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Caribbean Examinations Council

for CSEC

LE
P
M
A
S

for self-study and distance learning


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Caribbean Examinations Council

for CSEC

LE
P
M
A
S

for self-study and distance learning


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Contents 2

Introduction 3 T7
Marketing 185
T1
The nature of business 5

T8
Business nance 243
T2
Internal organisational
environment 47

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T9
The role of government in
an economy 251
T3
Establishing a business 85

T
10 Social accounting and
T4
The school-based
P international trade 263
assessment 99
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T11
Regional and global business
T5
Legal aspects of business 123 environment 278
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T6
Production 141
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Introduction 35

Purpose What resources will you need?



The Caribbean Examinations Council (CXC ), in Remember that this study guide will not be all that
collaboration with the Commonwealth of Learning you need to complete the syllabus and prepare for
(COL), has developed self-study guides for a number your examination. You are expected to make use of
of Caribbean Secondary Education Certicate (CSEC) the resources listed at the end of the course book as
and Caribbean Advanced Prociency Examination well as engage in other wide, general reading, which
(CAPE) subjects. The main purpose of the guides will improve your general knowledge, vocabulary
is to provide both in-school and out-of-school and structural competence.
candidates with resource materials to help them
You will also need basic study equipment, for
prepare for CXC examinations. Each study guide is

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example, paper, pens, pencils and highlighters for
student-centred and its language is student-friendly.
marking important parts of the text. A good dictionary
and a thesaurus are also essential to this programme.
Course aims
This course aims to: Managing your time
1 promote understanding of theories, concepts Remember to put aside a special time each day for
and practices that are applicable to the general reading in addition to your study time.
culturally diversied economic environment of
the Caribbean;
P Study guide structure
2 provide knowledge of business and of its role
in a rapidly changing Caribbean and global You will be exploring 11 sections in order to
economic environment; complete the Principles of Business syllabus. Each
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3 provide the opportunity for informed decision- section starts with the following items:
making through the development of skills in
Section introduction This gives you a brief
critical thinking, problem-solving, research and
overview of the entire section, and places it in
communication;
the context of the Principles of Business syllabus.
4 nurture students creative and entrepreneurial
Objectives These show you the main things that
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abilities to enable them to participate fully in the


the writers want you to learn, and the specic
local, regional and global economy;
skills that you should have acquired by the end
5 sensitise students to the need for responsible of the section. You should read these carefully to
social and ethical behaviour in their pursuit of acquaint yourself with what you are meant to be
business goals;
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learning.
6 enable students to access and apply appropriate Topics This lists the topics that are to be covered
technology in pursuing opportunities and solving in the section.
problems in business.
The topics in each section are structured as follows:
Course structure Introduction This places what you are about to
study in the context of your everyday life and
The course consists of 11 sections based on the
relates it to what you have done in previous
Principles of Business syllabus. Each section
sections.
addresses the skills and content of a specic
module of the syllabus. However, the sequence Contents This is the information that forms
of the section does not mirror that of the syllabus each lesson and is meant to guide you to an
modules since the syllabus modules are not bound understanding of each concept being taught.
by a rigid sequence. The sequence of topics in this Read carefully before you attempt any activities
course is designed to facilitate study by leading you that follow.
through topics in a way that enables you to build on Activities Instructions are provided at the start
previously learned skills. of each activity. Read all instructions carefully
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4 Introduction

before you attempt the activity. Some activities Assignments


require you to think about something before you
read any further. You should take the necessary Course assignments are included in order to allow
time to do so. The thinking activity is designed you to check your progress through the course. The
to help you focus your thoughts in the right assignments enable you to determine your areas of
direction and facilitate your ability to complete weakness and to check your understanding of the
the activities that follow. concepts.
Feedback Each activity has feedback that allows
you to determine how you have done in the Examinations
activity. If you have not completed the activity Please refer to the latest syllabus for guidance on
successfully, you should reread the preceding the structure of the exam, the number of papers, the

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examples or information carefully. length of each paper, what marks are allocated to
Examples These are meant to guide you to an each question and the structure of the school-based
understanding of the concept being taught. All assessment.
examples should be read carefully before you
attempt any activities that follow. School-based assessment
At the end of each section, you must pay special The school-based assessment component of the
attention to the following: Principles of Business syllabus is a single guided
End test This comes at the end of each section research project for school candidates. Candidates

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of the study guide and is designed to ensure are required to write a business plan for a specic
that you have acquired those skills identied functional area of a business. The project should
in the objectives. There is a feedback section be based on the theme of establishing a business.
following the test which allows you to measure Students should apply the knowledge and skills
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the accuracy of your answers, so that you will incorporated in Prole Dimension 2: Production,
know whether or not you have acquired the marketing and nance. The business plan should
competencies. If there are questions in the be on one of production, marketing or nance.
test that you have not answered satisfactorily, The report should be between 1,000 and 1,200
ensure that you return to the relevant section words (not including appendices).
of the study guide and review those areas until
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Private candidates, or those candidates who are


you are satised that you have understood the not under the direct supervision of a recognised
concept. educational institution, are required to write Paper
Key points These summarise important concepts 03/2 in lieu of the project. Please refer to a copy of
that you need to remember and pay special the latest syllabus for guidance on the structure and
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attention to in the future. length of this paper.


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1 The nature of business

General objectives Welcome to the wonderful and exciting world of business! An


excellent way to start is by understanding the jargon, or main
On completion of this section, words and concepts of the business world. The topics that you
you should: learn in this section will give you a framework or foundation
appreciate the stages in the that you will use for all the other sections. You will be using
development of business these new words as your own business vocabulary, so study
activities carefully. It is very important that you understand the topics,
because this information is used to make business decisions.
develop an understanding
of the underlying business Chapter 1 introduces you to the principles used by business
principles that form the basis organisations to guide their operations. You will learn how

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for business decisions. humans 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 all
Specic objectives their business activities. You will also learn about stakeholders
You should be able to: in a business, and the main functions and responsibilities of
businesses in a country. On completion of this chapter, you
explain terms and concepts should have a good understanding of the general features of
related to business
describe the transition of
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businesses.

business activity from barter Contents


to the use of exchange
Important business terms and concepts
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instruments
From barter to the use of money and e-commerce
differentiate among types
of private and public sector Types of businesses in the private and public sectors
business organisations Forms of business organisation and arrangement
distinguish among the
Economic systems
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economic systems Stakeholders


Responsibilities of a business
discuss the role of stakeholders
involved in business activities
Important business terms and concepts
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outline the role and functions


of a business. Have you ever tried to learn a new language or dialect? Maybe as a
child you played the game of creating your own language. This topic
is your introduction to the study of business. It helps you to form your
new business language or vocabulary. Before you can think and act like
a businessperson, you must rst learn how to use the words that they
use every day. Lets get familiar with the words below.

Enterprise
The word enterprise could simply mean a business. Generally, it
is used to describe an undertaking or activity with some degree of
difculty or risk. This undertaking has a specic purpose. A business
enterprise has a monetary purpose or goal. Enterprise could also
mean initiative, which is daring to do something new or different,
challenging or risky.

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6 Chapter 1

Example
Tommy has started a small restaurant. This enterprise should be very
successful because he is such a great chef!

Entrepreneurship
Entrepreneurship is the practice of identifying a new innovation
or opportunity, organising the nancing and other resources, and
taking the risk in the hope of creating wealth. The entrepreneur is
the individual who identies the opportunity and risks the time and
money to start to organise this new adventure. You could use the
internet and talk to your parents or guardians to learn about many
interesting entrepreneurs in your country.

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Barter
This means the exchange of goods for other goods. This was the rst
type of trade. Did you know that some businesses today still carry out
barter? 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 nancial gain for the
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business or entrepreneur. It can be represented in the following way:
Prot is the outcome or result when:
TR is $600 and TC is $400,
Example

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


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therefore:
which is the same as writing:
TR TC = prot
TR > TC
$600 $400 = $200 prot
Revenue is the money earned from the enterprise or business.

Loss
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A loss is the opposite of prot. When the costs of production and other
expenses are greater than the revenue, this is called making a loss. It
means that the business is not making enough money.
TR is $300 and TC is $500,
Example

A loss is the outcome or result when:


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therefore:
Total revenue (TR) is less than total cost (TC)
TR TC = loss
which is the same as writing: $300 $500 = ($200) loss
TR < TC

Activity 1.1
Lets see whether you understand the concepts of October
prot and loss. Imagine that Peter makes fruit juices in Total sales revenue is $60,000
your neighbourhood; below are his costs and revenues
Total cost for all expenses is $52,000
for September and October in 2010:
a In which month did Peter make a prot?
September
b What was the amount of the prot?
Total sales revenue is $50,000
c How much was the amount of the loss?
Total cost for all expenses is $55,000
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The nature of business 7

Feedback
If you understood how we calculated the prot and loss In part (c), the loss is written as a negative value by
in the examples given, this activity should have been using brackets ( ).
easy. Your answer should be: You could also have used a minus sign to show that it is
a negative value.
a Peter made a prot in October.
b TR $60,000 TC $52,000 = $8,000 prot
c TR $50,000 TC $55,000 = ($5,000) loss

Trade
This means buying and selling. A business will engage in trade in order
to make a prot.

