UNIT ONE

1.0 LOCAL OR DOMESTIC TRADE

Unit structure

• Introduction
• Learning outcomes
• The nature of domestic trade
• Retail trade
• Functions of the retailer
• Wholesale trade
• Functions of wholesalers
• Chain of distribution
• Unit summary
• References

Trade distributes goods and services

to consumers to satisfy society’s
wants.

1.1 Introduction

This unit presents you an opportunity to learn about retail and wholesale trade,
its role and its various dimensions. Trade is an activity that affects the life and
well being of every person, organization and nation. The distribution of goods
and services that satisfy human needs and wants depends upon trade. Trade
therefore is an essential activity for promoting the well being of societies and
nations.

Learning outcomes

By the end of this unit, you should be able to:

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 • Define the terms retail and wholesale trade.
• Discuss the chain of distribution of goods and services.
• Identify the functions of retail and wholesale trade.

1.2 The nature of domestic trade

The term trade means the buying and selling of goods and services, with the
main purpose of satisfying human wants, and in the process generating a profit
as a reward to the trader (Wokorachi, 1991:1).

Domestic trade takes place within national boundaries among individuals and
organizations. It can be divided into retail and wholesale trade. The diagram
below shows trade. The figure 1 below shows the components of domestic
trade, including the various services that help make trade possible.

The components of domestic trade

Figure 1

Local or domestic Services aiding the

trade conduct of trade

Warehousing

Advertising

Banking

Wholesale Retail trade Transport

trade
Insurance

Communication

The services include: (a) Warehousing, which provides storage of goods before
transportation and sale; (b) Advertising, which helps the producer to obtain
information about sources of inputs and prospective customers; (c) Banking,
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 which provides the finance required by the manufacturer; (d) Transport, which
helps move inputs and goods; (e) Insurance, required to compensate the
manufacturer in case of loss of goods; and communication which helps the
manufacturer to contact suppliers and consumers.

These services are so important that without them, trade would almost be
impossible.

1.3 Retail Trade

Retail trade, as we stated earlier, is one of the two broad components of

domestic trade. Retail trade involves the selling of goods in small quantities,
usually to the final consumer. Retail traders may be small scale or large scale,
depending on:

(a) the amount of capital invested in the business; (b) the size of the stock held;
and (c) the range of services offered to the consumer.

Among the small-scale retail traders, some trade formally while others
informally, usually without a license or permanent trading premises (Wokorach,
ibid, p.26).

Some small-scale retailers include:

(i) Mobile shops;

(ii) Hawkers
(iii) Street markets or vendors
(iv) Itinerant traders, etc.

Large scale retailers include:

(i) Supermarkets
(ii) Chain stores
(iii) Department stores, etc.

1.4 Functions of the retailer

The retailer, whether small or large, performs many functions, including

the following:

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 (i) The retailer buys goods in bulk from manufacturers or wholesalers, and sells
them in smaller quantities to individual consumers;
(ii) The retailer provides goods to consumers at convenient locations, often close
to residential areas and in central locations which are easily accessible to
consumers;
(iii) The retailer provides goods to consumers at convenient times by providing
long trading hours, and in some cases remain open during weekends;
(iv) Some retailers provide credit facilities to consumers, by allowing them to
collect goods and to pay for them later;
(v) Retailers often offer delivery services for expensive and bulky consumer
goods such as furniture, refrigerators and building materials.
(vi) Retailers often provide pre-sales service and after-sales service to
consumers, by giving information on how to use particular goods, and
offering repair and maintenance services.

Activity

1. Identify some retail traders in your community, and state whether they
are trading formally or informally.
2. Try to classify the retail traders you have identified as either small-scale
or large scale traders, based on the range of services they offer.

1.5 Wholesale trade

Wholesale trade is the second component of domestic trade. Wholesale trade

involves the selling of goods in large quantities to another trader. Many of the
goods that we buy on the day to day basis have passed through the wholesaler
before reaching us.

1.6 Types of wholesalers

There are three types of wholesalers:

(a) Cash and carry wholesalers,(b) general wholesalers and (c) specialist
wholesalers (Wokorachi, 75). Cash and carry wholesalers sell their goods strictly

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 on cash. They do not offer credit facilities, and they sell mainly groceries. They do
not offer delivery or transport facilities to buyers. General wholesalers sell a
wide range of goods; they are very large and have branches in many parts of the
country. Specialist wholesalers sell a limited range of goods, but provide a wide
variety of goods within that particular range.

1.7 Functions of wholesalers

Some of the main functions of the wholesalers are as follows:

a) Warehousing: involving storage of goods and keeping them safe until the
retailers want them. In the process, the manufacturer is relieved of the
cost of storage, and the retailer is provided with a ready supply of goods.
b) Risk bearing: The wholesaler takes a lot of risks by storing goods in large
quantities. For example, the goods may not be wanted by the customers,
or they may go out of fashion. Prices of goods may fall, forcing the
wholesaler to sell at a loss.
c) Keeping prices stable: by holding goods in store, wholesalers prevent
either shortage or excess developing on the market, thereby keeping
prices stable.
d) Breaking bulk: producers supply goods in large quantities to wholesalers.
Wholesalers in turn re-package the goods and sell them to retailers in
smaller quantities. This is of particular importance to the small retailers
who do not have enough capital and storage space.
e) Providing variety: Wholesalers usually order goods from various
producers from all over the world and stock them under one roof.
Retailers therefore find almost all the goods they need under one roof,
thereby saving money and time.

Activity

Many wholesalers today are willing to sell directly to consumers. Visit

one whole sale store in your town and find out from the manager why
they allow consumers to buy directly from their store.

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 1.8 Chain of distribution

Primary or secondary production makes goods available to consumers. Before

reaching the consumer, the goods travel through different routes which together
form what is called the chain of distribution. The various routes from producers
to consumers are illustrated in figure 2

Figure 2. Chain of distribution

Goods made by primary or

secondary industry
Marketing
Boards

Factory shops Mail order Large retailers Cash and carry Wholesalers
firms wholesalers

R1 R2 R3 R4 Goods pass through middle men

Retailers
Consumers buy and use
the goods to satisfy
Key: wants.
R1 = route 1
R2 = route 2 Source: adapted from Wokorachi, 1999: 4

Route 1: Some producers, such as small bakeries, may sell some of their bread
direct to the consumers through their own retail outlets.
Route 2: This route involves direct marketing, e.g. mail order companies may
advertise their products and call for orders by post or phone.
Route 3: Large retailers such as supermarkets buy directly from producers in bulk
from the producer and sell directly to the consumer.
Route 4: Some wholesalers buy goods in bulk from the producer and sell directly
to the consumer.

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Route 5: The wholesaler buys goods in bulk from the producer and sells them in
smaller quantities to the retailer. The retailer then sells the goods to the
consumer in suitable quantities according to the demand.
Route 6: Some parastatal organizations (such as the Food Reserve Agency) buy
produce (e.g. from farmers) and sell to consumers through wholesalers
and retailers.

Unit summary

In unit one, we learnt the following:

I) Trade is the buying and selling of goods and services to satisfy society’s wants.
II) Local or domestic trade can be divided into retail trade and wholesale trade.
III) Retail trade entails buying goods in bulk and selling them in smaller quantities,
usually to final consumers.
IV) Wholesale trade is the buying of goods, in bulk from manufacturers and selling
them in relatively large quantities to another trader.
V) Before they reach the final consumer, goods travel through different routes,
which together form what is known as the chain of distribution
VI) Retailers are classified into two groups: small scale and large scale, on the basis of
the amount of capital invested, size of stock held, and range of services offered.
VII)There are three main types of wholesalers: cash and carry wholesalers, general
wholesalers and specialist wholesalers.

References

Wokorachi, J.B. (1999), Commerce: A Complete Course, (Third ed.), Salama Publishers

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 UNIT TWO.

