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CHAPTER 1

A SOLE PROPRIETORSHIP

A business may be privately owned in three important forms. These are


the sole proprietorship, the partnership and the corporation. The sole
proprietorship is the most common in American business. More than 80 percent of
all businesses in the United Stated are sole proprietorships. Sole proprietorships,
however, do not do the greatest volume of business. They account for less than 16
percent of all business receipts. What kind of business is likely to be a sole
proprietorship? These small businesses are very often service industries such as
Laundromats beauty shops, repair shops and restaurants.

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CHAPTER 2

PARTNERSHIP

A partnership is an association of two or more persons to carry on a


business for propit. When the owners of a partnership have unlimited liability,
they are called general partners have limited liability, they are called limited
partners. There may be a silent partner as well a person who is known to the
public as a member of the firm but without authority in management. The reverse
of the silent partner is the secret partner- a person who takes part in management
but who is not known to the public. Any business may be operated as a
partnership. There are partnership in professional fields such as medicine, law,
accounting, insurance and stockbrokerage. Limited partnerships are a common
from of ownership in real estate, oil prospecting, and the mining and quarrying
industries, to name a few. Partnership are more advantageous than sole
proprietorships if one needs multiple sources of capital or diversified
management. Like sole proprietorships, they are easy to form and often receive
favored treatment by the government as well as tax benefits. There are a number
of disandvantages to partnerships. One is unlimited liability. This means that each
partner is responsible for all debts and legal responsibilities in connection with the
business. Another disadvantage is that partners may disagree with each other.
Complications can also arise with the death of a partner. For example, a share of a
the business could come into the hands of a less desirable associate.

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CHAPTER 3

CORPORATIONS

The privately owned business corporation is an institution established for


the purpose of making a profit. It is operated by individuals whose shares of
ownership are represented by stock ceritificates . person owning stock certificates
are called stockholders. The corporate form of ownership has several advantages.
The first is its ability to attract financial resources. A secons advantages is that if
the corporation attracts a large amount of capital, it can make large investments in
plants, equipment and research. A third advantage is that a corporation can offer
high salaries and thus attract telented managers. The privately owned business
corporation is not the only type of corporation that exists. Educational, religious
and charitable institutions are also permitted to incorporate. Usually this type of
corporation does not issue stock and is a nonprofit institution. If there is a profit, it
is generally reinvested in the institution rather than distributed to private
stockholders. In addition, there are governmental corporations in the United
Stated which may be established by cities, states, the federal governmental and
special agencies. Some examples of these governmental corporations are state
universities, state hospitals and city-owned utilities. Governmental corporations
are always nonprofit and usually do not issue stock certificates.

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CHAPTER 4

WHAT DOES AN EXCECUTIVE DO?

An employer has several options he can consider when he wants to hire a


new employee. First, he may look within his own company. But if none of the
present emloyees are suibtable for the position, he will have to look outside the
company. If his company has a personnel office, he can ask them to help him find
qualified applications. There are other valuable sources the employer can use,
such as employment agencies, consulting firms, placement offices and
professional societies. He can also advertise in the classified section of
newspapers and magazines and request prospective candidates to send in resumes.

The employer has two sets of qualifications to consider he wants to choose from
among prospective candidates. He must consider both professional qualifications
and personal characteristics. A candidates’s professional qualifications in clude
his educations, experience and skill. These can be listed on a resume. Personal
characteristics or personality traits, must be evaluated through interviews.

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CHAPTER 5

LINE AND STAFF POSITION

In business, organization structure means the relationship that exists


between positions and the people who hold the positions. Organization structure
structure is very important as it provides an efficient work system as well as a
system of communication.

Historically, line structure is the oldest type of organization structure. It is


based on the idea of direct vertical relationships between the positions and tasks of
each level, and the position tasks above and below each level. For example, a
sales manager and the salesmen. This means that the vice president of marketing
has direct authority over the salesmen. This establishes a chain of command which
can simplify problems of giving and taking orders.

When a business grows in size and complexity, there is a need for


specialists. At this point, executives may add staff departments and staff specialist
to do specific work. These people deal in services; they are not necessarily tied in
with the company product. These people are staff structure and include such
special activities as accounting, personnel, credit and advertising. In general, they
do not give orders to other departments.

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Line-staff Organization
President

Executive
Vice-President
Research and Development
Manager
Marketing Research
Product Research

Marketing Production Finance Personnel


Manager Manager Manager Manager

Line Organization

President

Executive
Vice-President

Marketing Production Finance Personnel


Manager Manager Manager Manager

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CHAPTER 6

ACCOUNTING

Accounting provides a financial picture a business firm. An accounting


department records measures the activity of a business and reports on the effects
of these transactions on the firm’s financial conditions. Accounting records and
reports provide data that are used by management, stockholders, creditors,
independent analysts, banks and government.

The income statement and balance hit are the two types of records that
most businesses prepare regularly . by reading these statement, once can identify
how many was received and spent by accompany. By analyzing these records, one
can determine whether or not the activities of the company have been good for it.
One major tool for the analysis of accounting records is ratio analysis. A ratio
analysis is the relationship of two figures. There are three main categories of
ratios in finance. Once such ratio builds with profitability. The main example of
this is the return on investment ratio, which is the most with widely used single
measure of a firm’s of operating efficiency.

A second set of ratios helps a company evaluate its current financial


position. These ratios deal with assets and liabilities. A third set of ratios with the
overall financial structure of the company, primarily analyzing the value of the
ownerships of the firm.