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Organisation
This means a group of persons using resources or things that are
arranged in a certain way to carry out specic activities in order to
achieve 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
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what should be produced, how and for whom. Different countries may
make different decisions about these things, so we would say that they
have different types of economies.

Producer
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This is a person or business that makes or creates goods or services.
Usually, the goal of the producer is to make a prot.

Consumer
This is the person (or group) that buys goods and services to satisfy
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wants. The goal of a consumer is to maximise satisfaction. Think of the


things 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
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This is the giving of one thing and the receiving of another. The things
exchanged are usually of similar value.
Whenever you purchase a book,
Example

Goods you are purchasing a good or a


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

Services
When you pay the dentist for
Example

This means work that is done for another; assistance or benet given. checking your teeth, you are
Services are intangible, unlike goods. paying for a service.
Market
A market is any situation in which buyers and sellers meet or
communicate in order to exchange goods and services. The buyers and
sellers do not have to meet face-to-face. Have you been to a produce
market in your country? Well, this is only one example of a market,
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where the buyers and sellers meet face-to-face. Buyers and sellers can
communicate and do business online or over the phone.

Commodity
This is an item that is traded, usually raw materials such as copper or
coffee.

Capital
This word has different meanings. It can mean the money and other
resources or things that are used to start a business. It can also mean
the money, machines and man-made materials that are used every day
in business.

Labour
This is the physical or mental work of a person. It also means the

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worker. Labour is another name for human resource.
Before we examine the nal word, lets carry out a revision activity.
How much do you think you remember?

Activity 1.2
Carefully read each of the following statements or 4 An intangible benet is called a
questions. This is a multiple-choice exercise. You must a service

each statement or question.


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select the best option among (a), (b), (c) and (d) below
b good
c commodity
1 Another word for a business is
d market
a building
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5 When coffee is traded between countries it is
b capital
called a
c enterprise
a loss
d economy
b prot
2 Persons who own and operate their own business c good
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are called
d commodity
a executives
6 Which of the following words could mean
b operators
man-made resources?
c economisers
a labour
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d entrepreneurs
b capital
3 A person who creates goods and services is called a c organisation
a consumer d market
b producer
c businessperson
d trader

Feedback
Your answers should be:
1 c 2 d 3 b 4 a 5 d 6 b
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The nature of business 9

Specialisation
Specialisation of labour refers to the division of a task into a number
of 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 distinct
operations, which included one person who drew out the wire,
another who straightened it, a third who cut it, and a fourth who
pointed it and so on. Since all of these processes were performed by
distinct hands, there was an increase in output to 48,000 pins in a
single day.
Specialisation is a form of division of labour in which each individual Activity 1.3
or rm concentrates its productive efforts on a single or limited
number of activities. Specialisation can: Here is your opportunity to test
whether you understand division
occur at the product or occupational level, for example, the

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of labour. List ve areas of
production of cows milk; specialisation for conducting the:
be a process, for example, the making of butter;
a building of a house
be by rm, for example, Jamaica Cement Limited specialises in the
production of cement; b manufacture of a motor car
be industry-related, for example, it could be conned to the bauxite c production of a movie.
industry;
be regional or international in scope, for example, the Caribbean Feedback
area is known for tourism.
P Your answer could include the
Let us now explore the advantages and disadvantages of division of
following activities:
labour and specialisation.
a The building of a house
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Advantages architect or draughtsman; mason;
It increases the skills of workers since the same task is repeated and plumber; electrician; carpenter.
workers learn from repetition. b The manufacture of a motor
It increases productivity. Less time is used to change from one car designer; engineer;
activity to another. upholsterer; painter; auto
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The cost of production is reduced since a greater number of items electrician.


are made. c The production of a movie
The quality of the product can also improve since workers are more scriptwriter; set designer; actor;
skilled and the use of machines means that quality control can be musician; director.
observed.
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Less time is spent on training of workers because only a small part


of the skill is necessary.
Disadvantages
The work is monotonous. The work becomes boring and
tiresome.
The work environment is impersonal since specialisation leads to
large-scale industries in which workers are no longer close family
members.
Workers may lose pride in their job since they are not completing
the entire job and, therefore, cannot fully appreciate the making of
the product.
Some processes require a large amount of capital to purchase the
machinery.
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Activity 1.4
This activity will help to reinforce your knowledge. The advantages and
disadvantages of the division of labour and specialisation. State whether
the following statements are true (T) or false (F).
1 Specialisation increases efciency.
2 Division of labour develops an individuals creativity.
3 Specialisation can be applied to all productive activities.
4 Cost per unit is reduced with specialisation.
Feedback
5 Specialisation produces sameness of products.
1 T 3 F 5 T
6 Workers feel alienated from their produce because of division of
labour. 2 F 4 T 6 T

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From barter to the use of money and
e-commerce
Business activities change over time. You must now examine the
history of business activity in order to understand why changes were
necessary. This topic explains these stages, which started with direct
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satisfaction or self-sufciency through to the use of money. You will
also 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?
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How our ancestors satisfied their needs and wants
Our early ancestors satised 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 for
their meat and skins, which provided food and clothing, respectively.
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They gathered berries, and scoured the shrubs and grasses for wild
peas and beans. Fishing in rivers and watercourses provided sh and
seaweeds.
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Activity 1.5
Imagine you were living in a primitive society; list ve items you would use
as food, and the source for each item.

Feedback
If you listed any item that is used directly from nature without any
processing, you are correct. Below is a list of some of these items.
Food such as fruits, peas, beans and berries were obtained from trees. Ground
provisions such as cassava and dasheen were dug out of the earth. Small
animals, including birds, and produce of animals such as milk and honey, were
obtained from animal life. Fish and seaweeds were sourced from the sea.
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The nature of business 11

Now let us examine how our early ancestors equipped themselves with Activity 1.6
clothing, shelter, tools and utensils. Clothing was provided from animal
skins, for example, wool from sheep. Branches and leaves from trees, From the information you have
and mud and stones from the earth, were used to build huts. Tools and just read, identify the items
weapons were made of animal teeth and bones, branches and small of nature used by our early
stones. Spears, for example, were made from tree branches. Utensils such ancestors.
as bowls for storing water were made from clay and stones or provided
from the cleaned-out insides of seeds such as the coconut. Grass was used
Feedback
to make baskets. Animal bones, horns and items such as elephant tusks
were used to make eating and drinking utensils. Wood and stones were You should list items from the earth,
used to make resides for the cooking of food and provision of warmth. seas, animals and trees. You could
include stones, grass, bones and
The development of the barter system similar answers.

You have seen that our early ancestors satised their needs directly

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from nature, hardly altering the original state of the goods by cooking
or applying any form of processing. Economists refer to this type of
existence as the direct satisfaction of wants. An economic system where
needs and wants are satised directly from nature is referred to by
economists as a subsistence economy.
A subsistence economy continued for thousands of years, until groups
of hunters and gatherers found it convenient to abandon their nomadic
way of life and settle down on the embankments of rivers, streams
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and waterways. Here, they could obtain a steady supply of water;
locations such as these provided fertile soils and both plant and animal
life could be found in abundance. This act of settling down created
the conditions for a more orderly and peaceful existence, in which
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family units could thrive by gathering food, caring for plants that they
found 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 to
Bartering
Example

satisfy the needs of families, who were forced to specialise in whatever


The exchange of sh for green
crops were native to the area they inhabited. For instance, a Taino
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peas, or bananas for yams, or


family producing corn on the banks of a river in Guyana still relished
pearls for a stone axe.
the meat and skins that Kalinago hunters from the interior possessed
in large quantities. It will be obvious to you by now that, in time, there These exchanges all involve the
would develop a system whereby tribes would begin to exchange their giving of one item for another,
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goods for those they were unable to acquire themselves. This system and money is not used.
whereby goods are exchanged for other goods is called bartering.
Activity 1.7
Limitations of the barter system From your reading of the above,
While bartering solved some problems, there were many drawbacks. dene the term barter, giving an
For bartering to be successful, one person must have what the other example in your answer.
person wants and be prepared to exchange. This condition is referred
to as a double coincidence of wants. For example, Jim must need the
bananas that Tom has, and Tom must need the peas that Jim has. Only Feedback
then is the exchange possible. The process became very complicated
If your answer indicates that
when more than two persons were involved in the exchange, since
bartering is the exchange of goods
persons would have to keep exchanging items until individual wants
and services without the use of
and needs were met.
money, for example, the exchange
Another problem was deciding the rate of exchange or the right quantity of gold bits for sheepskins, you are
acceptable in exchange for the other item. For example, how many indeed correct.
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12 Chapter 1

pounds of peas would be acceptable in exchange for a certain quantity of


bananas? For instance, are 10 lbs of peas equal to 2 lbs of bananas?
Another problem was the indivisibility of certain commodities. One
could not exchange part of a cow for peas, since refrigeration was not
yet invented. It therefore meant that the entire cow had to be traded
as 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. Some
items lost value with the passing of time, while others gained value
with time. For example, perishable goods lost value with the passing
of time, whereas precious stones such as gold gained value with time.
It became very difcult, therefore, to settle on trading principles and
practices that guaranteed a fair price for goods that were exchanged.