2.0 INTERNATIONAL TRADE

Unit structure

• Introduction
• Learning outcomes
• The need for international trade
• Absolute advantage
• Comparative advantage
• The Law of Comparative Advantage
• Advantages of international trade
• Reasons for restricting international trade
• Types of trade restrictions
• Balance of trade
• Balance of payments
• Terms of trade
• Unit summary
• References

Specialization and international trade

benefit trading partners.

2.1 Introduction

International trade is the movement (import or export) of goods, services and

capital between two countries. Goods and services entering the country from
another country are called imports, while those sold outside the country are
exports. The figure below shows the major components of international trade.

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 Learning outcomes

By the end of Unit 2, you should be able to:

• Discuss the factors that give rise to international trade.

• Discuss the advantages of international trade.
• Identify barriers to international trade.
• Distinguish between balance of trade and balance of payments.
• Distinguish visible from invisible trade.

2.2 The need for international trade

International trade becomes necessary because:

(a) the demand for goods and services differs one country to another, and (b)
the ability of countries to produce goods and services also differs (Harvey and
Jowsey, 1998:471). For example, a country may be able to produce a particular
commodity, but not in sufficient amounts to satisfy the demand of its citizens.
The United States of America is a case in point. While the country produces large
amounts of oil, it is nevertheless a net importer of oil, because its domestic
output cannot satisfy the home demand.

On the supply side, it should be noted that the various types of economic
resources such as land, labour and capital are unevenly distributed throughout
the world (Grant, 2000:452). One country may have an abundance of land;
another may have a large labour force, while a third may have an abundance of
capital.

However, the international mobility of such resources is generally limited (ibid).

Since these factors are difficult to move from one country to another, the
alternative is to allow countries to produce the goods they are best suited to
produce, and to use trade to exchange those goods for goods of other countries.
Therefore, lack of self sufficiency in economic resources is one of the reasons for
international trade.

We note that even if all countries could produce all the goods they wanted, there
would still be need for trade, which would improve the overall welfare of
trading partners. This is because the same unit of resource input, (for example
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 one hectare of agricultural land) would have different amounts of output (of say
wheat) in different countries. Hence, one resource output in country would
produce more of commodity A, while the same unit would produce more of
commodity B in another country. In other words, the costs of production for the
same commodity vary from country to country. One country may therefore have
an absolute advantage over another, in production.

Therefore, it would be mutually beneficial if each country specializes in

producing those goods in which it has greater advantage (through higher
productivity and lower costs), and use trade to obtain those goods and services
that it cannot produce cheaply itself.

2.3 Absolute advantage

Let us explore the concept of absolute advantage. Suppose there are two
countries A and B, as in table below. Before specialization and trade, one unit of
resource input can produce either 10 units of food or 6 units of clothing in
country A, and 5 units of food and 10 units of clothing in country B. Therefore,
the same amount of resources, country A can produce more food than country B,
while country B can produce more clothing than country A. Country A is therefore
said to have an absolute advantage over country B in the production of food,
while country B has an absolute advantage over country A in the production of
clothing. A country is said to have an absolute advantage in the production of a
commodity when it can produce more of that commodity than other countries
using the same amount of resources (Harrison, 1995:179).

Table: Absolute advantage and specialization

(i) Before specialization One unit of resource input can produce:

Food (units) Clothing (units)
Country A 10 6
Country B 5 10
Total 15 16
(ii) After specialization
Country A 20 0
Country B 0 20
Total 20 20

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 When two countries each has an absolute advantage in different commodities,
(as shown in the table above), total world output can be increased when each
country specializes in the production of these commodities in which it has an
absolute advantage. In the table above, country A specializes by devoting both
units of resource inputs to the production of food, while country B devotes its
two units of inputs to the production of clothing.

The result is that after specialization the two countries can produce 20 units of
food, instead of 15 units, and 20 units of clothing instead of 16. Trade between
the two countries would therefore be mutually beneficial.

2.4 Comparative advantage

However, even when a country has an absolute advantage in the production of

both commodities, trade can still be mutually beneficial, so long as each country
has comparative advantage over the other in the production of one commodity.
For example, table two below shows that country A has an absolute advantage in
the production of both wheat and cars. With the same amount of resources
country A can produce more of both goods than country B.

Table 2: Comparative advantage

Tones of wheat that can be Number of cars that can be

Produced from X amount of produced from X amount
resources. of resources.
Country A 40 10
Country B 20 8
However, each country has a comparative advantage over the other in the
production of one commodity. A country has a comparative advantage in that
commodity for which it has to sacrifice less of the other commodity, than its
competitor. Putting it another way, a country has a comparative advantage in
that commodity for which it has a lower domestic opportunity cost ratio than its
competitor. A domestic opportunity cost ratio is the number of units of a
commodity that must be given up for each unit of another commodity that is
produced. We use table 2 above to illustrate the above concepts. In country A, 4
tones of wheat must be given up for each car produced. The domestic
opportunity cost ratio is 4:1.In country B, 2.5 tons of wheat must be given up
for each car produced. The domestic opportunity cost ratio is 5:2. Country B

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 therefore, has a comparative advantage in the production of cars, since for each
car produced; less wheat is sacrificed than in country A. The table would also
show that country A has a comparative advantage in the production of wheat.
For each tone of wheat produced, country A must sacrifice 0.25 cars, whereas in
country B 0.4 cars must be sacrificed for each tone of wheat produced.

Activity

Indentify and list the goods that Zambia cannot produce but is able to enjoy as a
result of International trade

2.5 The law of Comparative Advantage

Comparative advantage in the production of goods in countries can lead to

specialization and trade. Economists call this the law of competitive advantage.
The law states that:

a) For two countries to trade in a mutually beneficial way in two goods, it is not
necessary for one country to have an absolute advantage in one good, and
another country to have an absolute advantage in another good. What is
required is that each of them should have a comparative advantage in one of
the goods.
b) Total production of the two goods in the two countries will increase if each
country transfers resources into the production of the goods in which it has a
comparative advantage.
c) Trade between the two countries allows both countries to have more of both
goods than they could have if they made themselves sufficient.

2.6 Advantages of international trade

Some of the main advantages of trade between countries are as follows:

a) Benefits of specialization
International trade enables countries to obtain the benefits of specialization.
Specialization by countries improves the standard of living for all (Harvey and
Jowsey, ibid, p.472). Without international trade, many countries would have

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 to go without certain products. For example, Zambia has no oil, does not
produce spices, and does not manufacture clothes.
b) Competition and efficiency in production
International trade increases competition and thereby promotes efficiency in
the production of various commodities.
c) Promotion of political links
International trade promotes beneficial political links between countries. For
example, among European Union countries, trade is an important link.

d) Total production of the two goods in the two countries will increase if each
country transfers resources (factor inputs) into the production of goods in
which it has a comparative advantage.
e) Trade between the two countries allows both countries to have more of both
goods than they could have if they made themselves self-sufficient.

2.7 Obstacles of International trade: Reasons for restricting trade.

We have seen that trade between countries leads to greater world production of
goods which are traded. This leads to an increase in the economic welfare of the
countries involved. It would follow therefore, that any measures which inhibit
trade between countries would reduce the volume of output and the level of
economic welfare. Inspire of the benefits expected from international trade,
countries sometimes adopt measures to restrict international trade (Harris,
1995:183). In general, international trade is controlled “because governments
think and act nationally rather than internationally” (Harvey and Jowsey,
1998:481). Many reasons are put forward to justify why countries disregard the
advantages of international trade. Some of the reasons are as follows:

(i) Nationally security

Many countries regard dependence on foreign sources of supply of goods,
especially those goods vital to national defense and survival, as highly
dangerous. They therefore try to achieve self sufficiency in the production of
all goods, even if this may not be the most efficient course of action. One
country which has this approach consistently is China. Since China has had
poor relations with the western powers, it has been determined to make
herself economically independent. Also, the United States of America has

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 emphasized the development of the oil industry to safeguard national
security, even though it may be less efficient than its competitors.

