXPERT 1. How would you define the concept of ‘business’? VIEW Business may be described as all the activities concerned with the production and distribution of goods and services in order to satisfy the needs and wants Dr. Margaret of consumers. Generally a business can be defined as an organisation where Latchman-Nicholson goods and services are offered for exchange, usually for money. Businesses include a range of companies, from a small owner-operated business such Programme Manager, as a family restaurant to multi-nationals such as Nestlé or Coca-Cola. Every UWI business requires capital investment and customers so that the exchange can lead to sales and profits. Remember: there are also non-profit organisations whose objectives may not be to maximise profits but rather ethical concerns, environmental and social issues. 2. Many young people dream of owning huge companies someday. Many imagine a sole trader to be too small and, therefore, very unprofitable. How would you advise them? If you have a good business idea and you like the idea of being your own boss then there are a number of different types of business structures that you can choose from. The legal structure of the business is quite important, as different types of businesses are subject to very different regulations and the wrong choice now could have costly consequences in the future. Take Massy Stores, a company originally begun in 1950 by Earnest Canning. The company evolved over the years to become one of the leading modern Caribbean supermarkets. There are numerous companies that enter the market as a small business such as a sole trader or partnership and that venture can grow to become a major multi-national corporation like Massy. KEY 3. Who are the stakeholders in business? Why should they be CONCEPTS interested in how well a business performs? Business A stakeholder is any person or group of people with an interest in the success All the activities concerned of a business. For example, the stakeholders of Caribbean Airlines (CAL) with the production and include shareholders (owners), the community, government, employees, distribution of goods and services in order to satisfy managers, customers and other persons who may be directly affected by the the needs and wants of way the business is run. Businesses have different rights and responsibilities consumers. towards their stakeholders. Conflicts will arise when the interests of one stakeholder group are opposite to that of another stakeholder group. You Economy may recall when the pilots at CAL were unhappy about salary issues and took The production, distribution and industrial action to force a decision. consumption of goods and services within a society as a whole, including the QUESTIONS way a country manages its resources (workers, land, 1. Define the concept of ‘business’. natural resources or money) 2. Most Caribbean islands have a mixed economy. Briefly explain why you believe most to produce, buy and sell those goods and services. Caribbean governments prefer this type of economic system. Stakeholder 3. Identify the various stakeholders who may be interested in the performance of a business. Any individual, Choose ANY FOUR of those which you have listed, and briefly explain why they are institution, group or agency which has a interested in how well a business performs. vested interest in how well a business performs. The Nature of Business | Unit 1 13  1.1 Forms of Exchange and Economic Systems their families through hunting, food gathering or Specific Objectives raiding the settlements of rival tribes. There was no established (formalised) economy during this time. After studying this topic, you will be able to: As time moved on, these nomads eventually settled into small communities where each family within explain key terms and concepts related the tribe occupied a small plot of land on which a to business; family hut was built and a small portion of the land trace the development of instruments was used to grow food to feed family members. of exchange; differentiate among the different With time, the early subsistence farmers economic systems. produced surplus food items and began to exchange these items with other families or tribes. For example, one family provided another Introduction family with a bag of cassava in exchange for a bag of breadfruit. This system where goods Humans have been described as an ‘economic were exchanged without the use of any form animals’ - we use products within our natural of currency is referred to as barter. Early environment to satisfy our basic needs and humans experienced many problems with wants. Early humans were nomadic – moving this system, and so they developed their own from one place to another in search of food, shelter forms of currency in order to make trade and security. They supported themselves and easier. Some tribes used items such as feathers, whilst others used shells, animal teeth or beads. Eventually, with the development of more organised economic systems, the use of money as a universal instrument of exchange was introduced. You will learn these concepts in this section and in particular about how they relate to our modern economic systems. 14 Unit 1 | The Nature of Business  CHECK Critical Thinking In which of the following scenarios is 1. How have things changed today? Are there any subsistence farming being practiced? similarities between some farmers today and Give reasons for your answer. the subsistence agriculture of early humans? Ms. James has a small garden where she grows 2. How has the invention of money changed limes, mangoes, guavas, plantain, seasoning the way farmers do business today? peppers and herbs for her personal use. Mr. Joe grows a range of fruits, vegetables The Subsistence Economy and root crops and also rears some goats, The subsistence economy, also referred to as chickens and sheep. He uses some of the the traditional economy, was the first economic produce of the farm to feed his family, but the system established by man. Under this system majority of the produce he sells to the local individual families farmed small plots of land with