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Activity 1.8
Read the following case and identify the problems of unsuccessful. After ve days, Ancient Tim met Zion,
the barter system experienced by Ancient Tim and who had some very large sh. They both had difculty
Zion. in deciding how many of Ancient Tims peas could
be exchanged for one of Zions large sh. Also, Zion
Case study
needed animal bones to make spears for shing the
Ancient Tim, who cultivated peas and corn for himself next day. He approached Mary, Harry and Jack, but by
and his wife, wished to have sh to complement his late evening he was unable to nd a suitable person
peas and corn for dinner. He approached Harry, but
Harry had only mutton and did not require peas or
P with whom to exchange his remaining sh for the
bones of animals.
corn. He approached Jane, Frank and Mary, but still was
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Feedback
The problems of Ancient Tim and Zion were derived from indivisibility of the commodity, that is, Tim did not
two problems associated with bartering: want all the sh Zion had, and, therefore, there was a
problem deciding on the exchange rate of the items
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the need for a double coincidence of wants, that is,


and their value, especially in light of the fact that
Ancient Tim had to nd someone who had sh and
they were both perishable items.
required peas and corn; later, Zion faced the same
problem when he could not nd someone who had
bones and required sh
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The history of money


Money is considered a nancial wonder since it solved many of the
problems associated with the barter system. In this section, we will
examine the functions and characteristics of money and show that
its introduction facilitated trade and led to the development of the
modern nancial system that is in operation today.
Our early ancestors progressed from using peas, stones and shells
to using precious metals for trading. The Egyptians were among the
rst to use metal rings as money. The Lydians introduced coins to the
Western world. Coins were more acceptable since they were
hard-wearing, easy to carry and contained valuable metals. These coins
were referred to as commodity money. The value of the coin depended
on the quantity of gold or silver it contained.
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The nature of business 13

The Chinese introduced paper currency. The Emperors seal and


signature were placed on the paper in order to authenticate the
currency. Paper currency is not intrinsically valuable since the paper
only represents wealth and promises that it would be exchanged at a
later date for other commodities. Representative money, therefore,
is accepted in the exchange for goods and services since it has been
authorised by the government.

Activity 1.9
This exercise will help you to understand the contribution money has
made to economic progress.
Indicate which of the following statements are true (T) or false (F).
1 In early civilisation traders used commodity money.

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2 Coins were introduced because they were durable.
3 Commodity money was regarded as token money.
4 Representative money was accepted because the emperors seal and
signature were placed on it. Feedback
5 Representative money can be exchanged for a commodity. 1 T 3 F 5 T
6 In todays trading, representative money is used. 2 T 4 T 6 T
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Features of money
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Money is any commodity that is accepted as a measure of value and a
medium of exchange. To be accepted as money, the commodity must
have the following features:
the commodity must be acceptable everyone must be willing to
accept it;
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it must be relatively scarce. In other words, the item must only


be available in small quantities. In this way, the value will be
maintained;
the commodity must be capable of being divided easily into smaller
fractions;
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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 (at money) and coins are the most common
forms of money.

Functions of money
Now let us consider the functions of money. In order for money to
effectively solve the problems of the barter system it must serve as a:
medium of exchange everyone must be willing to accept it in the
exchange for goods and services;
standard of value the worth of the goods or service is measured
in money, which sets the price of the item. For instance, a ring with
a 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. It


makes saving possible and hence brings about investment;
means of deferred payment money is used to pay for goods
bought on credit;
facilitator of the price mechanism it is the price one is willing to
pay to satisfy effective demand.

Activity 1.10
This activity will help you to recall the functions of money. Match the
statements 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. medium of exchange
This function deals with the price of items.

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3 It can be accumulated and used to purchase a car in three price mechanism
years time.
4 My stereo system can be purchased on hire purchase. store of value
5 It makes easy the exchange of currency for purchasing goods standard of value
and services.

Feedback
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1 medium of exchange 3 store of value 5 price mechanism
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2 standard of value 4 means of deferred payment

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


well as different forms of near money, that is, other acceptable forms of
payment. One example is a cheque, which is a signed order for payment
from a persons bank account. Another example is a bill of exchange.
Mr Chung Foo in China is selling
Example
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It is possible that bills of exchange were being used before paper money
two cars to Mr Davis in Grenada.
was created. A bill of exchange is a written order from one person to
The cars will be shipped off to
another. The person who sends it is instructing the person receiving it
Grenada as soon as Mr Davis
to pay a specic sum of money at a specic time in the future. The
accepts the bill of exchange
person who is sending it is called the drawer, the person receiving it is
that Mr Chung Foo has sent. The
called the drawee (who owes money to the drawer). The drawer may
cars will take 27 days to reach
give instructions for the money to be paid to another person.
Grenada, and the bill of exchange
Bills of exchange are usually used by persons who are selling goods to is due to be paid in 28 days.
others 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 benet
being purchased. A credit card is a card given by a nancial institution to
its customer which authorises that customer to purchase on credit. This
card enables the electronic transfer of information and money.
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The nature of business 15

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

Customer Bob presents his credit card to the grocery store instead of
Example

making a cash payment. The grocery stores cashier accepts the credit card
and inserts it in a machine which is electronically linked to the nancial
institution. It will reveal whether the card is valid and the amount of money
is authorised. If the transaction receives an approval message, the machine
prints copies of a receipt. The cashier gives Bob one copy of the receipt. The
cashier will send another copy of the receipt to Bobs nancial institution,
which will make the necessary payment. Bob will then have a specied
period of time to pay the nancial institution.

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Electronic transfer
Previously we used the word electronic. One meaning of the word
electronic is via the use of a computer network. This should help you
to understand how money is transferred electronically.
Electronic funds transfer is a very fast and safe way of making payments
P
during trade. The payment can be transferred electronically from one bank
account to another. A cardholder can insert his or her automatic banking
card (also called a debit card) into a machine which is electronically linked
to his or her bank accounts. By keying in a special code, the cardholder
M
authorises the transfer of money from his or her bank account.

Telebanking and e-commerce


E-commerce refers to any business transaction that is done through
the internet. This may include the transfer of money as well as
A

information. Many Caribbean businesses are able to compete with


other businesses all over the world by engaging in e-commerce. They
advertise, purchase materials and sell their products over the internet.
Telebanking is a system for conducting banking transactions over
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telephone lines.

Activity 1.11
This activity will help you to understand when the 2 Paul wants to sell his guava jam in England. It
different instruments of exchange are used. Answer the is produced in Guyana, but English buyers want
following questions by indicating which of the instruments to buy many cases in England. Paul can send the
would be most appropriate: a bill of exchange, credit card jams on a plane, but he wants payment rst.
or electronic transfer, or telebanking. What is the fastest payment method for Pauls
customers?
1 Marie lives in Jamaica. She is buying an expensive
machine from Japan. She has to show that she is 3 Oliver wants to travel to another part of the
willing to pay before the machine leaves Japan. country to purchase some supplies. It will cost
However, she does not want to release the actual a lot of money, but Oliver does not want to travel
money from her bank account until she is sure with a large amount of cash. What would be
that the machine has arrived in Jamaica. Which a more convenient payment method for
instrument should she use? Oliver?
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Feedback
1 Bill of exchange 2 Telebanking or electronic transfer 3 Credit card

Reasons for establishing a business


A business organisation is formed when a person or group of persons
uses resources to provide goods or services with the view of making a
prot. There may be other goals, such as maximising sales, the growth of
the rms assets or simply satisfying the owners desire to be in business.1
The prot-making motive distinguishes businesses from non-
prot-making organisations. The purpose of business is to make a
prot, whereas the purpose of non-prot-making organisations is

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humanitarian, that is, providing services or goods for the benet of
mankind. Non-prot-making organisations may, at the end of their
nancial year, generate a surplus.
Examples of non-prot-making organisations are social clubs and
organisations that provide support for disadvantaged persons in
society, for example, a home for abused women. P
Activity 1.12
Classify each of the following businesses as either
prot-making or non-prot-making. The rst one has
been done for you.
M
Profit-making Non-profit-making
business organisation
Tom repairs shoes for people in the community.
A

Rodney sells food items to the neighbourhood.


Mary prepares meals for the homeless.
John provides a taxi service.
S

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 to
offset the expenses of the group.
The farmers cooperative sells seedlings to the farmers in the
neighbourhood.

1
Layyne, W. Armanand , Samuel, Wendell and Anthony Kenny, CXC Principles of Business,
Cambridge University Press, 1994.
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Feedback

Profit-making Non-profit-making
business 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.

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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 to
offset the expenses of the group.
The farmers cooperative sells seedlings to the farmers in the
neighbourhood.
P
The main functions of a business
M
The functions are listed below.
The production of goods or services. Goods are tangible items
used to satisfy human wants and needs, whereas services are
intangibles that are used to satisfy human wants and needs.
The creation of jobs. In order to produce goods or services, labour
A

must be used. The amount of labour used will depend on whether


the rm is labour-intensive or capital-intensive. Labour-intensive
rms employ a large number of people, whereas capital-intensive
rms use a lot of machinery.
In the case of private investments, the aim is to make a profit. All
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businesses aim to make the highest possible returns on investment


so that the shareholders (owners) of the business receive an
adequate dividend.
The aim of non-prot-making organisations is to fulll a need in
the provision of goods or services that will be of benefit to the
community. In society, there are those who are unable to satisfy
their basic needs through their own efforts, and others who may
need nancial or social support.
To contribute to economic growth. Economic growth is the
increase in the total real output of goods and services in an
economy over time. Business adds to economic growth. Each new
business adds to output, and creates growth and employment.
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Types of businesses in the private and


public sectors
In mixed economies like ours in the English-speaking Caribbean,
businesses are classied 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 to
understand the decisions of different businesspersons.