(ii) Need for diversification

Many developing countries, especially those specializing in primary
production such as agriculture, reject the law of comparative advantage.
Their fear is that if they continue to specialize in primary production, they
will remain suppliers of raw materials to the developed countries, without
any hope of being industrialized themselves. In order to become
industrialized, a developing country must diversify its economy that is
developing a variety of economic activities such as industry, commerce, and
finance.
(iii) Protection of domestic industries
Government sometimes takes measures to restrict international trade in
order to protect domestic industries. They believe that if there is no control
on foreign competition, domestic industries will suffer. The most vulnerable
are “infant” industries, which have just started, and need time to be able to
resist foreign competition. Such infant industries are generally found in
developing countries.

2.8 Types of international trade restrictions

Trade restrictions between countries may hinder either import or exports, or

both. There are many types of trade restrictions, including the following:

(i) Tariffs: A tariff (or import duty) is a percentage surcharge imposed on the
price of goods entering the country. The effect of the tariff is to increase
the price of imported goods, so that the quantity of goods demanded and
purchased will tend to fall, assuming that the demand for those goods is
perfectly elastic. However, if the demand for such goods is inelastic, a
tariff will have little effect in reducing imports. Tariffs may be applied to
particular products, or across the board (Harrison, 1995:183).

A tariff will serve two purposes

a) Discouraging consumers from buying foreign goods, by making their
price higher: and

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 b) Government can hope to raise additional revenue.

(ii) Import quotas (or quantitative restrictions)

Another type of restriction is the import quota. An import quota seeks to
control directly the level of imports. Specific limits are placed either
selectively on the quantity of particular products that can be imported, or
across the board.

(iii) Exchange controls

A government may reduce the flow of goods into the country by restricting
the amount of foreign exchange (currency), available for purchasing such
goods. If for example, the Zambian government wanted to reduce the flow
of imports from the United States of America (USA), it may set limits on
the amount of United States dollars that importers can acquire to buy
American goods.
(iv) Subsidies
When subsidies are applied to domestic products, their prices are lowered,
and hence reduce competition from imported products. If on the other
hand exported commodities are subsidized, their competitiveness in
foreign markets can be increased, and the effect is the same as a tariff.
(v) Embargoes
An embargo is a ban on trade between two countries, placed on the
import or export of certain goods (Harrison, 1995:481). An embargo may
be total (a ban on all goods) or partial (a ban on selected categories of
goods only). Total embargoes usually exist between countries which are
hostile toward each other.

Activity

1. Who gains and who loses when a government imposes a tariff on

imports of a particular good?
2. Identify any factors that may restrict trade among COMESA
countries.

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2.9 Balance of trade

Each country exports and imports goods and/or services to other countries.
Exports earn country revenue, while imports result in payments to other
countries. The customs authorities usually keep statistical records of goods
coming in and those leaving the country. From these records, a country can work
out the total amount of goods imported and exported in a given year.

The balance of trade is the difference between the amount a country earns from
exports and what it spends on imports. If the value of exports is greater than that
of imports, the balance of trade is said to be favorable. This means that the
country is receiving more than it is paying to foreigners. If however, the value of
imports is greater than that of exports, the balance of trade is said to be
unfavorable. The country is paying out more than it is receiving from foreigners.
In such a case, the government may have to take actions to improve the trading
position of the country. All countries strive to export more than they import, so
as to build foreign exchange reserve which they can rely on during times of
difficulties such as wars or other catastrophes (Wokorach, 1996:96).

The term balance of trade is only used to refer to the export and import of
physical goods, such as cars clothes, foods, furniture etc. This is also referred to
as visible trade. Other items which are invisible are not included under the
balance of trade.

2.10 Invisible items

The invisible items refer to trade in services sold to foreign countries which bring
money into the country, and those bought from foreign countries which result in
money leaving the country. Examples of items of invisible trade include:
payments for shipping and insurance, cash remittances to and from other
countries, tourist expenditure, interest and dividends.

2.11 Capital items

Capital items refer to inflows and outflows of loans, gifts, grants and investments.
Investments can be divided into portfolio investments (foreign stocks, shares and

16
 government bonds), and real investments (establishing business and buying
property).

2.12 Balance of payments

The balance of payments is the difference between total exports and total
imports (including the visible, invisible and capital items. This means that the
balance of payment represents all payments made to other countries and
payments received from other countries. This is summarized in the diagram
below.

Summary of balance of payments components

Balance of Total earnings from: Total payments for:

payments
Equals • Visible items Minus • Visible items
• Invisible items • Invisible items
• Capital items • Capital items

A balance of payments surplus exists when total earnings from abroad exceed
total payments made abroad. When total payments made abroad exceed total
earnings from abroad, a balance of payments deficit is experienced. This
situation presents a serious economic problem which may be remedied by
instituting a tariff or an import quota on some goods.

Considering what has been said about the balance of trade and balance of
payments, it is clear that a country can have an unfavorable balance of trade
but a favorable balance of payments. This is because its favorable balance of
trade may be more than offset by its invisible earnings.

2.13 Terms of trade

The terms of trade may be defined as the rate at which one country’s output
exchanges against another country’s output. However, it is more common to
express the terms of trade as the ratio between the index of export prices and
the index of import prices as follows:

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 Index of export prices

Index of import prices

The index of export prices and the index of import prices are constructed from a
sample of prices of more than 200 export and import commodities respectively
(Grant, 2000:472).

2.14 Unit summary

In unit 2 we learnt the following:

I) International trade is the exchange of goods and services among two or more
countries.
II) International trade arises because the various types of economic resources
are unevenly distributed throughout the world and the international mobility
of these resources is limited.
III) Even if a country is self sufficient in the production of commodities it needs,
it will gain by specializing in producing those commodities in which it has an
advantage, and using trade to obtain goods which it cannot produce
efficiently itself.
IV) Specialization and trade can result in an increase in overall output of goods
and services, as each country transfers resources into the production those
goods in which it has a comparative advantage.
V) Inspire of the advantages of international trade, countries impose
restrictions on trade, for various reasons: (a) national security; (b) protection
of domestic industry; (c) need for diversification; and (d) correcting an
unfavorable balance of payment situation.
VI) Government uses various types of restrictions on trade including: (a) tariffs,
(b) import quotas, (c) exchange control and (d) subsidies.
VII) The balance of trade is a term that means the difference in value between a
country’s exports and imports. The term is used only to refer to trade in
physical commodities such as cars, furniture, and equipment. It is commonly
called visible trade.
VIII) The term invisible trade refers to trade in services such as tourism earnings,
shipping, insurance, interest, loans and dividends.

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 IX) Balance of payments is the difference in value between a country’s exports
(both visible and invisible), and its imports (both visible and invisible).
X) The concept terms of trade refers to the rate at which one country’s output
exchange against another country’s output.

2.15 References

Donnely, Graham (1991), A Foundation in Economics, Cheltenham, Stanley Thorns

Publishers Ltd.

Grant, S.J. and Stanlake, G.F. (2000), Introductory to Economics, (7th ed.), London,
Longman Group UK Ltd.

Harrison, Barry (1991), Economics: A Concise Guide, (second ed.), London, Longman

Harvey, J. and Jowsey E. (2008), Modern Economics, New York, Palgrave Macmillan.

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 UNIT THREE.

3.0 PUBLIC FINANCE

Unit structure

• Introduction
• Learning outcomes
• Why study public finance
• Taxation
• The theory of taxation
• Types of taxation
• Principles of taxation
• The main categories of tax
• Tax structures
• Tax system and equity
• The significance of taxation to a country
• Disadvantages of taxation
• The Role of Zambia Revenue Authority (Z.R.A)
• Budgets
• The role of a national budget
• Parts of a national budget
• Budgeting for a surplus
• Budgeting for a deficit
• A neutral budget
• National debts
• Problems associated with a national debt
• External debt
• Debt crisis
• Debt crisis: A case of Zambia
• Possible solutions to the debt crisis
• Entreprenuership
• References

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 Taxation provides the major source
of revenue for government.