supermarkets to make a profit. fruits, vegetables and root crops such as dasheen, yam, cassava, and potato for the sole purpose of feeding or supporting their immediate households. Even today, some families still have small backyard The term ‘economy’ simply refers to society as gardens where they grow fruits, vegetables, root a whole. It may be further described as the way crops, as well as seasoning peppers and herbs. a country manages its resources (the skills and Does your family engage in subsistence farming? talents of its people, its natural resources and revenue from tax and other sources) to produce, So far we have discussed the overall concept of buy and sell goods and services. A good may the ‘subsistence economy’, but what does the be defined as a tangible commodity, whereas word ‘subsistence’ mean? What is an ‘economy’? a service may be described as an intangible Let us break these terms apart and try to commodity. A tangible commodity can be understand their individual meanings. held, seen or touched, whereas an intangible commodity cannot be seen, held, or touched, The term ‘subsistence’ here refers to but it can be experienced. production of goods on a very small scale, in order to cater to one’s immediate needs and wants. No surplus is produced for export or trade. The Nature of Business | Unit 1 15  As time progressed, with improvements in CHECK transportation, changes in individual taste and 1. Categorise the each of following items as preferences, as well as improvements in technology a good or a service. Give reasons for your which allowed for specialisation (the breaking answer. down of complex tasks into simpler tasks) to take place, individuals within early communities or meat rice online banking civilisations began producing surplus in order cellular phone pedicure transportation to exchange with other community members. massage education milk This shift is referred to as indirect production. With indirect production the goods and services What other goods and services do you think consumed by man is not produced by him, but were once thought of as ‘wants’ but are by other large-scale producers. Such ‘economic now considered ‘needs’? activity’ led to the development of the premiere system of exchange within the subsistence economy: the barter system. Direct versus Indirect Production Production may be described as the creation CHECK of goods and services. Earlier on we discussed Consider the following scenarios. Which the subsistence economy. Within this economic scenario depicts indirect production and system individuals and families initially engaged which depicts direct production? Give in what is termed direct production as they reasons for your answer. provided for all their needs and wants without reliance on a third party (such as a supermarket). Scenario 1: Elizabeth has a small garden These families grew their own food crops, sewed where she grows a variety of fruits, their own clothing, provided their own form of vegetables, root crops and herbs for her entertainment or recreation, etc. personal use. She also has a small chicken coop where she keeps chickens. Every morning she goes to the coop to collect some Critical Thinking eggs to prepare breakfast. 1 Based upon your understanding of ‘direct Scenario 2: Mohan grows a range of fruits, production’, do you think there are still vegetables and root crops and also rears families today which engage in this type of some goats, chickens and sheep. He uses production? Share your examples with your some of the produce of the farm to feed his classmates. family, but the majority of the produce he sells to the local supermarkets to make a 2 Do you think it would be beneficial if more profit. Nikisha visits the supermarket regularly, families or individuals engaged in direct where she purchases her weekly supply of production? Explain your view. fruits, vegetables, meat and other household items to satisfy the needs of her family. 16 Unit 1 | The Nature of Business  come up with the idea of looking around to see Critical Thinking if you can make an exchange with someone else. Based upon your understanding of ‘indirect In this situation a lack of a double coincidence production’, provide examples of how you have of wants may develop, as you may find it benefited from indirect production. What are difficult to find someone who has the brand some of the drawbacks of indirect production? of shoes you want who is also looking for the exact brand of shoes that you happen to have for exchange. Only by finding such a person can you The Barter System correct the lack of double coincidence of wants. The concept of barter is the exchange of goods and services without the use of money. For example, An Agreed Exchange Rate if you swap your watch for a classmate’s bag, Even if an individual could be found who was then the two of you have engaged in barter. willing to engage in barter, early man still faced the The actual items aren’t relevant – you might be problem of how to decide on an appropriate value exchanging a pen for a pencil instead – but the and common exchange rate for items to be bartered. essential fact is that barter involves the exchange of similar items, or items of similar value, by Indivisibility of Goods two individuals without the use of money either Some commodities may have been difficult to to replace the items or to measure their value. trade as it was hard to divide them into smaller While this system had its advantages, it also parts. For example, dividing up animals would be came with its problems or limitations, which hard if the item being traded was a live animal. prompted early man to replace this system with a more advanced and less problematic system of Inability to Store Wealth exchange. Let us take a look at these advantages Goods exchanged could not be stored for future and disadvantages. use as such commodities were highly perishable or easily spoiled. Advantages of Barter Allowed for greater variety in diet as they CHECK could exchange food items with one another. Provided a means to avoid losing any surplus 2. Define the term ‘barter’. produced. 