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CHAPTER 7

CORPORATE FINANCE

Corporations need financing for the purchase of assets and the payment of
expenses the corporations can issue shares in exchange for money or property (
sometimes referred to as equity funding). The holders of the shares together form
the ownership of the company. Each share is represented by a stock certificate.
This is negotiable which means, that it can be bought and sold. The value of a
share is determined not only by the net assets divided by the total number of
shares outstanding, but also by any particular rights it gives two more value the
shares usually have.

A corporations can also get capital funds by borrowing. This is called debt
funding. When corporations borrow money, they give notes or bonds, which are
also negotiable. However interest has to be paid out whether business is profitable
or not.

Management must consider both the outflow and inflow of capital funds in
running the corporations. The purchase of inventory and supplies, payment of
salaries, results in an outflow. The sale of goods and services results in an
outflow. In the long run, the inflow must be greater than the outflow to result in a
profit.

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CHAPTER 8

BANK AND BUSSINESS

In the United States, commercial banks are classified into two main
groups. First, there are national bank which are chartered and supervised by the
federal government. Secondly, there are state banks which are chartered and
supervised by the state in which are they operated . In either chase all commercial
banks can make loans to borrowers. Commercial banks in major cities through out
the world such as Tokyo, Rio, or Paris, cooperate with each other. In this way
they can finance imports and exports between countries. When an importer buys
merchandise from another country, he will usually pay for it in the currency of
that country. He buys this currency from the foreign exchanges department of his
banks. In the same way, when an exporter receives foreign money from sales to
other countries, he sales this currency to his bank. By this method, the currency of
any country can usually be exchanged for that of any other. The system is called
international exchange.

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CHAPTER 9

WHAT IS MARKETING?

In modern terms, marketing is defined as the movement of goods and


services from manufacturer to consumer in order to satisfy the customer and to
achieve the company’s objectives. It can be considered as dynamic field that
involves a wide variety of activitieall about?

Marketing, which is sometimes called distributions, includes all the


business activities connected with the movement of goods and service from
producers to consumers or users. Marketing is made up, on the one hand, of
physical activities such as transporting, storing, selling goods, and on the other
hand, a series of decision undertaking any part of the process of moving goods
from producer to user. Marketing operation include product, planning, buying,
storage, pricing, promotion, selling, credit, traffic and marketing research.

The ability to recognize early trends is as important in marketing as


knowing the current state of affairs. Producers must know why consumer buy,
where and for what purpose. Through markets research, producer tries to predict
what the costumer will want and, through advertising, attempts to influence the
customer to buy.

Marketing operations take up more than half of the consumer’s dollar.


Every improvement in marketing technique has a led to wider distribution of good
in ever-increasing volume. The trend in the US has been to high mass
consumption, what has been described as “conspicuous consumption”. The
construction of shopping centers has made good easily available to consumer by
providing a wide range of merchandise and plenty of parking facilities.

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CHAPTER 10

PRODUCT DEVELOPMENT AND PLANNING

The number of new products that’s come into the American market every
year is overwhelming actually most of these products are not really new but
adaptation. This means that they are existing items to which an addition or
modification has been made. Very few of these are really innovation, or original.
For example, a transistor radio is an adaptation, about radio itself, television, the
electric razor, the refrigerator each was an innovation.

A large propotion of innovations and adaptations are manufactured and


marketed by small scale manufacturers. In is believed that the product is wanted
or needed, and the business was formed to market this one item. In some cases,
there is a patent to help ensure success. Too often, however, research and tasting
have not been adequate and the market has not been studied carefully.

In the case of large scale producers, there is usually more market research
and tasting. But there is no sure success. In many cases, however, much time and
money are saved by stopping what might have been a sure failure. Unsound
pricing, inadequate promotion and poor selling method may robe a promising new
product of success, also. In general less than one-fifth of all new product turn out
to be profitable.

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CHAPTER 11

WHOLESALING

Wholesaling is part of the marketing system which provides channels of


distribution that are used to bring goods to market. Most manufactured consumer
goods are marketed through an indirect channel. This might be from the
manufacturer to the wholesaler to the retailer to the consumer, or through more
complicated Channels. However, in general, wholesalers deal in products that are
to be resold by retailers to consumers. A direct channel moves goods from the
manufacturer or producer to the consumer.

Wholesaling is mostly a field of small business. Although there ia a


growing chain movement in the United States. About a quarter of wholesaling
units account for one-third of total sales.

Two-third of the wholesaling middlemen are merchant wholesalers who


take title to the goods they deal in. There are also agent middlemen who negotiate
purchases or sales or both. but they don’t take title to the goods they deal in. They
sometimes take possession. though. These agents don’t earn salaries. They receive
commissions; this is a percentage of the value of the goods they sell.

Wholesalers simplify the process of distribution. For example, the average


supermarket stocks 5.000 interns in groceries alone; a retail druggist may have
more than 6.000 items. Since a wholesaler handles a large assortment of items
from numerous manufacturers, he greatly reduces the problem of both
manufacturer and retailer. The storekeeper does not have to deal directly with
thousands of different people. He may have a well-stocked store and deal with
only a few wholesalers.

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CHAPTER 12

RETAILING

Retailing is selling goods and services to the custumer. As such, the


retailer is the most expensive link ini the chain of distribution. As middlemen,
they make their profit by charging the customer 25 to 100 per cent more than price
they paid for a given item.

Most retailers operate through stores, but there are mail-order houses and
vending machine operators. Retailer stores vary also, ranging from department
stores, discount houses, cooperatives, and franchises to single line retailers. Over
95 per cent of retail establishments concentrate on some single line of
merchandise such as food, hardware, etc. This seem to be changing, however, as
many single stores are now taking on a greater variety of supplies.