3.1 Introduction

Public finance refers to the way in which revenues are raised and expenditures
are incurred by a state or government. It involves the study of the public or
government budget i.e. to raise and spend money in order to maintain a nation’s
economy.

Learning outcomes

By the end of this unit, you should be able to:

• Explain the role of government in creating an environment for more job

opportunities.
• Describe economic growth.
• State reasons why price stability enhances economic growth.
• Identify practical steps by government to cure a balance of payments
deficit

3.2 Why study public finance?

In module 1 we learnt that the government plays a key role in influencing and
directing a country’s economy. Government’s economic activities are directed
towards aims such as the provision of public goods as well as consumer
protection. Government has an obligation to provide merit goods such as health
and education to all citizens. This is because the private sector cannot adequately
provide merit goods or indeed social security due to market failures.

There are basically five reasons why the government intervenes in the economy.
These are:

I) To address the problem of market failures.

II) To enhance income distribution.

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 III) To enhance the protection of basic rights and to ensure equality of
opportunities for all citizens.
IV) To practice paternalism – the perception that something’s are good while
others are bad e.g. the consumption of drugs. Government will say no to the
sale of drugs on the market.
V) To demonstrate responsibility for future generations. Government will
protect the environment for the benefit of the future generations.

In order for government to undertake the above stated activities, it needs

financial resources – hence the need for public finance. In this unit, therefore, we
shall examine the raising of government revenue and the management of
government expenditure. We shall go further to describe national debt and
income distribution.

3.3 Taxation

3.3.1 The Theory of Taxation

Taxes have always been there as long as there have been organized
governments. Taxes can be in kind or in cash. Even in Christian circles taxes are
there which are meant for redistribution purposes (to cater for the need’s
welfare).

In the middle ages individuals provided services to their lords in a forced manner
(slavery). In modern times, however, governments coerce their citizens to pay
taxes to finance governments – to provide public services. Taxation is a good
mechanism for government revenue mobilization, income redistribution and
general management of the national economy. It is part of the fiscal policy.

Almost all government expenditure is financed by taxation in most countries.

The sale of public assets through privatization programmers augments
government income. Government can also borrow in order to finance its
expenditure.

3.4 Types of Taxation

There are several types of taxation which include the following:

i) Taxes on earnings

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 Payroll taxes such as pay as you earn (P.A.Y.E) belong to this type of
taxation.
II) Taxes on individual income
These are taxes that apply to a broader set of income sources other than
just from pay roll. For instance the entire income of a family (not of any
specific individual in that family) can be taxable.
III) Taxes on corporate income
These are taxes imposed on corporate earnings and owners of capital.
Business firms such as mines, milling companies, construction firms, etc
pay corporate tax.
IV) Taxes on wealth
These are taxes paid on the value of assets (land, real estate, etc). They
include local taxes such as land rates.
V) Taxes on consumption
Value Added Tax (V.A.T), Excise duty, fuel levy, etc are examples of tax on
consumption.

3.5 Principles of taxation

In levying taxes government must have regard to the principles of taxation first
expressed by Adam Smith in his book the ‘Wealth of Nations’ (Donnelly, 1991):

i) Certainty: Tax payers must be made fully aware of how much tax they are
required to pay as well as when they have to pay it.
ii) Cost: The cost of assessing and raising taxes should be kept to a minimum.
iii) Convenience: As much as possible, taxes due should be paid at times most
convenient to the tax payer.
iv) Equality: Members of the community should pay taxes in proportion to
their income.

Additionally, the question of the tax base should also be addressed.

3.6 Two main categories of taxes

i) Direct taxes:
Direct taxes are imposed on resources. They are levied on an individual by
the state. Direct taxes are paid directly to the government. Examples of
direct taxes are poll tax, pay as you earn (P.A.Y.E), personal levy and

23
 customs duty. The most common direct tax in Zambia is income tax, also
known as pay as you earn (P.A.Y.E). It is the biggest source revenue for the
government. The higher the income the more tax you will be required to
pay. Personal levy is deducted from government employees twice a year
and is paid to the district councils.
ii) Indirect taxes:
These are taxes included on certain categories of goods. They are imposed
on resource use rather than on resources themselves. Indirect taxes are
paid when you buy an item in a shop. Value added tax is a good example
of an indirect tax. It is tax added to the value of an item. As the value of
the item increases so does the tax. At present VAT is charged at 16% in
Zambia. One advantage is that it is non-discriminatory. It provides an
equitable way to tax the value of sales.
Excise duty, which is tax levied on luxury goods or sale of specific
commodities such as cigarettes and beer, is another example of an indirect
tax. In Zambia excise duty has been increasing over the years.

3.7 Tax structures

By tax structure we refer to whether the tax is proportional, progressive or

regressive. Thus there are three types of tax structures as follows:

I) Proportional taxes
These are taxes that are charged to all taxpayers on the same proportion
of their income. For example, the government can tax every worker 20%
of their pay irrespective of the amount they get. In other words the
percentage of income paid in taxes remains the same for all income levels.

ii) Progressive taxes

These make those who earn more money pay more tax. A greater
percentage of their income is taxed e.g.
• Income below K500, 000 at 10% tax.
• Income from K500, 000 to K1, 000, 000 at 20% tax.
• Income above K1, 000, 000 at 35% tax.
In the above example we can see that as the income increases so is the
percentage in tax.

24
 iii) Regressive taxes
These make the poor pay a greater proportion of their income than the
rich. Flat rate taxes, such as the excise duties on tobacco, beer and petrol,
act regressively since the amount of tax included in the prices of these
goods represents a greater percentage of the incomes of the poorer
groups (Stanlake’s, 2000:307). The impact of the three structures of
taxations as income changes are illustrated in figure 3.

Progressive

Proportion of

Income taken in tax proportional

Regressive

Income

Figure 3: impact of taxes (source: Donnelly, 1991)

25
The table below summarizes the three types of tax structures.

Tax structure Description Example Ron’s taxes on Mary’s taxes

K5, 000, 000 on K8, 000, 000
income income.
Proportional A constant “Flat” tax K1, 000, 000 K1, 600, 000 or
percentage of or 20% of 20% of income.
income is taken in income.
taxes as income
increases.
Progressive A larger percentage Income tax K500, 000 or K2, 400, 000 or
of income is taken 10% of 30% of income.
in taxes as income income.
increases.
Regressive A smaller Sales tax K200, 000 or K160, 000 or
percentage of 5% of total 5% of
income is taken in purchases of K3, 200, 000 of
taxes as income K400, 000 or income.
increases. 4% of income.
Source: Adapted from Prentice Hall, Economics (Pearson, 2005).

3.8 Tax system and Equity

Tax equity describes how fair a tax system is to the tax payers. The criteria for
assessing tax equity are vertical equity and horizontal equity.

i) Vertical equity: This is the tax fairness based on the fact that people who earn
more income must pay more tax. A progressive tax structure promotes
vertical equity i.e. the effective average tax rate must raise with income so
that the rich pay a higher percentage of income in taxes than the poor.
ii) Horizontal equity: This is tax fairness whereby individuals who are the same
in all relevant aspects are treated equally. The principle of horizontal equity
implies that similar individuals who make different economic choices should
be treated similarly by the tax system.

3.9 The significance of Taxation to a Country

Taxation is significant to a country for the following reasons:

i) Taxation is required to cover government expenditure such as roads, hospital,

school and other infrastructure building including wages and salaries.
26
 ii) Taxation discourages excessive consumption in the economy by reducing the
supply of money to a single individual or groups of people. This is particularly
important where there is a shortage of goods to go around.
iii) Taxation, to a certain extent discourages importation of luxury goods into a
country.
iv) Taxation helps to reduce inequality of incomes in a country through vertical
equity considerations (progressive income tax).

3.10 Disadvantages of Taxation

Taxation may be associated with the disadvantages listed and discussed below:

i) If taxation is very heavy, it discourages workers from working very hard.

ii) Tax can act as a deterrent to savings since it reduces people’s ability to save.
iii) Tax also reduces the profit margin of enterprises. As a result, there is lack of
expansion of industries or non-investment in new business ventures.
Economic development is thus hindered.
iv) Taxation encourages inflation. Workers are forced to go on strike to ask for
more money to increase their purchasing power.
v) Taxation discourages economic diversification. People will be less willing to
invest in business areas where the tax is higher.