Private sector
The private sector is that part of the economy that is funded by private
individuals and is therefore owned and controlled by private rms. Firms in the private sector

Example
The objective of the private sector is to make a prot. The private One-owner businesses, such as
sector includes the self-employed, the manufacturing industries, rms the small shop on the street,

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in the construction industry, joint ventures, multinational rms and family-owned businesses, a large
cooperatives. In most countries, it also includes hawkers, that is, those business with several investors,
who are engaged in purchasing items from abroad to be sold locally on or multinational companies.
the streets or in homes.
Firms in the private sector have the following common features:
the aim is to make a prot;
prots are shared among shareholders or those who invest in the
company;
the business is funded by the owners;
P
there is little or no government intervention or control;
the business is funded by private individuals;
M
owners are free to make their own decisions as long as these
decisions are not contrary to the laws of the land.

Public sector
The public sector is that part of the economy that is nanced by the
A

government through taxpayers, and is controlled and operated by the


government or its agents. The surplus or prot is used for the benet
of the entire population. The public sector includes government-
controlled companies, companies incorporated by the government
through legislation, companies that are essential for the development
S

of the economy, and companies in which the private sector has little
or no interest until they are sufciently developed or if prots are to
be made in the future, for example, communication companies or
Public sector organisation
Example

production of water and energy.


Organisations in the public sector
Firms in the public sector share the following features. This sector: are government-controlled
aims to provide a service at the lowest possible price; agencies, such as those that supply
uses prots to improve the efciency of the rm or to benet all water and sewerage services, or
citizens; those in communication, such as
The Telecommunication Services
usually participates in ventures that provide basic necessities;
of Trinidad and Tobago (TSTT),
is funded by the government through taxation; the Jamaica Telecommunication
is driven by the need to provide goods and services to the Services and government
population so as to improve their quality of life. agencies such as the Ministries
of Health, Education and Social
Services.
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Activity 1.13
This activity will help you to identify businesses in the 6 The postal agency is a statutory body that is
private sector and the public sector. The knowledge controlled by an government-appointed board
will assist you in understanding why businesses of directors.
operate in a particular manner. Read the instructions
7 A public transport company that is funded by
of the various businesses and indicate whether these
taxpayers.
businesses are in the private or public sector.
8 A group of designers and seamstresses formed
1 Jim maintains his family by using his private vehicle
themselves into a company, Jamaica Garments,
for hire.
which supplies uniforms and a variety of cloths for
2 Mary goes to Florida every three months to shop. On the government.
her return she sells her goods in the vendors mall.
9 A multinational rm that has been serving
3 State Co. is a company of which the government food and related beverages to the Caribbean
has 60 per cent ownership; it supplies water to an area.

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Asian country.
10 Samsons Housing Development builds homes
4 Agri. Co., an agricultural company that grants loans throughout the Caribbean and Latin American
to farmers, is controlled by the state. countries.
5 Power Supply Inc. is a joint venture rm which
supplies energy to the country. P
Feedback
1 private 3 public 5 private 7 public 9 private
2 private 4 public 6 public 8 private 10 private
M
Forms of business organisation and arrangement
The sole trader/sole proprietorship
A

Definition
A sole trader is a person who has total ownership of and responsibility
for managing his or her business. The owner is the boss. As owner,
there is no obligation to share the prots with others and all the debts
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incurred by the business are the responsibility of the owner alone.


This responsibility for the debts may even extend to personal assets. In
other words, one may lose ones 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 family
and friends.
He or she enjoys all the prot and bears all the risks.
Capital is limited since the savings of the owner fund the
business.
He or she has personal contact with the client.
He or she performs a large variety of tasks related to the operations
of the business.
This type of business is not incorporated (not given a separate
identity) 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 for
professional services, such as doctors, lawyers and surveyors.

Formation
There are no legal formalities involved in setting up business as a sole
trader, except that a trade name must be registered and some traders
must acquire special licenses. For example, the sale of alcohol requires
a license from the local magistrate, and the sale of food items requires
prior approval from the local health authority.
Legally, the business and its sole proprietor are inseparable, and
therefore the owner is responsible for all debts, including taxes
(income tax) and National Insurance contributions as a self-employed
person.

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Management and advantages of the sole trader
The sole trader manages the business personally, and this has many
advantages, as listed below.
Ease of formation: As mentioned before, there are no legal
requirements, except in a minority of trades.
Independence: Many persons nd personal satisfaction in working


for themselves.
P
Simple organisational structure: The organisational structure is
simple, usually the owner and one or two employees, who may be
relatives or friends.
M
Personal control: The proprietor has personal control, with no
obligation to consult, thus decision-making is quick.
Personal service: The proprietor knows his staff and customers
individually and can vary the hours of work to suit the customers.
Secrecy: There is no need to disclose business affairs, except to
A

the tax authorities and to creditors when seeking loans. Minimum


accounting is necessary only to satisfy the income tax ofce.
Personal commitment to succeed: When working for oneself,
there is a greater commitment to succeed.
S

Disadvantages of the sole trader


Limited source of finance: The sole proprietors capital depends
on personal savings or prots, and on loans made on the security
of personal property. As a result, the amount of capital available is
often not enough for much expansion.
Lack of specialised staff: The owner may not be in a position to
employ specialised staff, and therefore the business may not expand
as quickly.
Over-reliance upon ones personal health and vigour: Illness or
old age can cause difculties. There is therefore a lack of security
for family, employees and clients.
Unlimited liability: If the business fails, even the personal
possessions of the owner will be sold in order to pay off the debts of
the business (if necessary).
Lack of leisure time: The sole trader has to work long hours and
may not be able to take a vacation.
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Lack of technology: The sole proprietor can seldom afford the


heavy capital outlay required, and therefore may not be able to
benet from economies of scale.

Partnerships
Definition
A partnership is an association of 2 to 20 partners operating
a business for the common goal of making a prot. The owners share
the responsibility for the running of the business and any subsequent
prot or losses that may be generated. Partnerships are not legal
entities in their own right. Consequently, a partnership cannot sue
or be sued in its own name; instead, each of the partners has to be
named.

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There are two kinds: ordinary partnerships and limited partnerships.
In ordinary partnerships, losses are shared equally, or as agreed by
partners. 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 is
20 members, except in the case of banking, in which the minimum
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number is 10. Among professions such as stockbrokers, stockjobbers,
lawyers and accountants, membership is unlimited since the
Partnership Act prevents professionals from forming companies.
There are two main types of partners: limited and general/ordinary
M
partners. In the ordinary partnership, each partner may take an
active role in the management of the business. Each partner acts as
an agent of the partnership, and therefore the action of one partner
is binding on all partners.
There must be at least one ordinary partner in the limited
A

partnership. The ordinary partners liability for debts and


obligations is unlimited.
Example

The limited partner cannot take part in management. He or she Partnership


has no power to bind the rm. Partnerships are popular among
professions like stockbrokers
S

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


and stockjobbers, accountants,
Capital is provided by the partners as agreed. solicitors, and among specialists
The retirement or death of one partner may require the like decorators.
reorganisation or dissolution of the partnership.
Formation
When a number of persons want to form a partnership, a written
agreement should be drawn up. This is called the Partnership Deed.
The written agreement, although not necessary, helps to settle
disputes. In the absence of such agreements, the partnership will be
governed by the Partnership Act.
The Partnership Deed or Articles of the Partnership sets out in writing
the 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;
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arrangements for division of prots 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 in
anticipation of prot, and the amount of interest, if any, to be
charged on these drawings;
the role of each partner;
salaries, if any, to be paid to certain partners for the performance of
special duties;
voting rights;
methods of determining goodwill;
arbitration procedures if partners cannot reach an agreement;
the duration of the partnership and method of dissolving the
partnership.

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In the absence of a Deed, the Partnership Act is enforced. It states that:
prots 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 specialised
skills must be included in the Partnership Deed.

Advantages of partnerships
P
More capital: More capital can be obtained than as a sole trader.
Specialisation: Partners can specialise and manage different sections
M
of the business according to their ability, experience and training.
This allows for greater efciency 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 the
A

sole trader. The business may not be dissolved at the death or


bankruptcy of a partner.
Limited liability: It is possible to have limited liability by being a
limited partner.
S

Workload shared: The workload is shared among partners, thus


partners 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 bad
mistake.
Limited capital: Capital is still limited and may be insufcient for
full expansion.
Disagreement: There can be difculty of management when
partners disagree.
Concentrated risk: The risk is still concentrated on a few.
Decision-making: Decision-making may take longer and arguments
may arise.
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Capital: Capital is limited to 20 partners.


Continuity: Continuity of the partnership may be broken on the
death 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 their
members. The cooperative society must be registered. Shares are sold
to 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.

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Membership is open to constituents.
There is limited interest on capital investments.
The surpluses of cooperative societies are distributed according to
the shares/purchases of the members.
Characteristics
Cooperatives share the characteristics listed below.

retail or other nancial activities.
P
They are voluntary, non-prot-making organisations engaged in

They are managed and controlled by their members.


The members are also the clients.
M
Members have a common bond, for example, all are teachers or
public 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.
A

Financial cooperatives, for example, credit unions.