The retailer performs many needed functions. First, he may provide a


convenient location. Also, he often guarantees and services the merchandise he
sells. Third, the retailer aids in promoting the product, often through displays,
advertising or sales people. Fourth, the retailer may finance the customer by
extending credit. Further, the retailer performs a storage function in his outlet. by
having goods available.

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CHAPTER 13

PRICING

All products and services have prices. Price comparisons can be difficult
to make because of consideration of credit terms. delivery, trade-in allowance.
guarantees, quality. and other forms of service. What price will produce the
greatest profit over a long period of time? There is no way to really determine this
price accurately. Is the price too high to produce a large volume? Too low to
cover costs? No other area of marketing operations has been more misunderstood
and subject to so much bad practice. Many businesses pursue unsound pricing
policies for long periods without becoming aware of it.

Prices are determined in various ways. For example, agricultural prices


(cotton, wheat) are decided in large central markets where forces of supply and
demand exist. This is pure price competition. Industrial product prices (iron, steel,
etc.) are decided by large companies. A few competing sellers control the amount
and price of goods sold to large numbers of buyers. Although competiton is the
public goal for most businesses in the United States, most operate in imperfect
competition. Prices are also set by the government, particularly for public utility
services railroads, manufactured gas, bus services, etc.

When demand increases, prices rise, profits expand and new investment is
attracted. But we see that there are other factors involved. Prices are related to
each other in various ways. Ultimately, everything is related in price, since the
consumer can buy only so much and must pay for everything out of a particular,
limited amount of money.

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CHAPTER 14

COMPUTER

The computer industry is one of the largest in the U.S and includes
companies that manufacture, sell and lease (rent) computers, as well as companies
that supply products and services for people working with computers.

A computer cannot think. A human operator must put data into the
computer and give instructions. The operator writes instructions that determine the
mathematical operations on information. It sometimes solves mathematical
problems very rapidly and may be a one-of-a-kind piece of equipment constructed
for a particular job.

Traditionally, the computer in business has been used for data processing.
This involves such administrative functions as preparation of payrolls, inventory
control in manufacturing, warehousing and distribution operations as well as
customer accounting and billing by banks, insurance companies, public utilities
and mass circulation magazines. Now the computer has taken on new kinds of job
and has become more involved in business operations as an essential tool in
decision-making at the highest administrative levels.

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CHAPTER 15

INTERNATIONAL BUSINESS

The multinational corporation. Or global company as it is sometimes


called. Is the outgrowth of the great trading companies of the 17th and 18th
centuries. When an 1811 New York statute said corporations could be created by
the filing of documents. It then became a matter of bureaucratic operations to
became a corporation. By 1850. This practice was common throughout the United
States and was under general statute in European contries as well. Thus began the
corporate movement. With the development of the jet plane, satellite
communications and computers, it became possible for a company to control
enterprises on the other side of the globe.

International corporate operations are now growing at double the rate of


economic growth of the industrialized nations. Some projections suggest that
within a generation, more than half of the world’s production may be
internationalized.

The hoped-for benefits of this internationalism are new jobs, higher living
standars and the closing of thee gaps between people—economic, educational and
technological. At the same time, serious questions are being asked of this new
trend in internationalism. Is it the most highly efficient way to use world
resources? Can the international company be the best force for a better world?
Can in take care of the self-interest and competitiveness on behalf of the greatest
good? In what way, finally, can the international company work toward easing the
world’s crises—monetary, political, energy and food?

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CHAPTER 16
COMPETITION
Competition permeates economic life. Prices, wages, methods of
production, types and quantities of products, the size and organization of business
firms, the distribution of resources, and people’s incomes – all result from
competitive processes. Consider market prices for consumer goods. The baker has
on hand a stock of bread, a valuable good for which consumers are willing to
compete by offering the baker a price. The baker wants to get the highest price
possible, but he is constrained. If he sets his price too high, customers will not buy
all that the baker has produced. They will buy from another baker, or they will
buy pizza or potatoes instead. So the baker sets a price that he thinks will “clear
the market”. That price is determined by the willingness of customers to compete
for his product, and by the willingness of rivals to compete for his customers. An
identical process occurs with producer goods. A steel plant has on hand a supply
of steel, for which automobile companies, appliance makers, and equipment
manufacturers are competing. The firm wants to get as much revenue as it can,
taking into account the willingness of its customers to pay and the threat of lower
offers from its rivals. The customers want to pay as little as possible, taking into
account that rival customers may outbid them. This two – sided competition will
again set a price that “clears the market. ”The market – clearing price represents
the lowest price that buyers of steel must pay, and the highest price that sellers of
steel can receive, each without being outbid by rivals.

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CHAPTER 17
SUPPLY
The most basic laws in economics are those of supply and demand.
Indeed, almost every economics event is the product of the interaction of these
two laws. The law of supply states that the quantity of a good supplied rises as the
market price rises, and falls as the price falls. Conversely, the law of demand says
that the quantity of a good demanded falls as the price rises, and vice, versa. One
function of markets is to find “equilibrium”, or “market-clearing” prices that
balance the supplies of and demands for goods and services. An equilibrium price
is the one at which each producer can sell all he wants to produce and, each
consumer can buy all he demands. Naturally, producers always would like to
charge higher prices. But even if they have no competitors, they are limited by the
law of demand: if producers insist on a higher price, consumers will buy fewer
units. The law of supply puts a similar limit on consumers. They always would
prefer to pay a lower price than the current one. But if they successfully insist on
paying less (say, through price controls), suppliers will produce less and some
demand will go unsatisfied. Economists often talk of supply “curves” and demand
“curves”. A demand curve traces the quantity of a good that consumers will buy at
various prices. As the price rises, the number of units demanded declines. That is
because everyone’s resources are finite; as the price of one good rises, consumers
buy less of that and more of other goods that now are relatively cheaper.
Similarly, a supply curve traces the quantity of a good that sellers will produce at
various prices. As the price falls, so does the number of units supplied.
Equilibrium is the point at which the demand and supply curves intersect – the
single price