3.11 The Role of Zambia Revenue Authority (Z.R.A)

Zambia Revenue Authority (Z.R.A) is a statutory body. It is a government agency

which collects taxes from companies and individuals on behalf of government.
Z.R.A operates as an independent body without government interference. It has
improved government’s ability to collect a lot of taxes. The agency has
introduced measures to prevent tax evasions. Z.R.A. also undertakes sensitization
campaigns to educate citizens on the importance of paying lawful taxes. Failing to
pay or choosing not to pay all lawful taxes is called tax evasion and is a
prosecutable offence. All citizens should be willing to pay all the taxes due to
them. This is a sign of good citizenship.

3.12 Budgets

A budget is an estimate or plan of future income and expenditure (Simfukwe etal,

1996). An individual or family might draw up a budget with regard to the

27
 expected income. Thus a budget is a plan on how an individual, family or nation
will collect and spend money.

A government budget is a plan of current and capital revenue and current and
capital expenditure of government in a given financial year. In Zambia for
instance, the financial year runs from 1st January to 31st December each year.

The government of Zambia presents an annual budget proposal to parliament

through the Minister of Finance and National Planning. A government budget can
also be referred to as the national budget.

3.13 The Role of a National Budget

A national budget is intended to play the following roles:

i) To carry out the development by providing financial outlay (money) for

public expenditure, cutting down on wastage and making the best use of the
money available.
ii) To supply community services.
iii) To redistribute income and wealth by making services like education, health
and several others affordable to the people. This is an allocative function of a
budget.

The national budget serves as an instrument for achieving economic control of

the economy during the year. It enables the Ministry of Finance and National
planning to assess the economic situation in the country. Government may wish
to produce a budget which will have an accelerating, neutral or restraining effect
on the economy in line with the national development agenda.

3.14 Parts of National Budget

There are two main parts to a national budget. These are:

a) Revenue
b) Expenditure

The revenue part is made up of the recurrent revenue which is money which the
government receives every year from various sources. The main source of
recurrent revenue is taxation. The expenditure part is made of the recurrent
expenditure and capital expenditure. Recurrent expenditure is money spent by
28
 government every year. For instance on salaries, maintenance etc. Capital
expenditure is money spent on new projects such as building of schools, road
construction, etc.

3.15 Budgeting for a surplus

When the economy is hit by too much inflation, there will be need for the
authorities to take measures to arrest the situation. In this case authorities will
raise taxes to reduce spending. This will leave the budget with a surplus.

The reduction of money supply in the economy will reduce aggregate demand for
goods and services. This will prevent prices rising thereby lowering inflationary
pressure in the economy.

Caution: Extra taxation may trigger wage, spiral inflation. It may also serve as a
disincentive to productivity.

3.16 Budgeting for a deficit

Budgeting for a deficit entails taking measures to increase money supply in the
economy by reducing taxation. This leaves the average citizen with more money
to spend. Situations which necessitate authorities to budget for a deficit include
high unemployment levels, loss of confidence by entrepreneurs on probability of
their businesses and the collapse of industries in the economy.

Budgeting for a deficit stimulates the economy by braising the aggregate

monetary demand so that citizens can spend more money. Another way of doing
this is for the government to increase welfare benefits to the needy people and
to go ahead with capital projects.

Budgeting for a deficit requires that government borrows extra money to meet
the budgetary shortfall.

3.17 Neutral budget

When the economy is believed to be performing well, the authorities will bring in
a neutral budget. Neither a stimulant nor a restraint will be required. This means
any tax charged will cancel out another. For instance, an increase in import duty

29
 will make little difference. This will leave the demand for fuel unaltered.

Activity

1. Suggest and discuss reasons why Zambia’s National Budget must

go through parliament before it is appropriated.

2. (a) What were Zambia’s budgetary estimates (in Zambian kwacha)

for the period from 2005 to 2010?

(b)Taking the X-axis to represent the years and Y-axis to represent

the budgetary estimates and using a scale of your choice, plot a
graph of the years against the budgetary estimates in (a) above.

(c) Comment on the general trend of the graph in terms of

whether or not the budgetary estimates have been increasing
over the years.

Generally comment, a good budget is one which addresses the economic as well as the
social needs of a society. It should be able to stimulate economic growth by encouraging
investment by citizens.

3.18 National Debts

The national debt is the accumulation of government borrowings over the years
(Grant, 2000:311). It is the debt of central government. A budget deficit causes
the national debt to rise. A budget deficit occurs when spending is higher than
revenues. Thus government must borrow money in order tom pay for the extra
expenditures. The main way that government borrows money is by selling bonds
(Pearson Prentice Hall, 2005:65). A national debt, therefore, may also be referred
to as the total amount of money that government owes the bondholders.

3.19 Problems associated with national debt

There are basically two problems that arise from national debt:

i) It reduces funds available for business to borrow and invest because

people buy government bonds instead of investing in business.

30
 ii) Government pays interest to bond holders and money spent interest can
not be spent elsewhere.

3.20 External debt

In instances where government borrows from foreign countries, the interest paid
to holders of the debt must be financed by export earnings or other payments
from abroad. These interest payments will therefore place a strain on the
country’s balance of payments. The external debt burden has been a major
problem for many developing countries since a greater proportion of their export
earnings is used to service the external debt.

3.21 Debt crisis

This arises from foreign trade. Sometimes a country may not have sufficient
foreign exchange to pay for its imports. This is as a result of an unfavorable
balance of payments or balance of payments deficit. The affected country will be
forced to borrow money from foreign countries or from the International
Monetary Fund (IMF) and the World Bank in order to solve the balance of
payments problem. Where the country does not generate enough foreign
exchange to repay the money and the interests accrued, it will borrow again in
order to repay the loans. The continuous borrowing in order to service the loans
means that the country will plunge in a debt crisis. As a result, it will be left with
little or no money to invest and expand the domestic economy.

3.21.1 Debt crisis: A case of Zambia

In 1996, Zambia had accumulated an external debt to the tune of U.S. $6.5 bn.
The World Bank classified Zambia among the 32 Highly Indebted Poor Countries
(HIPC). As a result, national expenditure on primary education and health fell
significantly.

In order to assist Zambia come out of the debt crisis, the donor community
recommended measures which included Structural Adjustment Programmes
(SAPs) and debt relief initiatives.

31
3.22 Possible solutions to the debt crisis

A country which is trapped in a debt crisis may have to embark on the following
measures in order to address the problem:

i) Increasing exports.
ii) Putting limits on imported goods.
iii) Reducing the interest rates.
iv) Soliciting for debt relief or debt cancellation.

3.23 Distribution of income

We have so far learnt that public finance is concerned with government spending
and revenue. Taxation is the chief source of revenue for government. Among the
objectives of government in taxation and spending i.e. fiscal measures, is one
related to the redistribution of income and wealth. Government would like to
achieve greater welfare of the citizenry.

There are four main reasons why government is interested in the distribution of
income. These are:

i) Fairness: There should not be poverty in the midst of plenty.

ii) Gross inequality of income is divisive of society and disruptive to economic
life, e.g. through industrial unrests for higher pay.
iii) The distribution of income affects macro variables such as saving and
taxation yield. These variables must be considered by government as it
formulates stabilization policies.
iv) It is government’s moral obligation to compensate for any failures on its
part, by providing a cushion for both unemployment and inflation.

Economists have different ways of analyzing income distribution. They may

analyze it in terms of households, families, single individuals, sex, educational
attainment, etc. The family is however, the more common method to use.

Families are ranked in terms of the incomes they receive and then examined.
Lorenz curves are drawn to show the income inequalities between the families.
Factors such as education, wealth, discrimination, ability and monopoly power
help to explain reasons why the incomes of various groups may be different.

