CONSUMERS’ SPENDING, SAVINGS and borrowing

* TYPES OF PERSONAL INCOME

There are several ways of measuring personal income:

1. Gross personal income: This is the total personal income from all sources of an individual.
2. Disposable personal income: This is the amount which remains after income tax and national insurance contributions have been deducted from gross personal income. Disposable personal income = Gross personal income – Income Tax & NI contribution.
3. Real disposable personal income: This refers to the quantity of goods & services which disposable income can buy. It is the purchasing power of money income.

* WHY DO PEOPLE SAVE?

People save money because:                   

1. It is good social attitude.
2. It is helpful for future.
3. For any particular objective.
4. For security purpose.
5. Of increasing disposable income.
6. High rate of interest attract to save more.
7. They are attracted by different saving schemes.

* FACTORS INFLUENCE CONSUMER SPENDING

1. Increase in real income ( more real income more spending )
2. Amount of wealth held ( more wealth held more spending )
3. Easy borrowing ( easy borrowing, easy spending )
4. Hire-purchase facilities ( easy installments, more spending )
5. Rate of interest ( low rate of interest more spending )
6. Changes in the rate of income tax ( decrease rate of interest, more spending)
7. Changes in the distribution of income ( lower income household spend a greater proportion of their income then higher income households )

* EFFECT OF CHANGES OF INTEREST RATE

Changes in interest rate may have a number of effect.

A rise in the rate of interest may:

1. Increase savings
2. Discourage spending
3. Reduce investment.
4. Raise firms’ cost of production.
5. Raise the exchange rate.
6. Discourage  borrowing.

A fall in the rate of interest may:

1. Decrease savings.
2. Encourage spending.
3. Increase investment.
4. Decrease the exchange rate.
5. encourage borrowing.

*HOW & WHY DIFFERENT INCOME GROUPS HAVE DIFFERENT EXPENDITURE PATTERN:

People spend more as their income increases; they also tend to save a large

percentage of their income. When incomes are very low, there will be no savings- the whole of the disposable income will be required to buy the basic necessities of life. As income increases, however, and the most urgent needs can easily be satisfied, it becomes possible to spend more & save more. When incomes  increase in developed countries, much of the extra spending goes on durable consumer goods(e.g. cars, videos) and on a variety of services (e.g. holidays abroad).

*How does the pattern of  spending change as living standard improve?

Pattern of spending changes  mainly due to the increase of real incomes.

Food :                   As real incomes rise, people tend to buy a greater variety of better quality foodstuffs but share of income spent on food tends to fall.

Transport & vehicle :  The rise in real incomes induce growth of private transport & vehicles.

Housing:                The rise in real incomes increases home ownership, better housing facilities.

Durable household goods : As real incomes rise, people possess more and more durable consumer goods like air condition, T.V., fridge, mobile phones etc.

Services :              As real incomes rise, people spend more on holiday, air travel, catering services etc.

Why do economists favour free trade

Free trade is trade taking place without restrictions and free flow of goods from one country to another removing all barriers to enable mutual benefit to both countries engaged in free trade.

The great advantage of free trade is that consumers can buy the products that are most competitive, whether they are produced at home or abroad. It helps to improve the standard of living of the people and economic well being. Many economists argue that free trade rather than protectionism is the way to create jobs and prosperity. Their view is that protectionism encourages protected industries to be inefficient. They have no incentive to become efficient and produce goods that consumers want to buy at the keenest prices. Such industries are unlikely to develop into strong industries capable of conquering export markets. Free trade on the other hand forces firms to be efficient or else they go bankrupt. If a firm can beat off imports at home, then it stands a good chance of being a successful exporter. Competition brought about by free trade produces efficient industries and thus leads to jobs and prosperity. What is more if countries  follow free trade policies, each country will specialize in those products in which it has a comparative advantage  and this produces gains to consumers in all countries.

TYPES OF BUSINESS ORGANIZATIONS 

SOLE TRADER (Sole-proprietorship):

When a business is owned and managed by a individual or single, he is known as the sole trader or individual entrepreneur.