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CHAPTER 18
PROFITS
In a market economy, profits are the core aim of economic activities.
Those who organize production efforts do so to maximize their income. Their
search for profits is guided by the famous “invisible hand” of capitalism: the
highest profits are to be found in producing the goods and services that potential
buyer most want. Capitalists earn a return on their efforts by providing three
productive inputs. First, they are willing to delay their own personal gratification.
Instead of consuming all their resources today, they save some of today’s income
and invest those savings in activities (plant and equipment) that will yield goods
and services in the future. When sold, these future goods and services will yield
profits that can then be used to finance consumption or additional investment. Put
bluntly, the capitalist provides capital by not consuming. Without capital much
less production could occur. As a result some profits are effectively the “wages”
paid to those who are willing to delay their own personal gratification. Second,
some profits are a return to those who take risks. Some investments make a profit
and return what was invested plus a profit, but others don’t. When a savings and
loan association or an airline goes broke, the investors in those firms lose their
wealth and become poorer. Just as underground miners, who are willing to
perform a dangerous job, get paid more than those who work in safer occupations,
so investors who are willing to invest in risky ventures earn more than those who
invest in less risky ones. On average those who take risks will earn a higher rate of
return on their investments than those who invest more conservatively. Third,
some profits are a return to organizational ability, enterprise, and entrepreneurial
energy. The entrepreneur, by inventing a new product or process, or by organizing
the better 136 delivery of old product, generates profits. People are willing to pay
the entrepreneur because he or she has invented a “better” mousetrap.

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CHAPTER 19
INSURANCE
Insurance plays a central role in the functioning of modern economies.
Life insurance offers protection against the economic impact of an untimely death;
health insurance covers the sometimes extraordinary costs of medical care; and
bankdeposits are insured by the federal government. In each case a small premium
is paid by the insured to receive benefits should an unlikely but high-cost event
occur. At the core of the insurance problem lies the concept of risk or the variation
in possible outcomes of a situation. The effective response to risk combines two
elements: efforts or expenditures to lessen the risk, and the purchase of insurance
against the risk that remains. In exchange for a premium, the insurer will pay a
claim should a specified contingency, such as death, medical bills, or shipment
loss, arise. The insurer is able to offer such protection against financial loss by
pooling the risks from a large group of similarly situated individuals. With a large
pool, the laws of probability assure that only a tiny fraction of insured shipments
is lost, or only a small fraction of the insured population will be hospitalized in a
year. If, for example, each of 100,000 individuals independently faces a 1 percent
risk in a year, on average 1,000 will have losses. If each of the 100,000 people
paid a premium of $1,000, the insurance company would collect a total of $ 100
million, enough to pay $ 100,000 to anyone who had a loss. But what would
happen if 1,100 people had losses? The answer, fortunately, is that such an
outcome is exceptionally unlikely. Insurance works through the magic of the Law
of Large Numbers. This law assures that when a large number of people face a
low probability event, the proportion experiencing the event will be close to the
expected proportion. For instance, with a pool of 100,000 people who each face a
1 percent risk, the law of large numbers dictates that 1,100 people or more will
have losses only one time in 1,000.

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CHAPTER 20

BONDS

Bond markets is an important component of capital markets. Bonds are


fixed-income securities – securities that promise the holder a specified set of
payments. The value of a bond (like the value of any other asset) is the present
value of the income stream one expects to receive from holding the bond. This has
several implications:
1. Bond prices vary inversely with market interest rates. Since the stream of
payments usually is fixed no matter what subsequently happens to interest rates,
higher rates reduce the present value of the expected payments, and thus the price.
2. Bonds are generally adversely affected by inflation. The reason that higher
expected inflation raises market interest rates and therefore reduces the present
value of the stream of fixed payments. Some bonds, though, are indexed for
inflation.
3. The greater the uncertainty about whether the payment will be made, the lower
the “expected” payment to bondholders and the lower the value of the bond.
4. Bonds whose payments are subjected to lower taxation provide investors with
higher expected after-tax payments. Since investors are interested in after-tax
income, such bonds sell for higher prices. The major classes of bond issuers are
the government, corporations, and municipal governments.

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CHAPTER 21
MONEY AND BANKING
The role of money and banking system is an important part of the study of
economics. Money, after all, is involved in nearly all economic transactions. This
section explains the nature and functions of money, the demand and supply of
money and the role of the banking system in the money – creation process.

Definition of Money
What is money? Money is any good that is widely used and accepted in
transactions involving the transfer of goods and services from one person to
another. Economists differentiate among three different types of money:
commodity money, fiat money, and bank money. Commodity money is a good
whose value serves as the value of money. Gold coins are an example of
commodity money. In most countries, commodity money has been replaced with
fiat money. Fiat money is a good, the value of which is less than the value it
represents as money. Dollar bills are an examples of fiat money because their
value as slips of printed paper is less than their value as money. Bank money
consists of the book credit that banks extend to their depositors. Transactions
made using checks drawn on deposits held at banks involve the use of bank
money.

Functions of money
Money is often defined in terms of the three functions or services that it provides.
Money serves as a medium of exchange, as a store of value, and as a unit of
account.