32
 Government should therefore make and implement fiscal and other policies
that are aimed at achieving fair distribution of income.

3.24 Unit summary

In Unit 3, we learnt that:

i) Public finance refers to the way in which government revenues are raised
and government expenditures are incurred. It involves the study of
government budgets.
ii) The main source of government revenue is taxation.
iii) The two main categories of taxes are direct taxes and indirect taxes. Direct
taxes are paid directly to the government while indirect taxes are paid
when we buy an item from a shop.
iv) Taxes can further be classified proportional, progressive and regressive
taxes.
v) A budget is an estimate or plan of future income and expenditure.
vi) A national budget is prepared once per year and is submitted to
parliament for approval before it is implemented.
vii) The national debt is the stock of outstanding government debt.
viii) Problems associated with a national debt include reduced finances
for investment as well as the cost associated with debt servicing.
ix) Fair distribution of income is important in order to avoid serious income
inequalities among the citizens.

Activity

1. What government economic policies are aimed at empowering more women

with more income?
2. Name a tax system which tends to improve on the equality of income
distribution among civil servants in Zambia? Explain how the system tries to
achieve fairness in income distribution.

33
3.25 References

Begg, D, etal (2008), Economics (9th ed.) Berkshire, McGraw – Hill

Donnely, Graham (1991), A Foundation in Economics, Lackhamton, Stanley

Thornes.

Grant, S.J and Stanlake, G.F. (2000), Introductory Economics (7th ed.),
Harlow Pearson Education Ltd

Ministry of Education, (1997), Civic Education Manual, Lusaka, schools and

Colleges press (Z) Ltd.

Pearson Education (2005), Guide to Essentials of Economics, Boston, Prentice

Hall.

Todaro, M.P. and Smith S.C. (2009), Economic Development (10th ed.), England,
Pearson.

34
 UNIT FOUR.

4.0 GOVERNMENT AND THE ECONOMY

Unit structure:

• Introduction
• Learning outcomes
• The government objectives for the economy
• Full employment
• Economic growth
• Price stability
• Balance of payments (B.O.P) position
• Favourable balance of payments
• Unfavourable balance of payments
• Measures to deal with the balance of payments deficit
• Unit summary
• Activity
• References

Government formulates economic

policies which are aimed at enhancing
economic prosperity and welfare of its
citizens.

4.1 Introduction:

In this unit we shall explain government and the economy in terms of

employment, economic growth, price stability and the balance of payments.
Government has a huge responsibility of ensuring that the national economy is
on the right footing. This is so because, ultimately, it is government which bears
the largest share of the blame for deprivation and poverty of its people.
Remember, it is only government which has the final authority in terms of
presiding over national affairs.
35
 Government makes and implements various policies which are aimed at creating
a conducive environment for economic growth and prosperity of a nation.
Imagine a society in which there is absolute absence of law and order, would you
expect to see any meaningful productivity in such a society? It is government
which ensures that law and order are maintained. Law and order, for example,
are a good catalyst for economic prosperity of any given society.

Learning objectives:

By the end of this unit, you should be able to:

• Explain the role of government in creating an environment for more job

opportunities.
• Describe economic growth.
• State the reasons why price stability enhances economic growth.
• Identify steps by government to cure a balance of payments deficit.

4.2 The government’s objectives for the economy

All governments, whatever their political complexion, claim to work for the
economic good of the nation (Donnely, 1991:252). In pursuing this aim they
usually identify, among others, the following objectives for their policies.

4.3 Full employment

Unemployment results in unused human resources. It also results in unused

capital and other productive resources as well. Thus the economy will
underperform. Unemployment also leads to social deprivation and may cause
political unrest when it is very serious. In turn, government will find it more
difficult to manage the economy successfully. It is therefore the wish of all
governments to minimize the unemployment levels by creating more job
opportunities for their citizens.

4.4 Economic growth

Economic growth refers to the expansion of the productive capacity of the

economy. An expanded economy will be able to support a growing population
and to improve people’s living standards. Economic growth increases the

36
 likelihood of the government to pursue policies of change without any one
section of society losing out in the process. The result is that government is more
likely to receive the national support necessary top ensure success for its policies.
One way of bringing about economic growth is by government encouraging
economic diversification. Another way is by introducing the new technology in
industry.

4.5 Price stability

Inflation distorts economic activity. It also causes uncertainty in the conduct of

business and affects some groups in society more than others. Low income
groups, fixed income groups and money lenders are among those affected.
Inflation will result in the non attainment of other economic objectives. It is
therefore the primary aim of government to contain inflation to acceptably low
levels. Note that it is rarely the aim of government to eradicate inflation entirely
because doing so would hinder the attainment of other objectives. For instance,
by entirely eradicating inflation you will be creating more unemployment in the
economy. Sound monetary and fiscal policies put in place by government can
help to curb inflation.

4.6 Balance of payments (B.O.P) position

A country’s balance of payments (B.O.P) is a record of all its financial and

economic transactions with the rest of the world. This arises because countries
are engaged in international trade. International trade gives rise to indebtedness
between countries. The balance of payment shows the relationship between a
country’s payments with the other countries and its receipts from them, and is
thus a statement of income and expenditure on international accounts. Note that
international trade involves the use of foreign currency. The US dollar is one of
the major vehicle currencies that are used to pay for imports. A balance of
payments compares the total value of all the exports with the total value of all
the imports of a country usually for a period of one year (12 months).

4.6.1 Favourable balance of payments

This is a situation whereby the value of net exports is greater than the value of
net imports (X > M). The country concerned records a surplus. The following are
among the advantages:

37
 a) The country will experience improvement in its foreign reserves.
b) The country is able to import more capital equipment/machinery to scale
up domestic production.
c) Surplus reserves are a good indication of economic growth for the country.

4.6.2 Unfavorable balance of payments

This is a situation whereby the value of net exports is less than the value of net
imports (X < M). It can also be referred to as a balance of payments deficit.
Disadvantages include the following

a) It draws the country’s much foreign reserves.

b) It may compel affected country to borrow from institutions such the IMF
in order to offset the deficit.
c) It adversely affects economic growth as the affected country cannot
manage to import the required capital such as machinery and equipment
from abroad.

4.7 Measures to deal with the balance of payments deficit.

There are several measures which a country facing a balance of payments deficit
can take to remedy the situation. They include the following:

a) Expenditure - reducing policies

These are policies designed to give consumers less income to spend on
imports. The two principal methods of reducing incomes are:
(i) Increasing income tax in order to reduce disposable income.
(ii) Raising interest rates to reduce demand.
b) Expenditure – switching policies
These are policies designed to encourage consumers to switch their
demand away from imports towards home produced goods. This can be
done by increasing the price of imports in comparison with home
produced goods. Methods of encouraging expenditure switching are:
(i) Introducing tariffs and other import controls.
(ii) Reducing inflation to a level below that of other countries.
(iii) Reducing the cost of production of domestic firms, e.g. through
subsidies.

38
 (iv) Bringing about devaluation or a depreciation of the exchange rate
thus making imports more expensive.

4.8 Unit summary

In unit 4, we learnt that:

i) Government directs and controls the activities of a national economy

through various policies.
ii) All governments make policies which are aimed at creating full
employment for its people, triggering and sustaining economic growth,
containing inflation within manageable limits as well as maintaining
equilibrium in the balance of payments.
iii) A favourable balance of payments is advantageous to a nation in that it
will attract foreign reserves into a country. Conversely, a balance of
payments deficit will drain a country’s foreign reserves.
iv) Expenditure - reducing as well as expenditure - switching policies can help
remedy the balance of payments deficit.

Activity

1. Identify and discuss practical steps which the Zambian government is

taking to address the problem of high unemployment levels in the
country.
2. Why do you think cross border trade (smuggling) distorts the picture of
the balance of payments.

39
ENTREPRENUERSHIP

Overview

This chapter provides you with an overview of entrepreneurship and of the

language of entrepreneurship. The challenges associated with
defining entrepreneur and entrepreneurship are explored, as is an overview of
how entrepreneurship can be studied.