3. Give three reasons why the barter system failed. Disadvantages of Barter A Lack of a Double Coincidence of Wants This was one of the major limitations of the barter system. People were required to find Critical Thinking buyers who not only wanted the surplus that they had for sale, but who also had what they In pairs or small groups discuss the following wanted in exchange. For example, suppose your questions: mom gets you a particular brand of sneakers for Have you ever bartered anything with your birthday that you don’t really like because friends? Did you get a good deal? Why or it is not ‘in fashion’ amongst your peers. You why not? What about your friend? The Nature of Business | Unit 1 17  The Money Economy As we discussed earlier, the problems or limitations of barter prompted early man to replace this system with a more advanced, and less problematic system of exchange – which led to the development of the money economy. The Development of Money Money, in earlier societies, did not take the form of coins and notes. Rather, it took the form of beads, feathers, elephant tusks, grain, shells and the like. This was followed by the use of gold, silver and other precious metals. The use of metals was further refined by the development Critical Thinking of coins. The use of money has proven to be ‘Earlier forms of currency were more quite advantageous as it holds its advantageous than the use of money.’ value over time; it can be Do you agree? easily translated into prices, and is widely accepted. Characteristics and Functions of Money Money has a number of key characteristics and As time passed, functions: people began depositing Characteristics of Money these coins and other valuables It is portable It can be easily transported from one with goldsmiths point to another. for safekeeping. It is divisible It can be divided into smaller or Goldsmiths levied fractional units. Example: cents. a small premium (a charge) for keeping these It is acceptable It is accepted by people in a country valuables safe. People were in exchange for goods and services. then given a receipt that served as evidence of It is durable Coins and bank notes are designed a transaction with the goldsmith. This receipt to last, and any worn bank notes are could then be brought back and handed over to replaced. withdraw money. This process was later refined yet further by the introduction of bank notes. It is scarce It is limited or restricted in supply. The development transformed goldsmiths into It is homogenous Coins and bank notes are similar in bankers. appearance and feel. 18 Unit 1 | The Nature of Business Functions of money Function Description It is a medium of This is the main function of money. It addresses some of the problems encountered with the barter system. exchange Money is used to facilitate trade. It is a unit of account Money provides a means by which goods and services can be given an appropriate value in the process of trade. It also provides a means by which mathematical or economical calculations can be made. It is a standard of The development of money allows individuals to postpone payments for items. Money facilitates the deferred payment expansion of the credit sector within our economy, allowing individuals to purchase items by using credit cards or on hire purchase. Items purchased by such methods are paid for at a later date. It is a store of value Money can be stored for future purposes and, so long as prices are stable, then the value of money remains relatively constant. This allows individuals to purchase a desired item at a later date. The Value of Money Instruments of Exchange (Payment Methods) It is important to note that money, in and of itself, has no value. The instruments of exchange Instrument of Description that we utilise on a day-to-day basis as we Exchange engage in daily transactions – such as buying a Coins A form of legal tender that is referred drink from a supermarket or paying for a taxi – to as ‘token money’. It’s useful for do not of themselves have any value. making purchases of small value items. Bank notes A form of legal tender which is also CHECK referred to as ‘paper money’. Bank notes are issued by Central Banks in 1. Indicate whether the following fixed denominations: $5, $10, $20, $50 statements are true or false: and $100. This is useful for paying for A. Money is described as a medium of goods and services which don’t accept exchange credit or debit cards. The value of paper B. Money was used during the barter system money is determined based upon the C. One of the characteristics of money is that level of economic activity that takes it is divisible place within an economy; how well D. Money, in and of itself, has no value that economy flourishes. E. Money can be used as a standard of Cheque You get these from your bank, but deferred payments cheques are not legal tender. A cheque is a written order by you as 2. In pairs or small groups make a list of as the drawer to a drawee to pay many different types of currencies as you a specified amount from your bank know. In a time limit of 3 minutes hold account to a payee. a competition to see which group in the class can make the longest list. The Nature of Business | Unit 1 19  There are numerous instruments of exchange used in modern-day society. Instruments of CHECK exchange are the mediums available to us for Sam had a total of $10,000 in bank deposits. trading goods and services, for example cash, He prepared a cheque ordering One Penny cheques, credit cards and bank drafts. The table Bank Ltd. to pay out $5,000 to Electronics below describes some of the most common Ltd. for the purchase of a flat screen instruments of exchange (payment methods). television. Which party to this transaction functions as: (a) the drawer, (b) the drawee Let us now go on to explore other instruments and (c) the payee? of exchange that are commonly used in business transactions: Instrument of Description Exchange Credit card A small plastic card utilised as a form of payment in business transactions. Credit cards allow individuals to purchase goods and services immediately and then pay back the credit card