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

Consumer cooperatives involved in the retail trade, for example, the


El Dorado Cooperative, which retails foodstuff.
Service cooperatives such as the St Christophers Taxi
Cooperatives.
Advantages of cooperatives
There are many advantages to be gained from being a member of a
cooperative. Listed below are some of these advantages.
Members pool their resources.
Members are the owners.
There is shared decision-making.
All prots are shared among the membership.
The community bond is strengthened.
Products are much lower in price since administrative expenses are
lower.
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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 the
organisation.
Decision-making is slow and therefore clients may lose out on
opportunities.

Activity 1.14
This activity will help reinforce your knowledge in dening and stating the
formation and management of sole traders, partnerships and cooperatives.
Fill in the blanks in the table.

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Form of business Definition Formation Management
Sole trader
Partnership
Cooperative

Feedback
P
Form of business Definition Formation Management
M
Sole trader A person who owns, No legal requirements, Managed by the owner.
controls, manages and however, trade names
has total responsibility must be registered.
for his or her business.
Partnership An association of 2 to No formal requirement, Management by ordinary
20 partners operating a but it is best if a partners.
A

business for the common Partnership Deed is


goal of making a prot. drawn up.
Cooperative A business that is formed Each member purchases Governed by
by individuals with a shares to form the membership through a
S

common bond. capital base of the management board.


business. Board of management
elected annually by the
membership.

Activity 1.15
List the advantages and disadvantages of sole proprietorships,
partnerships, and cooperatives.
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The nature of business 25

Feedback

Form of business Advantages Disadvantages


Sole trader 1 Easy to form. 1 Source of nance is limited.
2 The owner has great exibility. 2 Lack of specialised staff.
3 There is a simple organisation structure 3 Over-reliance on ones personal health and
usually the owner and one or two vigour.
workers. 4 The owner has unlimited liability.
4 Personal service is provided to clients. 5 The owner has limited leisure time.
5 The owner has personal incentive to 6 Simple technology is used because of the
succeed since all prots belong to him or lack of nance.
her.
6 There is no need to disclose prots.

Partnerships 1 More capital is obtained. 1 Ordinary partners have unlimited liability.

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2 Specialisation is possible since partners 2 The actions of ordinary partners are binding
may bring their expertise to the business. on the partnership.
3 There is continuity of the business. 3 Capital is still limited.
4 Some partners enjoy limited liability. 4 Conict may occur among the partners.
5 The workload can be shared. 5 Decision-making takes longer.
6 Partners share in the decision-making. 6 In the absence of a partnership agreement
prots are shared equally, irrespective of
efforts.
Cooperatives 1 Members pool their resources. 1 The membership may not have the expertise
2 Members are the owners.
P necessary to build the organisation.
3 Decision-making is shared. 2 Decision-making is slow.
4 All surpluses are shared among the
membership.
M
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.
A

Companies
Definition
S

A company is a business entity that has been incorporated, that is, the
company has a separate legal identity from that of the owner(s). This
separate identity means that the company can enter into contracts, make
any 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 can
commence trading. Certain documents must be submitted to the
Registrar 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 companys relationship with the outside world.
It contains:

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the companys name, which must contain the word Limited;
the address of the companys registered ofce;
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
P
These control the internal running of the company. They cover such
areas as:
procedures for calling an annual general meeting;
rights and obligations of the directors;
M
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
A

This is the amount stated in the Memorandum of Association,


which is the maximum amount which the company is authorised
to raise.

Prospectus
S

This is an invitation to the public to buy shares in a public limited


company. It contains detailed information to enable investors to
estimate its prospects. It is important that the public should not be
misled.

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 prots.
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, and
usually sales of shares are restricted to the membership.
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Characteristics of private limited companies


Capital is obtained from private individuals, nancial institutions,
government agencies or retained prots.
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 the
membership is larger.
The company has continuity and thus can easily obtain loans from

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nancial institutions.
The company has a separate legal identity from the ownership.
Shareholders have limited liability. The nancial commitment of the
shareholder does not extend to his or her personal possessions.
Disadvantages of private limited companies
Capital is limited since the membership is limited to 50.

Companies.
P
The company must le its nancial reports with the Registrar of

Selling of shares is restricted to the private grouping.

Public limited companies


M
Definition
A public limited company or joint stock company is an incorporated
company that offers shares to the public.
Management
A

The board of directors, which is elected by the shareholders at the


annual general meeting, manages the public limited company. The
board of directors appoints an executive director or chief executive
ofcer, who heads the company and reports to the board on the
S

operations of the company.


Characteristics of public limited companies
There must be at least seven shareholders, with no limit on the
maximum 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 and
nancial institutions.
The company is continuous; it does not close down on the death of
a shareholder.
Greater specialisation is possible.
Advantages of public limited companies
It is easier to obtain nance. A public company is able to obtain
investment from many small investors as well as from large
organisations.
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Shareholders have limited liability. Ownership and control are


separated.
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 and
directors 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 and
day-to-day administration of the company are divided the
shareholders are the owners and the directors run the company.

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Control of the company may be lost if another company or other
people obtain sufcient shares in the company.
These companies lack the personal element that is a feature of the
simpler forms of business organisations.

Multinational corporations
Definition
P
Multinational corporations (MNCs), also called transnational
corporations, are a network of rms which operate in multiple
countries but are owned and controlled by a single group of
shareholders.
M
Characteristics of multinational corporations
The following are characteristics of multinational corporations.
Multinational corporations are created through direct foreign
investment (DFI).
A

Headquarters of multinational corporations are usually located in


a developed country, while subsidiary companies are located in
developing countries.
These rms usually use the latest technology and invest heavily in
S

research and development.


These rms are usually capital-intensive and therefore benet from
economies of scale.
Management
Expatriates with limited local inputs manage the subsidiaries of
transnational or multinational rms.

Advantages of investment by multinational corporations to


the host country
The following are some of the benets to the host country of
multinational 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 to


the host country
The following are some of the disadvantages to the host country of
multinational corporations.
Risk of abuse of workers rights and poor working conditions in
the factories.
Possible destruction of the environment.
Possible intimidation of trade unions, which try to improve working
conditions and to expose the poor conditions of work.
Possible abuse of consumers, for example, babies fed breastmilk
substitute or children exposed to intensive tobacco marketing.
Risk of destruction of communities, especially when the company
moves to another location.

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Repatriation of prots.

Activity 1.16
Dene limited liability companies (private and public), and
multinationals; then state how they are formed and managed.
P
Feedback

Form of business Definition Formation Management


M
Private limited company A business Must be incorporated and, Managed by the owners or
organisation with therefore, must give to the Registrar persons appointed by the
250 members. of Companies the following owners
Membership is documents:
restricted to close Memorandum of Association
friends and family. Articles of Association
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Statements of Authorised,
Registered or Nominal Capital
Public limited company An incorporated Must be incorporated and must give a Managed by a board of
business organisation to the Registrar of Companies the directors
with at least seven following documents: b Daily operations
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members that offers Memorandum of Association managed by an


shares to the public Articles of Association executive director with
Statements of Authorized, help of specialist staff
Registered or Nominal Capital
Prospectus
Multinational corporations Network of rms Incorporated in a developed Managed by team of
which operate in country expatriates
multiple countries

Activity 1.17
List the advantages and disadvantages of limited liability companies
(private and public) and multinational corporations.
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Feedback

Form of business Advantages Disadvantages


Private limited company 1 The capital base is larger than that of the 1 Although capital base is larger than
sole trader or partnership. that of the shareholder, it is still limited
2 Companies have continuity. since the membership is restricted
3 The company can easily obtain loans. to 50.
4 Shareholders have limited liability. 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. 1 Setting-up of the company is time-
2 There is continuity of the business. consuming and costly.
3 Shareholders have limited liability. 2 The accounts have to be made public.
4 The value of shares is quoted on the stock 3 Decision-making takes longer.
exchange and, therefore, members can There may be conict between owners

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4
assess the value of their shares. and paid managers.
5 The company has a separate legal 5 The company is in a vulnerable position
identity. since it may be taken over by mergers.
6 These companies enjoy economies of
scale.
Multinational 1 Large foreign capital injected into the 1 Possible poor working conditions and
corporations country. abuse of workers rights.
2 Creates employment. 2 Possible destruction of the environment.
3 Transfers skills.
P
4 Increases revenue (through taxes) for the
3 Possible intimidation of workers and
trade unions.
country.
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State corporations
Definition
State corporations are independent organisations set up by the
A

government to carry out a service. The government does not control


their daily operations, but can x the overall strategy for them and
nominate their board of directors. These are usually non-prot-making,
but in the long term they have to be self-nancing. State corporations
are usually in the broadcasting eld, and in the transport, power and
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telecommunication industries.

Formation
State corporations are formed by legislation, that is, by the passing of
laws by Parliament.

Management
The government appoints a board of governors or directors for a
stipulated time frame. An executive director is also appointed to head
each organisation. The executive director reports to the board of
governors or directors.

Characteristics of state corporations


State corporations normally display the characteristics listed below.
Funding is mainly done by the state providing grants, although
some legislation allows the organisations to raise their own funds.
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The state or state-appointed auditors monitor all accounting


procedures.
Annual accounting reports must be sent to the Auditor General.
The aim of the state is not to make a prot, but it is expected that
these corporations may break even.