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CHAPTER 22
ECONOMIC SYSTEMS
An economic system is quite simply the way in which a country uses its
available resources (land, workers, natural resources, machinery etc.) to satisfy the
demands of its inhabitants for goods and services. The more goods and services
that can be produced from these limited resources, the higher the standard of
living enjoyed by the country’s citizens.
Planned economies: Planned economies are sometimes called‘command
economies’ because the use of resources (such as labour and factories) thatare
used to produce goods and services as it owns factories, land and natural
resources. A planned economy is simply to understand but not simple to operate.
It does, however, have a number of advantages:
• Everyone in society receives enough goods and services to enjoy a basic
standard of living.
• Nations do not waste resources duplicating production.
• The state can use its control of the economy to divert resources to wherever it
wants. As a result, it can ensure that everyone receives a good education, proper
health care or transport is available.
Several disadvantages also exist. It is these disadvantages that have led to many
nations abandoning planned economies ever recent years:
• There is no incentive for individuals to work hard in planned economies.
• Any profits that are made paid to the government.
• Citizens cannot start their own business and so new ideas rarely come forward.
• As a result, industries in planned economies can be very inefficient.
A major problem faced by command or planned economies is that of deciding
what to produce. Command eco- nomies tend to be slow when responding to
changes in cannot predict changes in people’s tastes and fashions. Planners are
like to underproduce some itemsas they cannot predict changes in demand.
Equally, some products, which consumers regard as obsolete and unattractive,
may be overproduced. Planners are afraid to produce goods and services unless

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they are sure substantial amounts will be purchased. This leads to delays and
queues for some products.
Mixed economies:A mixed economy means very much what it says as it
contains elements of both market and planned economies. At one extreme we
have a command economy, which does not allow individuals to make economic
decisions, at the other extreme we have a free market, where individuals exercise
considerable economic freedom of choise without any government restrictions
Between these two extremes lies a mixed economy. In mixed economies some
resources are controlled by the government whilst others are used in response to
the demands of consumers. The aim of mixed economies is to avoid the
disadvantages of both systems while enjoying the benefits that they both offer. So,
in a mixed economy the government and the private sector interact in solving
economic problems. The state controls the share of the output through taxation
and transfer payments and intervenes to supply essential items such as health,
education and defence, while private firms produce cars,furniture, electrical items
and similar, less essential products. The U K is mixed economy:
some services are provided by the state (for example, health care and defence )
whilst a range of privately owned business offer other goods and services.
Market economies: In a true market economy the government plays no role in the
management of the economy, the government does not intervene in it. The system
is based on private enterprise with private ownership of the means of production
and private supplies of capital, which can be defined as surplus income available
for investment in new business activities. Workers are paid wages by employers
according to how skilled they are andhow many firms wish to employ them They
spend their wages on the products andservices, they need. Consumers are willing
to spend more on products and services, which are favoured. Firms producing
these goods will make more profits and this will persuade more firms to produce
theseparticular goods rather than less favoured ones. This, we can see in a market
economy it is consumers who decide what isto be produced . Consumers will be
willing to pay high prices for products they particularly desire. Firms, which are
privately owned, see the opportunity of increased profits and producethe new

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fashionable and favoured products. The market system of economic organization
is also commonly described as a free enterprise or laissez-faire, or capitalism
system. Weshall use all these terms to stand fora market economy. The framework
of a market or capitalisn system contains six essential features. They are:
• Private property
• Freedom of choise and enterprise
• Self – interest as the dominating motive
• Competition
• A reliance on the price system
• A very limited role of government

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CHAPTER 23
INVESTMENT ACTIVITY
In economic science, investment is capital expenditure on physical
productive assets, e.g. machinery, factory buildings, roads, bridges, houses, and
stocks. Real investments generally involve some kind of tangible asset.
As a financial term investment embraces purchases of stock exchange securities or
deposits of money in banks, building societies, or other financial institutions, with
a view to income and, in appropriate cases, capital gains. Users of capital, from
governments to every kind of industrial or commercial joint-stock company, all
depend for the supply of their financial resources on those who are willing to
invest their funds, on investors. Investment is closely associated with other
aspects of economic order such as the role of financial centres, labour migration,
and the regime of international trade prevailing at the time. Technological
advances, the removal of exchange controls and financial deregulation have all
contributed to the expansion of international capital flows. As a result foreign
investment has become a fundamental feature of international economic
development. There are two main channels for international investment:
foreign direct investment(FDI) and foreign indirect investment, or portfolio
investment. Foreign direct investment (FDI) occurs when citizens of one
nation(the “home” nation) acquire managerial control of economic activities in
some other nation (the “host” nation). Setting up a foreign operation through a
joint venture, establishment of a foreign branch or the purchase or formation of a
foreign subsidiary are examples of foreign direct investment. Firms controlling
activities in several nations have become known as “multinational enterprises”
(MNSs), “transnational corporations”(TNCs) and, more recently, “global
corporations”. The reasons why effects of FDI are generally assessed as positive
can be summarized as follows: first, FDI speeds the international diffusion of new
Technologies and other efficiency enhancing intangible assets, such as
organizational skills. Then, FDI in many national markets will stimulate
competition among firms. The process of supplying capital to a foreign institution,

26
through a loan or purchase of stock, without sharing in the institutions
management is foreign indirect investment. In financial circles, individuals or
households that own securities are known as individual investors. Along with
them, there are institutional investors. Institutional investors are a group of
investors who have funds to invest as a consequence of the conduct of their
business. The group includes insurance companies, banks, investment trusts,
financial and industrial companies.The past 30 years have witnessed a
concentration of financial power in the hands of institutional investors.
In 1990 they controlled over $6 trillion in assets, the majority invested in common
stock and corporate and government bonds. An investor, when confronted with a
list of investment possibilities, will want to assess the risks and general
advantages and disadvantages connected with putting his or her Money into this
or that security. To receive higher return, investors must be prepared to accept a
higher level of risk. Trying to limit or minimize the risk investors construct and
diversify port folios and spread their foreign investments among a number of
different countries.
Institutional investors have contributed to development of new types of
investment management techniques, sophisticated portfolio monitoring, have
pioneered the application of quantitative security valuation techniques, such as
dividend discount models. In spite of the existing obstacles, recent years have
seen a growing interest of foreign investors in the Russian market.