The objective is to enable you to apply current concepts in entrepreneurship to

the evaluation of entrepreneurs, their ventures, and the venturing environment.
You will develop skills, including the capability to add value in the new venture
sector of the economy. You will acquire and practice evaluation skills useful in
consulting, advising, and making new venture decisions.

Entrepreneurs and Entrepreneurship

Considerations Influencing Definitions of Entrepreneur and Entrepreneurship

It is necessary to be able to determine exactly who entrepreneurs are before we

can, among other things, study them, count them, provide special loans for them,
and calculate how and how much they contribute to our economy.

• Does someone need to start a business from scratch to be called an

entrepreneur?

• Can we call someone an entrepreneur if they bought an ongoing business

from someone else or took over the operations of a family business from
their parents?

40
 • If someone starts a small business and never needs to hire employees, can
they be called an entrepreneur?

• If someone buys a business but hires professional managers to run it so

they don’t have to be involved in the operations, are they an entrepreneur?

• Is someone an entrepreneur if they buy into a franchise so they can follow

a well-established formula for running the operation?

• Is someone an entrepreneur because of what they do or because of how

they think?

• Can someone be an entrepreneur without owning their own business?

• Can a person be an entrepreneur because of the nature of the work that

they do within a large corporation?

It is also necessary to fully understand what we mean by entrepreneurship before

we can study the concept.

Gartner (1990) identified 90 attributes that showed up in definitions of

entrepreneurs and entrepreneurship provided by entrepreneurs and other
experts in the field. The following are a few of these attributes:

• Innovation – Does a person need to be innovative to be considered an

entrepreneur? Can an activity be considered to be entrepreneurial if it is
not innovative?

• Activities – What activities does a person need to do to be considered an

entrepreneur?

• Creation of a new business – Does someone need to start a new business to

be considered to be an entrepreneur, or can someone who buys a business,
41
 buys into a franchise, or takes over an existing family business be
considered an entrepreneur?

• Starts an innovative venture within an established organization – Can

someone who works within an existing organization that they don’t own be
considered an entrepreneur if they start an innovative venture for their
organization?

• Creation of a not-for-profit business – Can a venture be considered to be

entrepreneurial if it is a not-for-profit, or should only for-profit businesses
be considered entrepreneurial?

After identifying the 90 attributes, Gartner (1990) went back to the entrepreneurs
and other experts for help in clustering the attributes into themes that would help
summarize what people concerned with entrepreneurship thought about the
concept. He ended up with the following eight entrepreneurship themes:

1. The Entrepreneur – The entrepreneur theme is the idea that

entrepreneurship involves individuals with unique personality
characteristics and abilities (e.g., risk-taking, locus of control, autonomy,
perseverance, commitment, vision, creativity). Almost 50% of the
respondents rated these characteristics as not important to a definition of
entrepreneurship (Gartner, 1990, p. 21, 24).

• “The question that needs to be addressed is: Does entrepreneurship

involve entrepreneurs (individuals with unique characteristics)?”
(Gartner, 1990, p. 25).

42
2. Innovation – The innovation theme is characterized as doing something
new as an idea, product, service, market, or technology in a new or
established organization. The innovation theme suggests that innovation is
not limited to new ventures, but recognized as something which older
and/or larger organizations may undertake as well (Gartner, 1990, p. 25).
Some of the experts Gartner questioned believed that it was important to
include innovation in definitions of entrepreneurship and others did not
think it was as important.

• “Does entrepreneurship involve innovation?” (Gartner, 1990, p. 25).

3. Organization Creation – The organization creation theme describes the

behaviors involved in creating organizations. This theme described
acquiring and integrating resource attributes (e.g., Brings resources to bear,
integrates opportunities with resources, mobilizes resources, gathers
resources) and attributes that described creating organizations (new
venture development and the creation of a business that adds value).
(Gartner, 1990, p. 25)

• “Does entrepreneurship involve resource acquisition and integration

(new venture creation activities)?” (Gartner, 1990, p. 25)

4. Creating Value – This theme articulated the idea that entrepreneurship

creates value. The attributes in this factor indicated that value creation
might be represented by transforming a business, creating a new business
growing a business, creating wealth, or destroying the status quo.

43
 • “Does entrepreneurship involve creating value?” (Gartner, 1990, p.
25).

5. Profit or Nonprofit

• “Does entrepreneurship involve profit-making organizations only”

(Gartner, 1990, p. 25)?

6. Growth

• Should a focus on growth be a characteristic of entrepreneurship?

7. Uniqueness – This theme suggested that entrepreneurship must involve

uniqueness. Uniqueness was characterized by attributes such as a special
way of thinking, a vision of accomplishment, ability to see situations in
terms of unmet needs, and creates a unique combination.

• “Does entrepreneurship involve uniqueness?” (Gartner, 1990, p. 26).

8. The Owner-Manager – Some of the respondents questioned by Gartner

(1990) did not believe that small mom-and-pop types of businesses should
be considered to be entrepreneurial. Some respondents felt that an
important element of a definition of entrepreneurship was that a venture
be owner-managed.

• To be entrepreneurial, does a venture need to be owner-managed?

Examples of Definitions of Entrepreneur

44
An entrepreneur can be described as “one who creates a new business in the face
of risk and uncertainty for the purpose of achieving profit and growth by
identifying significant opportunities and assembling the necessary resources to
capitalize on them” (Zimmerer & Scarborough, 2008, p. 5).

An entrepreneur is “one who organizes, manages, and assumes the risks of a

business or enterprise” (Entrepreneur, n.d.).

Examples of Definitions of Entrepreneurship

Entrepreneurship can be defined as a field of business that

seeks to understand how opportunities to create something new

(e.g., new products or services, new markets, new production
processes or raw materials, new ways of organizing existing
technologies) arise and are discovered or created by specific persons,
who then use various means to exploit or develop them, thus
producing a wide range of effects (Baron, Shane, & Reuber, 2008, p.
4)

A concise definition of entrepreneurship “is that it is the process of pursuing

opportunities without limitation by resources currently in hand” (Brooks, 2009, p.
3) and “the process of doing something new and something different for the
purpose of creating wealth for the individual and adding value to society” (Kao,
1993, p. 70)

Basic Questions in Entrepreneurship Research

45
According to Baron (2004a), there are three basic questions of interest in the field
of entrepreneurship:

1. Why do some persons but not others choose to become entrepreneurs?

2. Why do some persons but not others recognize opportunities for new
products or services that can be profitably exploited?

3. Why are some entrepreneurs so much more successful than others (Baron,
2004a, p. 221)?

To understand where these foundational research questions came from and what
their relevance is today, it is useful to study what entrepreneurship research has
uncovered so far.

Entrepreneurial Uniqueness

Efforts to teach entrepreneurship have included descriptions of entrepreneurial

uniqueness based on personality, behavioural, and cognitive traits (Chell, 2008;
Duening, 2010).

• Personality characteristics

o Three personality characteristics of entrepreneurs that are often

cited are:

▪ Need for achievement

▪ Internal locus of control (a belief by an individual that they are

in control of their own destiny)

▪ Risk-taking propensity

• Behavioural traits
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 • Cognitive skills of successful entrepreneurs

Past studies of personality characteristics and behavioural traits have not been
overly successful at identifying entrepreneurial uniqueness.

As it turned out, years of painstaking research along this line has not
borne significant fruit. It appears that there are simply not any
personality characteristics that are either essential to, or defining of,
entrepreneurs that differ systematically from non-entrepreneurs….
Again, investigators proposed a number of behavioural candidates as
emblematic of entrepreneurs. Unfortunately, this line of research
also resulted in a series of dead ends as examples of successful
entrepreneurial behaviours had equal counterparts among samples
of non-entrepreneurs. As with the personality characteristic school of
thought before it, the behavioural trait school of thought became
increasingly difficult to support (Duening, 2010, p. 4-5).