Nationalised industries
Definition
Nationalised industries are rms which were once privately owned,
but have been taken over by the government. Governments seek
to nationalise key industries, that is, the industries on which the
government depends for the countrys economic survival, for example,
the oil industry in Trinidad and Tobago or the bauxite industry in

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Jamaica.

Formation
A company becomes nationalised when the government purchases all
or the majority of shares in the company.

Management
As for state corporations, a board of governors is appointed. The board
reports to the line minister of government. Each nationalised industry
P
has an executive director who heads the company. The audited
accounting reports of these companies must be laid with the auditor
general or a government accounting rm.
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Characteristics of nationalised industries
Nationalised industries display common features, including the
following:
They are legal entities.
The state is the only shareholder.
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They are managed by boards of directors that are appointed by the


state.

Advantages of nationalised industries


The following are advantages of nationalised industries.
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Ownership and control are in the hands of the state, thus all prots
remain in the country.
The company is in a better position to service the needs of the
community, for example, the funding of community projects in
education, 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 attract
the best expertise.
The industries may be a drain on the governments revenue.
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Government departments
The system of government in the Caribbean is divided into two broad
categories central and local government1.3 The central government
consists 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. Each
ministry is headed by an elected ofcial, the minister, and a team of
technocrats headed by a permanent secretary.
The local government system consists of the municipal authorities,
for example, the city corporations. This arm of government serves the
community. They are mainly responsible for local road maintenance,
garbage collection, maintenance of parks and roadways, cleaning of
gullies and culverts, public cemeteries, and the consumer markets.
Funding is provided by central government and the collection of rates

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and taxes from the local residents. At a local government election,
councillors are elected. From among these councillors, the mayor of a
city 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 specic project.

P
Franchise: an agreement between an established company
(a franchiser) and a franchisee, in which permission is granted to
conduct business in a prescribed manner set out by the franchiser.
The franchisee has an obligation to pay royalty fees to the franchiser
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periodically, but the franchisee in return gains from the reputation
and business expertise or management of the franchiser. This business
arrangement is gaining increasing popularity in the Caribbean, for
example, in McDonalds, KFC, Pizza Hut and The Body Shop.
A

Activity 1.18
Match the statements below with the following types of organisation structure. A structure may be used more
than once. The rst one has been done for you.
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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 rm 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.

3
Robinson, Karlene and Hamil, Sybile, CXC Principles of Business, Carlong Publishers
(Caribbean) Ltd, Kingston, 2001.
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Statement Organisation
A foreign company joins with a local company.
The board is appointed by the government.
The aim is to provide a service, not generate prots.
Too much political interference.
Prots are returned to the people.

Feedback

Statement Organisation

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An independent organisation set up by the state to carry out a service. state corporation
A rm once in the hands of private individuals but now owned and nationalised industry
controlled by the government.
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
P
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
M
The aim is to provide a service, not prots. state corporations
Too much political interference. state corporation and nationalised industry
Prots are returned to the people. nationalised industry and state corporation

Economic systems
A

Which country do you live in? Did you know that your country uses
an economic system? The term economic system refers to the way
society organises its scarce resources to produce goods and services to
satisfy the needs and wants of the population. Societies are organised
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to 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 classied 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 rarely
used today. In those early societies, people formed communities and
produced food and basic goods for a simple lifestyle. An example is
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Taino society, where enough was produced to satisfy the needs of all
persons, and simple exchange took place if there was any surplus.
There was usually a community leader, such as a cacique, who made
the decisions of what, how and for whom the goods and services
would be produced. Bartering was used to obtain the goods that the
community 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 economy


The free market is an economic system in which the customer drives the
economy. The consumer inuences the producers decisions on what to
produce since the producers will not make a prot by producing goods
that are not in demand. Consumers exercise the right to buy whatever
they want to satisfy the needs and wants of their family.

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Private individuals own the resources in a free market economy
and there is little or no governmental interference. The factors of
production 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 and
efciency of production and supply. The market forces, therefore,
determine allocation of resources.
In a free market economy, goods and services are bought and sold
P
on the market. The market may be a physical place, such as an
agricultural market, which many persons in the Caribbean visit on
Saturdays or Sundays to obtain fruit, vegetables and meat. A market
may also be a neighborhood shop, a bank, an insurance company or
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the stock market, where shares of companies are bought and sold.
Although there are no pure free market economies, the US and Hong
Kong are examples of two economies that are closest to the theoretical
concept of a free market economy.
Let us now explore the benets and limitations of the market economy.
A

Benefits of the market economy


The benets of market economies are listed below.
Governments involvement is very limited. The activity of the
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government is usually restricted to the collection of taxes.


Competition among rms forces prices down.
Producers are free to use the factors of production in any way they
consider to be most suitable to them.
Consumers are free to spend their money in any way to give them
maximum 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 efciency in the use of factors of production, since
market forces determine the allocation of resources.
Limitations of the market economy
The limitations of market economies are listed below.
The prot motive drives this economy and thus encourages unequal
distribution of wealth.
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Large sums of money are spent on advertising, which creates


articial demand and increases prices.
Monopolies develop and these can exploit consumers since they can
unilaterally decide on higher prices.
Social and merit goods, for example, health, defence, education and
security, may not be adequately provided for.
Trade unions may be suppressed since the capitalist may seek to
suppress wages in order to minimise the cost of production.

Activity 1.19
This activity will help reinforce your knowledge of the 5 Consumers have a wider variety of ______________
advantages and disadvantages of the market economy. and __________.
Complete the following sentences.
6 Because of the prot motive there is ____________

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1 The market economy is a more _________________ __________.
type of market.
7 Advertising creates ____________ _______________.
2 There is limited ______________ ________________
8 Market economies are not driven to produce _____
in this type of market.
and _______ goods.
3 Consumers set the ____________ of goods and
9 _________________ are generally present.
services.
10 ____________________ are low since trade union
4 Prices are kept down because of ________________.
P activities are not encouraged.

Feedback
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1 efcient 3 prices 5 goods, services 7 articial demand 9 monopolies
2 governmental 4 competition 6 unequal 8 social, merit 10 wages
involvement distribution
of wealth
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Planned or command economy


A planned economy is one in which the government assumes
responsibility for economic planning in order to achieve the best possible
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use and distribution of a countrys scare resources. Governments,


therefore, inuence 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 economic
activities.
The government decides on what to produce, how much to produce
and 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 the
resources.
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 inexible compared
with the decision-making of the capitalist economy, and this may
lead to scarcity of goods or services.
The government may have the responsibility of administering and
implementing the plans. This task may be too enormous for the
technocrats working with the government and hence there may be Planned economies

Example
inefciency in the delivery of goods and services. North Korea, Cuba and the
Private sector initiatives may be blocked. Soviet Union (before 1990).
Planning may be manipulated by the more powerful groups that
may not act in the best interests of all.

Activity 1.20

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This activity will help you to understand the features of 4 Competition ensures efciency.
planned economies.
5 Income is more evenly distributed.
The following sentences describe features of a planned
6 Poverty is eradicated.
economy. State whether each statement is true (T) or
false (F). 7 The government usually operates through large
bureaucracies and hence this is a more efcient
1 Private enterprises assume full responsibility for
system.
economic planning.
2 Key economic variables such as income and
P 8 The private sector usually takes a leading role.
investment are under the direct control of the 9 Prices are controlled by the state.
government.
10 Powerful politicians can inuence government
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3 What to produce and how much to produce are decisions, which may not be in the best interests
inuenced by the consumer. of the population.

Feedback
A

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

Mixed economies
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Mixed economies are economic arrangements in which both


government and private individuals make economic decisions as to
what to produce, how to produce and for whom goods and services
should be produced.
The mixed economy is by far the most popular form of economic
organisation existing in the world today. Most countries, including the
English-speaking Caribbean states, have mixed economies.

Characteristics of the mixed economy


Involvement of both state and private individuals.
Efcient 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 efcient use of resources. A wide variety of goods


are available since the government complements those goods and
services that are provided by the private sector.
Governments are free to make laws to protect natural resources and
the people.
Limitations of mixed economies
There is always a need to keep a balance between government and
private sector involvement.
Conict may arise between government and private investment, and
thus result in long delays in the production of goods and services.

Stakeholders
Now that you understand how business activities evolved and the

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different types of businesses, you should examine the persons or
groups who make decisions. These are the stakeholders, and they are
all affected by business decisions. Did you know that you are also a
stakeholder in the various business activities that take place in your
community? Let us examine what we mean by this term.
Definition: Stakeholders are the various groups within and outside
an organisation that stand to potentially gain or lose as a result of the
organisations actions.
Examine the following list of stakeholders.
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owners/employers/investors
employees
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customers/consumers
suppliers
government
the members of society (including the media, special interest
groups, communities)
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lenders/investors and other creditors.


It is important to identify the stakeholders in a business so that the
organisation:
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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 its
stakeholders.