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CHAPTER 24
INCOME STATEMENT / PROFIT AND LOSS STATEMENT
The income statement, or profit and loss statement measures the
performance of an enterprise. The bottom line of this statement is the net result of
the operations of the enterprise in the reporting period. It reveals the change
during the period in the equity of the enterprise resulting from its operations.
Revenues
Revenues are inflows or enchangements of assets ( or reductions of liabilities) that
arise in the course of the normal activities of the enterprise. The events that result
in revenues and revenues themselves are referred to by a variety of names:
including sales, fees, interest, dividends, royalties and rent.
Expenses
Expenses are outflows or depletions of assets (or additions to liabilities) that arise
in the course of the enterprise`s normal activities. The events from which
expenses arise and expenses themselves are referred to by a variety of names,
including cost of sales, wages and deprecation. An expense is recognized when it
is realized that an expenditure does not produce future economic benefits, It also
recognized when a liability is incurred without the recognition of anasset. When it
is possible to do so, expenses are recognized in the income statement on the basis
of direct association between expenses incurred and the earning of specific items
of income. The process is commonly referred to as matching of expenses with
revenues.
Gains and losses
Gains are increases in equity that result from transactions that are incidental to the
enterprise`s activities and from other transactions, events or circumstances
affecting the enterprise during a period, except those that result in revenues or
equity contributions. Losses are decreases in equity that result from transactions
that are incidental to the enterprise`s activities and from other transactions, events
or circumstances affecting the enterprise during a period, except those that result
in expenses or distributions of equity. Gains are normally recognized when
realized.

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CHAPTER 25
PRIVATIZATION
Privatization is the process by which the production of goods or services is
removed from the government sector of the economy.This can be done either by
the public sale of shares in a previously state – owned enterprise, or by the use of
private business to do government work under contract. The leader in this strategy
was the Thatcher government of Great Britain from 1979 to 1990. Previous
governments had tried limited denationalization (the restoration of nationalized
enterprises to their previous owners), but with limited success. Privatization
involved totally new owners. In some cases the state enterprises that were
“privatized” had never been in the private sector. Because state – owned
companies have no profit motive, they have no incentive to produce goods that
consumers want, and to do so at low cost. In addition, even if they want to satisfy
consumer demands, they have no idea of what consumers want. The result is
misallocation of resources. Management responds to political, rather than to
commercial, pressures. The capital assets of state businesses are often of poor
quality because the governments are not interested in the renewal of capital
equipment. Before the British water industry was privatized in 1989, it was
undercapitalized by over $11 billion. As a result the water supply failed to meet
European standards for quality and safety. Similarly, the post office had cut back
its services. First telegrams disappeared, then Sunday collection, then Saturday
second delivery. These changes made life easier for producers at the expense of
service to consumers. Most serious of all, the losses of state industries consume
funds that are needed for The British privatization of nearly four dozen major
businesses and several hundred small ones was a success. Privatized British
industries outperformed the market average once they entered the private sector,
and the privatized stocks rose in value faster than the stock market average.
Following the collapse of communism in eastern and central Europe, first Poland,
Hungry, and Czechoslovakia, then Romania and several of the former Soviet
republics began to privatize. The problems in these economics were very different

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from those faced by the advanced economies. Decades of low wages meant that
little wealth was available for investment, and no stock markets existed on which
to make sales. Very often, there were no laws to protect or even permit private
ownership, much less the supporting infrastructure of contract law and financial
support services such as banks and accountants. For this reason the formerly
socialist economies found themselves forced to blaze a new trail of privatization,
sometimes using the distribution of “coupons” to the population as a means of
spreading ownership. Very often some degree of “informal” privatization was
permitted, in which management effectively expropriated what had been state
property. Unlike Britain, which had about 10 percent of its economy in state
hands and had sold threefifths of it over ten years, the socialist countries were now
faced with privatizing 60 to 80 percent of their economies within half that time.
Still new capitalist countries learned from the experience of their early leaders.
These included the techniques of writing off past debts, allocating shares to
workers, splitting monopolies into competing elements, and establishing new
regulatory agencies to calm public fears about the behavior of the newly
privatized operations. By restoring market incentives and commercial reality,
privatization revived state-owned industries. It diverted billions of dollars from
the support of loss-making government concerns into expansion of wealth-
creating private businesses.