company with monthly payments in the future. The credit card company will charge the customer interest if his/her account is not fully paid off by the end of the month. Interest payments on credit cards can be quite high. Bill of exchange A bill of exchange is usually used to facilitate international trade between an importer and an exporter of a commodity. It is also used to facilitate trade between local businesses. This document of trade may be described as a written order that binds one party to pay a fixed sum of money to another party at a predetermined future date. The business or person who prepares the bill of exchange is referred to as the ‘drawer’, and the business or person who receives or accepts the bill of exchange by signing it is referred to as the ‘drawee’. When the drawee signs that document it becomes a legally binding agreement between the two parties. For example, let us assume that Johnsons Ltd. orders lumber from Lumber Inc.. Lumber Inc. (the drawer) prepares a bill of exchange which outlines that Johnsons Ltd. (the drawee) is required to pay a specific sum of money either immediately or on a fixed date in the future for payment of the lumber provided by Lumber Inc.. Johnsons Ltd. may pay Lumber Inc. directly, or the business may order its bank to make the required payment to Lumber Inc. on its behalf. Electronic transfers This involves the electronic transfer of money from one account to another. It is a generally considered a secure and fast means of making payments. Internet banking This service allows customers to bank at any time of day from their homes, offices or any other location via their cell phones, laptops or tablets. Customers can check their bank balance, make payments or transfer funds from one account to another – among other services. Tele-banking This refers to telephone banking services. It allows customers a high level of personalised service where they can speak directly, via the telephone, to a bank employee regarding issues or queries with their bank accounts. This type of service can be expensive for the bank to provide and therefore it is often reserved for wealthy clients. 20 Unit 1 | The Nature of Business  CHECK 1. How is internet banking different from tele-banking? 2. For each of the following items, identify the instrument of exchange which is best suited. Give reasons for your answers. A. Jessica is very excited about graduation which is scheduled to take place next month. She is busy shopping online for an elegant dress and fashionable shoes. B. Mr. Joseph purchased a container of goods from an American supplier to sell in his supermarket. C. Jason wants to purchase a packet of cheese curls from the vending machine on the school’s compound. D. Leanne wants to avoid the long lines for bill payment at Water and Sewerage Company (WASCO). E. Alana won $150 in a raffle and would like to deposit it into her bank account. Electronic Commerce CASE STUDY Read the case study Lindon had a great passion for and answer the cars and wanted to establish a car retail business. questions that However, he believed that his dream would never become a follow. reality as vehicles were not manufactured on his home island. He discussed this with a friend, Brad. Brad: ‘Lindon, we are living in the era of e-commerce! There’s no need to give up on your dream because there is no manufacturing plant on our island. You can use the internet to buy your vehicles from an international supplier, import them, and resell them to the locals at a profit! That’s one of the greatest benefits of e-commerce – we have access to almost anything we desire anywhere in the world!’ Lindon: ‘All that’s true, but I’m worried that the security of my personal and financial information may be at risk if I trade over the internet. And I won’t be able to see the actual product until it arrives – what if it’s not what I ordered or the car gets damaged through the shipment process?’ Brad: ‘It is important to practice good cyber-safety, that’s true. There are many dishonest people online who may 1. Based upon the discussion scam you out of your money and you may never receive the presented above, define the goods that you paid for. It’s good that you’re considering term ‘e-commerce’. all of these factors. Let’s do some research to find secure websites and reliable suppliers for your business.’ 2. Suggest two benefits of e-commerce for the people of Lindon took Brad’s advice and did some research. He your country? located a trustworthy supplier of reconditioned or used cars in Japan who was eager to do business with him. 3. Identify three drawbacks of Within a few months, Lindon’s business was up and e-commerce? running quite successfully. The Nature of Business | Unit 1 21  Advantages of e-commerce Technology is constantly changing, and it Provides businesses with access to a very wide may be difficult and costly for businesses market or customer base. Customers are able involved in e-commerce to keep up. to access stores from anywhere at any time. Stiff competition. There may be numerous The business can sell to anyone in the world. businesses online offering similar services. Customers have the benefit of greater variety. Businesses have to compete even more or Decreased retailing costs – businesses have spend a lot of money on marketing and lower overhead costs as there is less need for advertising in order to get their websites ‘bricks and mortar’ or physical store locations. seen by consumers. Customers can shop 24 hours a day, seven Problems can arise with the delivery of days a week. items bought given the remote distance Retailers can quickly respond to customer between suppliers and customers around queries or complaints online and provide the world. Delivery may be affected by them with current information. This may differences in climate as well as human allow businesses to build a one-to-one error. Also, depending upon the distance relationship with the customer. between suppliers and customers around the world, high delivery charges may be applied. Disadvantages of e-commerce Damaged goods are often difficult to The personal touch is lacking online. replace, and customers are often required Customers are unable to see, touch, experience to pay a return shipping fee. or inspect the products before purchase. Security issues regarding personal and E-commerce requires the use of internet financial information put consumers at connections, electronic devices or credit cards. risk of identity theft and online scams These are not available to everyone around or fraud. the world. STUDENT RESEARCH PROJECT Choose a business in your community which actively uses the internet to purchase or sell goods or services to consumers. Arrange an interview with the owner of the business, and share the findings of your research with your class. Provided below are guiding questions for the conduct of your interview: 1. Can you describe the activities of your business? 