The roles of stakeholders involved in business activity


Role of employers/investors/managers
These parties want to achieve:
the best return on their investments (prots);
efcient management of the resources (employees, raw materials,
equipment) through planning, control and other functions and
strategies 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 and
respectful treatment, good working conditions and the necessary
tools 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 efciently 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 complaints

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and 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:

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regulations that force the business to consider the best interests of
the other stakeholders;
assistance to businesses in the form of loans, training, research and
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nancial aid/subsidies;
information to all the stakeholders (in many cases);
protection for consumers through laws and agencies; also protection
to all the other stakeholders.
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Activity 1.21
Use this exercise to assess your understanding of owners, wanted to know if Sandra knew how to grow
stakeholders. Read the following situation and healthy chickens. Sandra is also concerned about her
complete the table that follows. prots.
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Sandra has graduated from school and plans to keep Use the table below to identify the type of
layer chickens in her backyard. She plans to sell the stakeholders in this situation. In the space provided,
eggs to the two corner shops in her neighbourhood. write the name of the stakeholder.
Her younger cousin, Althea, will assist her with caring
for the chickens. Type of stakeholder Name of the stakeholder
As soon as Sandra started building a structure for the Owner
chickens, several persons began to voice their concerns.
Phillip, who lived beside her, wanted to know how Employee
often she would be cleaning the hen-house. Althea Customer
wanted to know if she would be paid a reasonable
amount of money. Tommy, one of the corner-shop Community member
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The nature of business 39

Responsibilities of a business Feedback


You have already learned that businesses can be formed in different
ways, and that their decisions and activities are inuenced by Type of Name of the
the different stakeholders. Now you must look at the business stakeholder stakeholder
itself as an important participant in its community or society. Owner Sandra
Business organisations have economic, nancial, political and
Employee Althea
social responsibilities to the society in which they operate. These
organisations have a responsibility to invest capital in order to Customer Tommy
increase the wants and needs necessary for survival. In the pursuit Community
of their economic role, business organisations should not destroy the Phillip
member
environment nor add to any conict among the various religious, ethnic
or regional groups in the community. Also, business organisations
should ensure that equality and democratic principles are adhered to at
all times. The main responsibilities can be grouped as shown below.

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Economic responsibilities: The business and its owners or
managers operate within an economic system and should play
their part in helping this system to be effective. The business does
this by providing employment to citizens in the economy and by
contributing to the overall growth of the economy; if the business
exports goods and services, it will help to increase the overall
exports of the country. Pricing policies that are too aggressive can
have a very negative effect on other businesses in the economy, and


can exploit consumers.
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Financial responsibilities: Similar to the above, businesses must
create a reasonable nancial return to the owner or investor. This
may not always be high because of the various objectives of a
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business.
Social responsibility: Businesses should make decisions that are
in the best interests of the society in which they operate. They also
rely on this society to provide vital resources.
Political responsibility: Businesses have many obligations to the
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government.
Ethical responsibility: The term ethics refers to beliefs about what
is right and wrong conduct; most societies agree on the basic ethics
of honesty and fair play. Businesses should make ethical decisions.
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Economic responsibilities
Example

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 benet
business activity
Operate along democratic principles of equality and fair play
Act in accordance with the laws, for example, paying all taxes when they
are due
Assist in setting policies by giving feedback, making suggestions
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Ethical responsibilities
Design ethical guidelines for their behaviour/decisions and follow these
guidelines
Encourage good business ethics of their stakeholders by refusing to do
business with unethical rms or persons
Social responsibilities
Protect the environment and avoid social costs (borne by society as a
result of business operations, for example, pollution)
Develop the culture of a country
Educate consumers and community members on safety tips and proper
use and disposal of products
Use some of the prots to help develop and benet the community,
as well as the culture of the country

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Activity 1.22
Classify the activities listed below according to the relevant
area of responsibility. The rst one has been done for you.

Economic Financial Political Social


paying corporation
1
taxes
P
2 making pastries for
todays sales
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3 improving the well-
being of employees
4 sponsoring the sports
day of the primary
school in the area
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5 disposing of garbage
in a timely and tting
manner
Feedback
6 lobbying the
government to provide
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1 Financial 7 Social
measures that would
encourage savings 2 Economic 8 Political
7 improving the 3 Social 9 Financial
environment
4 Social 10 Financial
8 promoting an
awareness of human 5 Social 11 Economic
rights violations
6 Political
9 reinvesting prots into You perhaps had difculty
the business
categorising some items. Why not
10 providing a 30 per cent tick those that are both? This is
return on investment to not a problem since the categories
shareholders may be a combination of two areas,
11 providing employment 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 concepts
related to the business environment in which goods and services are
produced and traded.
Instruments of trade developed in early times through the system
of bartering have evolved today to the use of bills of exchange and
electronic banking systems using credit cards and electronic transfer
instruments.
The private sector is funded by individuals who enter business
to make a prot, whereas the public sector is controlled by the
government for providing goods and services to the population.
Types of business include the sole trader, partnership, corporation,
limited liability company and multinational corporation.

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Economic systems include the traditional, free market, planned and
mixed systems.
Businesses have economic, nancial, political, ethical and social
responsibilities.

End test

Answer all questions.


P c the quality and quantity of goods;
1 Dene the term barter. d job creation and job specialisation.
2 Give three examples of bartering. 15 Describe the institutional characteristics of:
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3 List three features of bartering. a free market economies;
b planned economies;
4 State two advantages and two limitations of
bartering. c mixed economies.

5 Dene the term money, giving examples of 16 Explain the main differences between the
private and public sectors.
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items used in the past instead of money.


6 List three features of money. 17 List the stakeholders of a business.

7 State the functions of money. 18 Briey describe the ve main responsibilities of


a business.
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8 State four benets derived from the


introduction of money. 19 List the characteristics of:
a the sole trader;
9 Explain the term indirect satisfaction of wants.
b partnerships;
10 Dene the term division of labour.
c cooperatives.
11 Explain the advantages and disadvantages of
20 Outline the advantages and disadvantages of
specialisation.
each type of business listed in question 19.
12 Explain the functions of a business.
21 Identify the regulatory practices instituted
13 Describe the economic, nancial, political and by governments for setting up a sole trader,
social responsibilities of a business organisation. partnerships and cooperatives.
14 Explain the effects of the change from a 22 Outline the characteristics of limited liability
subsistence to a money economy on: companies and multinational corporations.
a availability of goods; b access to goods;
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23 State the advantages and disadvantages of 25 Describe the characteristics of state


limited liability companies and multinational corporations and nationalised industries.
corporations.
26 State the advantages and disadvantages of
24 Identify the regulatory practices instituted state corporations and nationalised industries.
by governments for establishing limited
27 Describe how state corporations and
liability companies and multinational
nationalised industries are established.
corporations.

Feedback
1 Barter is the exchange of goods and services without 7 The functions of money are that money serves as a:
the use of money. medium of exchange everyone must be willing

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2 Three examples of bartering are the exchange of: to accept it in exchange for goods and services;
bananas for breadfruit standard or value the worth of the goods or

service is measured in money, which sets the


sh for shrimps
price of the item;
wooden spears for eating utensils.
store of value money can be saved and used in
3 Features of bartering are: the future;
direct exchange of items means of deferred payment money is used for

immediate exchange of items


P goods bought on credit;
facilitator of the price mechanism the price one
direct satisfaction of needs and wants.
is willing to pay for a good or service.
4 Two advantages of bartering are:
8 The introduction of money (any four):
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individuals are able to enjoy more goods and
facilitated the exchange of goods and services;
services
encouraged the division of labour;
it encourages division of labour.
enabled individuals to enjoy more goods and
Limitations of bartering are the possible absence of
services;
(any two):
promoted investment;
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double coincidence of wants


facilitated credit.
rate of exchange

store of wealth indivisibility 9 Indirect satisfaction of wants is the system by


which needs and wants are fullled with the help
store of value.
of others. One satises ones needs and wants
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5 Money is any commodity that is accepted as a through the exchange of goods and services with
measure of value and a medium of exchange, such as: another individual. It involves bartering and,
precious metals currently, the use of money.
shells 10 Division of labour refers to the organisation of a job
beads into a number of related tasks. For example, in the
making of a shirt in a factory, the job is divided into
were some of the items used in the past as money.
cutting, stitching, placing of the buttonholes and
6 Features of money are (any three): sewing of the buttons.
acceptability
11 Advantages of specialisation are listed below.
divisibility
It increases the skills of workers since the
homogeneity same task is repeated and workers learn from
durability continuous repetition.
portability It increases productivity since less time is needed

when changing from one activity to another.


relative scarcity.
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As output increases, the cost of production is 14 a The change from subsistence to a money
reduced. economy meant that the community enjoyed a
Less time is spent on training since workers are better standard of living since more goods were
only required to master one task. available. People now had more leisure time.
The quality of the product can also be improved b Goods were easily available to all since the use
since workers are more skilled. of money made the exchange process easy.
Disadvantages of specialisation are listed below. c The change from subsistence to a money
economy meant that the quality and quantity
The work is monotonous. One is required
of goods improved and increased since
to perform the same task repetitively.
specialisation or division of labour was possible.
The work, therefore, becomes boring and
tiresome. d More jobs were created because of job
specialisation.
Specialisation usually occurs in large-scale

industries and therefore the work environment 15 a The institutional characteristics of free market
is impersonal. economies are that:

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Workers lose pride in their work because they they are customer-driven the consumer
are not completing the entire job. inuences the producers decisions on what
Some specialisation processes require large capital to produce
investment. private individuals own the resources

there is little or no government interference


12 The functions of a business are listed below.
the factors of production are controlled by
The production of a good or service. Goods

and services are required for the satisfaction of market forces goods and services are sold
needs and wants.
P on the market.
b The institutional characteristics of planned
The creation of jobs. Business needs labour to

produce goods and services. The amount of economies are that:


labour will depend on whether the rm is the government plans, coordinates and
M
labour-intensive or capital-intensive. controls all economic activities
In the case of private investments, the aim is the government decides what to produce,

to make a prot. All businesses aim to make how much to produce and controls all the
the highest possible returns on investment so resources
that the shareholders of the business receive an prices are set by the state.
A

adequate dividend.
c The institutional characteristics of mixed
Non-prot organisations aim to full a need
economies are:
in the provision of a good or service that will
be to the benet of the community. In all involvement of both state and private

communities there are those who cannot individuals


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provide for themselves and therefore rely on the efcient use of resources
services of non-prot organisations. more equitable distribution of income than
To contribute to economic growth. Economic in free market economies.
growth is stimulated by the increase in business
16 The private sector is that part of the economy that
activity, which adds to the total real output of
is funded, owned and controlled by individuals and
goods and services.
private rms. The main objective of the private sector
13 Business organisations have a responsibility is to make a prot. On the other hand, the public
to invest capital in order to increase the wants sector is nanced by the government through the
and needs necessary for the survival of man. money of taxpayers and is controlled and operated
In the pursuit of their economic role, business by the Government or its agent. The public sector
organisations should not destroy the environment aims to provide a service at the lowest possible price.
nor add to any conict among the various religious,
17 The stakeholders of a business are:
ethnic or political groups in the community.
Also, equality and democratic principles must be owners

adhered to at all times. employees


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44 Chapter 1

customers the owner manages the business himself or


suppliers herself
government the owner maintains personal contact with
clients
society.
these businesses are conveniently located in
18 The ve main responsibilities of a business are the rural area.
listed below.
b The characteristics of partnerships are that:
Economic responsibilities: The business and its

owners/managers operate within an economic partners can consult each other when
system and should play their part in helping making decisions
this system to be effective. The business does they are governed by a Partnership Deed or
this by providing employment to citizens in the the Partnership Act
economy and by contributing to the overall there are 2 to 20 members
growth of the economy; if the business exports
prots and losses are shared according to a
goods and services, it will help to increase

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Partnership Deed or the Partnership Act
the overall exports of the country. Pricing
policies that are too aggressive can have a partners share knowledge and skills
very negative effect on other businesses in the few formalities are required to set up the
economy, and can exploit consumers. business
Financial responsibilities: Similar to the above, there is no obligation to publish accounts.
businesses must create a reasonable nancial return
to the owner/investor. This may not always be high c The characteristics of cooperatives are that they:
because of the various objectives of a business. are owned and operated by members to
Social responsibility: Businesses must:
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promote their common economic interest


avoid social costs (borne by society as a result provide opportunities for members to pool
of business operations), for example, air capital
pollution; protect the environment; provide limited liability
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educate consumers and community members use democratic decision-making


on safety tips and the proper use and disposal have members who share a common bond.
of the products;
20 Advantages of the sole trader:
use some of the prots to help develop and
The owner gets the personal satisfaction of
benet the community, as well as the culture
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of the country. being his or her own boss.


The owner enjoys all the prots but bears all
Political responsibility: Businesses have an
obligation to the government to: the risk.
It is easy to form.
act in accordance with the laws;
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The owner enjoys personal contact with clients.


assist in setting policies by giving feedback,
making suggestions, lobbying for changes. The owner is under no obligation to keep or

Ethical responsibility: The term ethics refers to disclose nancial statements.


beliefs about what is right and wrong conduct; The owner has a commitment to succeed.

most societies agree on the basic ethics of Disadvantages of the sole trader:
honesty and fair play. Businesses must:
There is limited funding.
design ethical guidelines for their behaviour and
They lack specialised staff.
decisions and follow these guidelines;
The owner has unlimited liability.
encourage good business ethics of their
There is limited time for leisure.
stakeholders by refusing to do business with
unethical rms or persons. Simple and out-of date technology may be used.
The owner relies heavily on his or her good
19 a The characteristics of the sole trader are that:
health and energy.
it is easy to set up
Advantages of partnerships:
the owner enjoys all the prots and bears all
The sharing of partners knowledge and skills.
the risks
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The nature of business 45

Partners can consult each other when making capital is obtained from private individuals,
decisions. nancial institutions, government agencies or
Sharing of the management of the business. retained prots
with the exception of ordinary shareholders, all
Few formalities necessary to set up.
shareholders have limited liabilities
No obligation to publish accounts.
the company must be registered with the
The business has continuity.
Registrar of Companies
Limited partners have limited liability.
the word limited must be included in the name
Disadvantages of partnerships:
accounting statements are prepared and a copy
Partners may not always work harmoniously. sent to the Registrar of Companies.
Death or bankruptcy of one partner will The characteristics of a public limited company
automatically dissolve the partnership, unless include the features that:
otherwise provided for in the Partnership Deed.
there must be at least seven shareholders,
The actions of partners are binding on the with no limit on the maximum number of

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partnership. shareholders
Ordinary partners have unlimited liability. the shares are traded openly on the stock market
Capital is still limited. the public limited company is incorporated
The risk is borne by a few ordinary partners. capital is obtained from shareholders equity
Advantages of cooperatives: and nancial institutions
Members are the owners. the company is continuous
Decision-making is shared. specialisation is possible since specialist staff
All surpluses are shared among the
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can be employed
membership. there is a large capital base.
Community bond is strengthened. The characteristics of multinational corporations
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Products are much lower in price since (MNCs) are listed below.
administrative expenses are lower. MNCs are created through direct foreign

Rewards are shared among all the membership. investment (DFI).


Disadvantages of cooperatives: Headquarters of MNCs are usually located in a

The membership may lack the specialist developed country, while subsidiary companies
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knowledge and skills to build the organisation. are located in developing countries.
Firms usually use the latest technology.
Decision-making is slow and therefore the

business may lose out on opportunities. Firms invest heavily in research and development.

Firms are usually capital-intensive and thus


21 No requirement is necessary to set up a sole trader
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unless the owner is using a trade name, then the benet from economies of scale.
trader must register the trade name. 23 Limited liability companies have advantages that
Although there is no formal requirement to set up include the fact that:
partnerships, it is advisable that a Partnership Deed they are able to raise large capital, particularly

be made. Again, if the partnership is operating in the case of public liability companies
under a name other than that of the owners, it is shareholders risk is limited to the value of the
advisable to register the trade name. shares they have invested
Cooperatives are required to be registered with the companies have a separate legal entity
the relevant government agencies. The books of
there is continuity since the death of a share-
accounts must be prepared annually.
holder does not affect the survival of the rm
22 Limited liability companies are of two types shares are transferable, particularly in the public
private limited or public limited liability companies. limited company
The characteristics of a private limited company they can benet from economies of scale since
include the rules that: they can employ specialists and engage in
membership is between 2 and 50 persons research and development
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46 Chapter 1

nancial statements are available for inspection Their objective is to provide a service to the
by members of the public. population.
The disadvantages of limited liability companies A board of directors appointed by the
are listed below. government manages them.
Considerable legal procedures are involved in Funding is mainly from the government
setting up this type of business. and grants.
Owners often lose touch with what is Accounting procedures are monitored by the
happening in the organisation. state.
Managements actions may not always be in the
Characteristics of nationalised industries:
best interests of the shareholders.
Previously privately owned, they were taken
In private limited companies shares are not
over by the state.
always transferable, except with the approval of
The state is the only shareholder.
the membership.
They are a separate legal entity.
In the private limited company, because of

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the family structure, entrepreneurial talent is A board of directors appointed by the
drawn from a restricted pool. The public liability government manages them.
company is in the vulnerable position of being Accounting reports must be sent to the auditor
taken over by mergers. general.
The advantages of multinational corporations to
26 An advantage of a state corporation is that the
the host country are:
state has the autonomy to act on its own.
the injection of foreign capital in the economy Disadvantages of a state corporation are that the
the creation of employment opportunities
the transfer of skills
P company may depend heavily on state funding and
there may be too much political interference.
increased revenue through taxation. Advantages of nationalised industries:
Perceived disadvantages of multinational Prots remain in the country.
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corporations to the host country are: The company serves the various needs of the

possible poor working conditions and abuse of community.


workers rights Nationalisation prevents monopolies from

risk of destruction of the environment forming.


Ownership of the most protable industries is
possible intimidation of workers and trade
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unions. in the hands of the state.

24 Limited liability companies must be incorporated Disadvantages of nationalised industries:


and therefore must submit to the Registrar of Low salaries are paid to top executives.
Companies the following: The non-protable industries may be a drain on
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Memorandum of Association the governments revenue.


Articles of Association 27 State corporations are incorporated through an
Statement of the Authorised or Nominal Capital.
Act of Parliament, that is, through legislation.
These rms are funded by the taxpayers. The
25 Characteristics of state corporations: government purchases the shares of nationalised
They are established by the government industries. In fact, the government is the only
through legislation. shareholder.

Tutor-marked assignment

You are the newly promoted director of a satisfy the companys social responsibilities to
manufacturing company producing cement in the community and show how this plan would be
Harbour View, Jamaica. Draw up a plan that would implemented. (40 marks)
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Caribbean Examinations Council

for CSEC

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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 experienced
educators 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:



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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
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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
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potential.
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I S B N 978-1-4085-0903-6

Distributed by
Nelson Thornes Caribbean 9 781408 509036