This shed doubt on the value of trying to change personality characteristics or

implant new entrepreneurial behaviours through educational programs in an
effort to promote entrepreneurship.

New research, however, has resurrected the idea that there might be some value
in revisiting personality traits as a topic of study. Additionally, Duening (2010) and
has suggested that an important approach to teaching and learning about
entrepreneurship is to focus on the “cognitive skills that successful entrepreneurs
seem uniquely to possess and deploy” (p. 2). In the next sections we consider the

47
new research on entrepreneurial personality traits and on entrepreneurial
cognitions.

Entrepreneurial Personality Traits

While acknowledging that research had yet to validate the value of considering
personality and behaviour traits as ways to distinguish entrepreneurs from non-
entrepreneurs or unsuccessful ones, Chell (2008) suggested that researchers turn
their attention to new sets of traits including: “the proactive personality,
entrepreneurial self-efficacy, perseverance and intuitive decision-making style.
Other traits that require further work include social competence and the need for
independence” (p. 140).

In more recent years scholars have considered how the Big Five personality traits
– extraversion, agreeableness, conscientiousness, neuroticism (sometimes
presented as emotional stability), and openness to experience (sometimes
referred to as intellect) – might be used to better understand entrepreneurs. It
appears that the Big Five traits might be of some use in predicting entrepreneurial
success. Research is ongoing in this area, but in one example, Caliendo, Fossen,
and Kritikos (2014) studied whether personality constructs might “influence
entrepreneurial decisions at different points in time” (p. 807), and found that
“high values in three factors of the Big Five approach—openness to experience,
extraversion, and emotional stability (the latter only when we do not control for
further personality characteristics)—increase the probability of entry into self-
employment” (p. 807). They also found “that some specific personality
characteristics, namely risk tolerance, locus of control, and trust, have strong

48
partial effects on the entry decision” (p. 807). They also found that people who
scored higher on agreeableness were more likely to exit their businesses, possibly
meaning that people with lower agreeableness scores might prevail longer as
entrepreneurs. When it came to specific personality traits, their conclusions
indicated that those with an external locus of control were more likely to stop
being self-employed after they had run their businesses for a while. There are
several implications for research like this, including the potential to better
understand why some entrepreneurs behave as they do based upon their
personality types and the chance to improve entrepreneurship education and
support services.

It is only fairly recently that entrepreneurship scholars have focused on cognitive

skills as a primary factor that differentiates successful entrepreneurs from non-
entrepreneurs and less successful entrepreneurs. This approach deals with how
entrepreneurs think differently than non-entrepreneurs (Duening, 2010; Mitchell
et al., 2007).

Entrepreneurial cognitions are the knowledge structures that people

use to make assessments, judgments or decisions involving
opportunity evaluation and venture creation and growth. In other
words, research in entrepreneurial cognition is about understanding
how entrepreneurs use simplifying mental models to piece together
previously unconnected information that helps them to identify and
invent new products or services, and to assemble the necessary
resources to start and grow businesses (Mitchell, Busenitz, et al.,
2002, p. 97).

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Mitchell, Smith, et al. (2002) provided the example of how the decision to create
a new venture (dependent variable) was influenced by three sets of cognitions
(independent variables). They described these cognitions as follows:

Arrangements cognitions are the mental maps about the contacts,

relationships, resources, and assets necessary to engage in
entrepreneurial activity; willingness cognitions are the mental maps
that support commitment to venturing and receptivity to the idea of
starting a venture; ability cognitions consist of the knowledge
structures or scripts (Glaser, 1984) that individuals have to support
the capabilities, skills, norms, and attitudes required to create a
venture (Mitchell et al., 2000). These variables draw on the idea that
cognitions are structured in the minds of individuals (Read, 1987),
and that these knowledge structures act as “scripts” that are the
antecedents of decision making (Leddo & Abelson, 1986, p. 121;
Mitchell, Smith, et al., 2002, p. 10)

Entrepreneurical opportunities

The exploitation of entrepreneurial opportunities may include:

• Developing a business plan

• Hiring human resource
• Acquiring financial and material resources
• Providing leadership
• Being responsible for both the venture's success or failure
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 • Risk aversion

the economist Joseph Schumpeter (1883-1950) saw the role of the entrepreneur
in the economy as "creative destruction", Which he defined as launching
innovations that simultaneously destroy old industries while ushering in new
industries and approaches. For Schumpeter, the changes and "dynamic economic
equilibrium brought on by the innovating entrepreneur [were] the norm of a
healthy economy".[18] While entrepreneurship is often associated with new, small,
for-profit start-ups, entrepreneurial behavior can be seen in small-, medium- and
large-sized firms, new and established firms and in for-profit and not-for-profit
organizations, including voluntary-sector groups, charitable
organizations and government.

Entrepreneurship may operate within an entrepreneurship ecosystem which

often includes:

• Government programs and services that promote entrepreneurship and

support entrepreneurs and start-ups
• Non-governmental organizations such as small-business associations
and organizations that offer advice and mentoring to entrepreneurs
(e.g. through entrepreneurship centers or websites)
• Small-business advocacy organizations that lobby governments for
increased support for entrepreneurship programs and more small
business-friendly laws and regulations
• Entrepreneurship resources and facilities (e.g. business
incubators and seed accelerators)

51
 • Entrepreneurship education and training programs offered by schools,
colleges and universities
Financing (e.g. bank loans, venture capital financing, angel investing and
government and private foundation grants Entrepreneurship has both advantages
and disadvantages. Here are some of them:
Advantages:

• Potential for financial success

• Independence and control over one’s own business .
• Personal growth and fulfillment
• Ability to pursue innovative ideas

Disadvantages:

• Lack of guarantee of success 2.

• Heightened responsibility of owning a business 2.
• Challenging, stressful, and lonely for some entrepreneurs 2.
• Requires leadership qualities, open-mindedness, creativity, and
innovative strategies to remain competitive and fulfill the vision 2.

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REFERENCE BOOKS

1. The Lean Startup by Eric Ries: This book is a guide to help entrepreneurs
create successful startups by using a scientific approach to building
products and businesses.
2. The Art of Possibility by Rosamund Stone Zander and Benjamin Zander:
This book is about the power of possibility and how it can transform your
life and your business.
3. The Innovator’s Dilemma by Clayton M. Christensen: This book explores
why successful companies fail and how disruptive innovation can help
companies succeed.

4.8 References

Clayton, G.E. (1995), Economics: Principles and Practices, Ohio, McGraw-Hill.

Donnely, Graham (1991), A Foundation in Economics, Lackhampton, Stanley

Thornes.

Harvey, J and Jowsey, E (2007) Modern Economics: An Introduction (8th ed.),

London, Palgrave Macmillan

Nuttall, C. and Lobley, D (2001) Success in Economics, (4thed.), London, John

Murray Publishers Ltd.

53
 BIBLIOGRAPHY

Begg, D, etal (2008), Economics (9th ed.) Berkshire, McGraw – Hill

Clayton, G.E. (1995), Economics: Principles and Practices, Ohio, McGraw-Hill.

Donnely, Graham (1991), A Foundation in Economics, Lackhampton, Stanley Thornes.

54
Grant, S.J and Stanlake, G.F. (2000), Introductory Economics (7th ed.), Harlow Pearson
Education Ltd

Harrison, Barry (1991), Economics: A Concise Guide, (second ed.), London, Longman.

Harvey, J and Jowsey, E (2007) Modern Economics: An Introduction (8th ed.), London,
Palgrave Macmillan

Ministry of Education, (1997), Civic Education Manual, Lusaka, schools and Colleges
press (Z) Ltd.

Nuttall, C. and Lobley, D (2001) Success in Economics, (4thed.), London, John Murray
Publishers Ltd.

Pearson Education (2005), Guide to Essentials of Economics, Boston, Prentice Hall.

Todaro, M.P. and Smith S.C. (2009), Economic Development (10th ed.), England,
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Wokorachi, J.B. (1999), Commerce: A Complete Course, (Third ed.), Salama Publishers

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