2. What are some of the benefits that your business has enjoyed from engaging in e-commerce? 3. Have you experienced any challenges when you engage in e-commerce? What are they? How have you overcome them? 22 Unit 1 | The Nature of Business Economic Systems 1. Level of government involvement: How high is the government’s control of the economy? The development of the money economy, indirect production and organised trade resulted Very low Middle Very high in the establishment of economic systems. This Free market Mixed Planned may be defined as a system or plan put in place economy economy economy by the government of a country as to how it will allocate its scarce resources within the 2. Level of freedom of choice: Do producers have economy for the production and distribution the freedom to produce desired goods of goods and services to satisfy the needs and and services? Do consumers also have the wants of its population. freedom to choose from a variety of goods and services? One of the greatest economic problems faced Very low Middle Very high by countries is that of scarcity, where there are Planned Mixed Free market limited natural and financial resources available to economy economy economy satisfy the needs of the population. Governments are therefore forced to budget and allocate 3. Ownership of resources: Are resources largely resources across the country as best as is possible. owned by the state or by the private sector? Little state Balance of both state Largely state ownership and private sector ownership Critical Thinking Free market Mixed Planned economy economy economy Think about your country. Do you believe that it is affected by the problem of scarcity? Give reasons for your answer. 4. Price fixing: Are prices set by the state or by market forces of demand and supply? State sets Balance of both state Market forces Determining a Country’s Economic System prices and market forces As discussed at the start of this unit, early man Planned Mixed Free market economy economy economy operated under the subsistence or traditional economic system. In today’s world, however, countries may be categorised as having one of 5. Ownership of profits: Are profits from business the three types of economic system: owned by the state or by private individuals? 1. a planned, command or socialist economic State-owned Balance of both Private system state and private individuals individuals 2. a free market or capitalist economic system Planned Mixed Free market 3. a mixed economic system economy economy economy In determining which economic system a Let us now consider the advantages and government of a country has in place, some key disadvantages of each of these three modern characteristics must be considered: economic systems. The Nature of Business | Unit 1 23  The Planned Economy Consumers’ wants are ignored because in a Supporters of planned or command economic planned economy the government focuses systems argue that: solely on satisfying the basic needs of the population. Consumers are therefore forced to The state acts in the interest of the people accept whatever the state decides to produce. as a whole and is therefore better placed Where the government has such control over to produce goods and services that benefit the resources and people of a country, the everyone, not just a select cross-section of rights of citizens may be ignored or abused. the population who can afford them (as is the case in the free economy). This way the government ensures that the basic needs of Examples of countries with highly planned the entire population are met. economies around the world include China, North Korea and Cuba. Resources may be allocated more effectively in areas where needed as the government may be equipped with more relevant Critical Thinking information about the economy and be able to make more informed decisions. If your government were to implement a Wasteful competition amongst businesses is planned economy do you think it would be avoided as equal distribution of resources is more advantageous or more disadvantageous encouraged. for the citizens of your country? Justify your view. You can ask your teacher to help you With active government involvement in discuss the pros and cons. planned economies, the production of products that are harmful to the planet and the community may be discouraged. The Free Market Economy Critics of the planned economy argue that: Supporters of free market economies argue that: There is no freedom of choice either for There is complete freedom of choice for both consumers or for producers. producers and consumers. A wide variety of goods and services are available to consumers Extensive government control results in to satisfy their every need and want. unnecessary regulations and paperwork known as ‘red tape’ (bureaucracy). There is little or no government interference, which eliminates ‘red tape’. Private sector initiatives may be stifled. Individuals and companies may be very Resources may be allocated more efficiently by reluctant to establish businesses in countries the private sector as emphasis is placed upon with planned economies. investing in areas where profit may be maximised in the interest of the economy as a whole. Low employee morale: being under the absolute control of the government, Extensive competiti