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CHAPTER 26
ACCOUNTING
Accounting is frequently called the “language of business” because of its
ability to communicate financial information about the organization . Various
interested parties, such as managers, potential investors, creditors, and the
government, depends on a compony’s accounting system to help them make
informed financial decisions. An effective accounting system, therefore, must
include accurate collecting, recording, classifying, summarizing, interpreting, and
reporting of information on the financial status of an organization. In order to
achieve a standardized system, the accounting process follows accounting
principles and rules. Regardless of the type of business or the amount of money
involved, common procedures for handling and presenting financial information
are used. Incoming money (revenues) and outgoing money (expenditures) are
carefully monitered, and transactions are summarized in financial statements,
which reflect the major financial activities of an organization. The work of
accountants is rather sofisticated. People who specialize in the field of accounting
are known as bookkeepers and accountants. Bookkeepers deal in taxes and
different business transactions of the company. The accountant’s responsibility is
to analyze and interpret the financial data and make it understandable for users. In
the United States, accountants are usually classified as private, government, and
public. Private accountants work solely for private companies or corparations that
hire them to maintain financial records, and governmental accountants work for
governmental agencies. Both private and governmental accountants are paid on a
salary basis, whereas public accountants receive fees for the services. Public
accountants work independently and provide accounting services such as auditing
and tax computation to companies and individuals. Many accountants have special
certificates after they pass examinations in Institute of Accountants. Certified
accountants in England are called chartered accountants. In the USA the certified
accountants are called certified public accountants (CPA).

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CHAPTER 27
THE FINANCIAL MANAGEMENT
The financial plan of a company includes the timing and the amounts of
funds, as well as the inflow and outflow of money. Financial managers also
forecast the economic conditions, the company’s revenues, expenses and profits.
The plan starts and ends with the company’s objectives. Managers review them
and determine the funding they require. Managers also compare the expenses
involved and the revenues expected. It helps them predict cash flow. Management
plans a strategy to make the ending cash positive, and accordingly works out the
way the resources should be allocated. Resources are invested according to the
strategic plan of a company into materials and inventory, personnel and
advertising, etc. Managers are responsible for carrying out this strategy, the whole
process being supervised by the General Executive and the Board of Directors of
the company

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CHAPTER 28
HOW FUNDS FLOW THROUGH A BUSINESS
Basically, money or funds go into purchasing assets, paying operating
expenses and producing income. The operating expenses include the cost of
materials and supplies. The manufacturer also must pay employee wages, rent or
mortgage, insurance premiums and utility bills. Small firms sometimes operate on
a cash basis. They neither obtain credit, nor borrow money. Other firms extend
their resources through the use of credit. The owner of the firm invests some of
his own money and has a lot more of other people’s. The businesses use money to
buy assets like land, buildings and furnishings, and tools, machines, and
equipment. The manufacturer sometimes buys them with mortgage loans which he
secures by the building or the equipment itself. In other words, the bank or
insurance company really owns the property until the manufacturer has paid the
mortgage in full. The use of debt, or credit, increases both the assets and the
income of the purchaser. The use of borrowed money to make more money is
called leverage. Big companies issue securities to attract funds from other
companies and the public. Securities are traded on the open market. New
businesses can start with the businessmen’s own assets. Start-up financing may
also come from relatives and friends. The larer firms can obtain funds from
venture capital investors. These financial intermediaries specialize in funding
ventures with good promise and invest in businesses which generate high profits
within five years. Initially venture capital firms invested in high-tech industries,
but now other branches enjoy this kind of financial aid, especially those working
in the health-care field. Funds can also be borrowed from the bank. In order to
provide a loan, a bank must have funds to lend. This comes from paid-in capital,
earnings of the previous years and the bank’s customers’ deposits. The banker
always remembers that the money he lends is not his bank’s own money. It is
money deposited by the bank’s customers, whether in a demand or time account.
This idea limits the risk that a commercial banker will take. To evaluate the risk, a
banker must first obtain certain basic information about the potential borrower:
how much money the borrower needs, the purpose and the term of the loan, and

33
how the borrower will repay the loan. The banker evaluates the three C’s of credit:
character, capacity and capital – the integrity of the borrower, his ability to repay,
and the soundness of his financial position. The integrity of the borrower is
determined by previous loans and by his standing with other banks. Every where
in the world banks exchange credit information with each other. The borrower’s
ability to repay depends on the purpose of the loan. The financial position of the
borrower is determined on the basis of his financial statement. This consists of a
detailed balance sheet and a profit and loss statement. The bank demands an
audited financial statement covering the previous three years.

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CHAPTER 29
FINANCIAL MARKETS.THE BOND MARKET
People and organizations wanting to borrow Money are bought together
with those having surplus funds in the financial markets. There are a great many
different financial markets, each one consisting of many institutions, dealing with
different instruments in terms of the instrument maturity and the assets backing it,
and serving different types of customers. Generally, financial markets are
classified as Money or capital markets and primary or secondary markets. Money
markets deal in short-term securities having maturities of one year or less. Capital
markets deal in long-term securities having maturities greater than one year. An
investor who purchases new securities is participating in a primary financial
market. So, when businesses, units of government or individuals can not satisfy
their needs for funds by revenue from sales of goods and services, they can turn to
either debt financing (any process by which the firm gets cash or some other
assets in return for a promise to pay an agreed upon sum plus interest) or equity
financing (any process by which a firm raises funds in return for a share in its
ownership and management). Some sources of funds available to businesses (like
issuing stock) are not available to governments go into debt – they borrow short
and long-term funds by issuing bonds. A bond is an instrument in which the issuer
(debtor/borrower) promises to repay to the lender/investor the amount borrowed
plus interest over some specified period of time .It should be stressed that one of
the most important characteristics of a bond is the nature of its issuer. Issuers
include federal (central) governments and their agencies, supranationals (such as
the World Bank, the Asian Development Bank), municipial governments, and
nonfinancial and financial corporations.

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Economic Activity

Most people work in order to earn their living. They produce goods and
services. Goods are either produced on farms, like maize and milk, or in factories,
like cars and paper. Services are provided by such things as schools, hospitals, and
shops. Some people provided goods, some provided services. Other people
provided both goods and services. For example, in the same garage, a man may
buy a car, or he may buy some service which helps him to maintain his car. The
work which people do is called their economic activity. Economic activities make
up the economic system. The economic system is the sum-total of what people do
and what they want. The work which people undertake either provides what they
need or provides them with money. People buy essential commodities with
money.

Most people work to earn a living, and produce goods and services. Goods
are either agricultural (like cars and paper). Services are such things as education,
medicine and commerce. Some people provide goods, some provide services.
Other people provide both goods and services. For example, in the same garage a
man may buy a car or some service which helps him to maintain his car. The work
people do is called economic activity. All economic activities together make up
the economic system of a town, a city, a country of the world. Such an economic
system is the sum-total of what people do and what they want. The work people
undertake either provides what they need or provides the money with which they
can buy essential commodities. Of course, most people hope to earn enough
money to buy commodities and services which are non-essential but which
provide some particular personal satisfaction, like toys for children, visits to the
cinema and books.

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The science of economic

Economic is a science. The science is based upon the facts of our everyday
lives. Economist study our everyday lives. The study the system which affects our
lives. The economist tries to describe the facts of the economy in which we live.
He tries to explain how the system works. His methods should be objective and
scientific. We need food, clothes and shelter. If we could get food, clothes and
shelter without working, we probably would not work. But even when we have
these essential things, we may want other things. If we had them, these other
things (like radios, books and toys for the children) might make life more
enjoyable. The science of economics is concerned with all our material needs and
wants. It is not just concerned with basic needs like food, clothes and shelter.

The science of economics is based upon the facts of our everyday lives.
Economists study our everyday lives and the general life of our communities in
order to understand the whole economic system of which part we are. They try do
describe the facts of the economy in which we live, and to explain how it all
works. The economist’s methods should of course be strictly objective and
scientific. We need food, clothes and shelter. We probably would not go to work
if we could satisfy these basic needs without working. But even when we have
satisfied such basic needs, we may still want other radios, books and toys for the
children. Human beings certainly have a wide and very complex range of wants.
The science of economics is concerned with all our material needs; it is concerned
with the desire to have a radio as well as the basic necessity of having enough
food to eat.

Different economic system

Not all economic systems are the same. The economic system of the
United states is very different from the economic system of the Union of Soviet
Sosialist Republics. The American system is based on the principles of Karl Marx.

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Karl Marx was a political economist who lived in the 19th century. The American
system is capitalistic, while the Russian system is communistic. The economic
ideologist of these two nations differ very much from each other. The economic
system of Britain is similar to the American system. Britain has an economic
system based on private enterprise and private supplies of capital. Property in
Britain and the United States can be owned by individual citizens. The economic
freedom of the citizen of Britain and America is not complete freedom. Citizen
must obey the law, but otherwise they can use their time, money and effort as they
wish.

Not all economic system are the same. The economic system of the USA
differs greatly from the system of the USSR. The American system is based of
private enterprise with private ownership of the means of production, while the
Russian system is communistic and is based upon the principal of Karl Marx, the
19th century political economist. The economic ideologies of these two nations
contrast very strongly. Britain is similar to the USA. It has an economic system
based on private enterprise and private supplies of capital, which can be defined
as surplus income available for investment in new business activities. Property in
both the US and Britain can be owned by individual citizen and these citizen
exercise considerable economic freedom of choice. They can choose what they
want to do and how they want to earn their living, but are not of course entirely
free to do as they wish.

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CHAPTER 30

THE LIMITS ON ECONOMIC FREEDOM

A person is economically free, if he can do what he wishes with his own


property, time and effort. In all communities, of course, limits are set upon this
personal freedom. In some countries the limits are complex: in others they are
relatively simple. All individual citizens are required to conform to the laws made
by their governments. Complete economic freedom of action can cause great
difficulties, because the freedoms of various individuals will conflict. If citizens
were completely free, some landowners might build factories in unsuitable places.
If there was no system of control, factory-owners might make their employees
work too long each day. If they were completely free, workers might stop working
when they got their first pay, and come back to do more work only when they
needed more money. Such economic freedom could create a very unstable
economy. Laws related to economic conditions are sometimes concerned with
workers’ health, wages and pensions. They are sometimes concerned with
contracts between employers and employees. They are sometimes concerned with
the location of places of work. Sometimes they help the employers; sometimes
they protect the interests of the workers.

If a person can do what he wishes with his own property, time, and energy,
then economists say that he is ‘economically free’ in all communities, of course,
limits are imposed upon the personal freedom of their citizens and these limits are
in some cases very complex but in others relatively simple. All individuals are
required to conform to the laws made by their governmets. Complete economic
freedom of action can create great difficulties,because the freedoms exercised by
various individuals often conflict.

39
If citizens were completely free, some landowners might build factories in
unsuitable places, while some factory-owners might make their employees work
too long each day. If they were completely free, workers might stop working
when they got their first pay, and come back only when they needed more money.
Such economic anarchy could cause instability (unemployment; loss of
production etc.) in the whole economy of a country. Laws related to economic
conditions are sometimes concerned with contracts between employers and
employees. Sometimes they are concerned with workers’ health, wages and
pensions, and sometimes with the location of places of work. Sometimes they
protect the interests principally of the workers, while at other times they may be
beneficial towards the employers, the government policy towards both employees
and employers will depend very much upon the political and economic ideology
adopted by the government, and may be biased towards employers and capital on
the one hand, or workers and the problems of labour on the other hand.

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References

ENGLISH for ECONOMISTS by Drs. Y. Saiti

A rapid course in English for students of economics by Tom Mc Arthur

Active Business by

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