Characteristics of Sole-proprietorship:

a) Formation: No restriction in formation. There is no registration of any sort. Any body can start this business according to his will and time at any place.

b) Capital: In this business the businessman himself provide capital, but his resources are limited. Some time he borrows money from his friend or relatives.

c) Unlimited liabilities: Businessman has unlimited liabilities. If the business gets losses, sometime he has to sell his personal property.

d) Management of the business : He is the single person to manage the business. He is singly responsible for the decision making and for policies.

e) Secrecy Every business has its own secrets, which is the basis of its success. Trade secrets such as secret formulas, special accounts are very important. This type of business has more security as compared to other types.

f) Personal Relations : As in this type of business, the businessman has direct contact with the customers therefore, he knows the likes and dislikes and the need of the customers.

g) Saving in Expenses The same members of the family usually run single person business, therefore, saving in expenses is highly observed.

h) Legal Entity: It has its legal entity.

i) Distribution Of Profit He is the only person who enjoys the profit.

j) Business On The Small Scale It is a small scale and usually he does not extend due to the reason of control.

Merits /advantage of Sole-proprietorship:

1. Easy formation

2. Secrecy

3. Personal interest

4. Immediate decision

5. Personal contracts

6. Saving in expenses

7. Publicity

8. Satisfaction of individual liking and interest

9. Flexibility

10. Free in depended
NOTE: YOU HAVE TO EXPLAIN ALL THERE POINTS

Demerits/disadvantages of sole-proprietorship:

1. Limited capital

2. Limited management ability

3. Unlimited liabilities

4. Unsuitable for large-scale business

5. Lack of continuity

6. Wrong decisions

7. Less public interest

9. Danger of loss

10. Lack of expert services

11. Insolvency

12. Business success depends upon personal ability

13. Limited life

NOTE: YOU HAVE TO EXPLAIN ALL THERE POINTS

PARTNERSHIP BUSINESS

What is a Partnership?

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.

Advantages of Partnership

·        Easy to set up

·        More capital can be brought into the business.

·        Partners bring new skills and ideas to a business

·        Decision making can be much easier with more brains to think about a problem.

·        Partners share responsibilities and duties of the business.

·        Division of labour is possible as partners may have different skills.

Disadvantages of Partnership

·        There is unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell of their personal belongings.

·        Disagreement among the partners can lead to problems for the business.

·        There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit.

·        There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt.

Partnership Deed

Before starting a partnership business, all the partners have to draw up a legal document called a Partnership Deed of Agreement.

It usually contains the following information:

·         Names of included parties - includes all names of people participating in this contract

·         Commencement of partnership- includes when the partnership should begin. The date of the contract is assumed as this date, if none is given.

·         Duration of partnership - includes how long the partnership should last. It is automatically assumed that the death of one of the contracting parties breaks the contract, unless otherwise stated.

·         Business to be done - includes exactly what will be done in this partnership. This section should be very particular to avoid confusion and loopholes.

·         Name of firm - includes the name of the business entity.

·         Initial investments - includes how much each partner will invest immediately or by installments.

·         Division of profits and losses - includes what percentages of profits and losses each partner will receive. If it is not a limited partnership, then there is unlimited liability (each partner is responsible for all partners' debts, including their own).

·         Ending of the business - includes what happens when the business winds down. Usually this includes three parts: 1) All assets are turned into cash and divided among the members in a certain proportion; 2) one partner may purchase the others' shares at their value; 3) all property is divided among the members in their proper proportions.

·         Date of writing - includes simply the date that the contract was written.

PRIVATE LIMITED COMPANIES

 

Private limited Companies

These are closely held businesses usually by family, friends and relatives.
Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering.
Shareholders may not be able to sell their shares without the agreement of the other shareholders.

Advantages

Limited Liability: It means that if the company experience financial distress because of normal business activity, the personal assets  of shareholders will not be at risk of being seized by creditors.

Continuity of existence: business not affected by the status of the owner.
Minimum number of shareholders need to start the business are only2.
More capital can be raised as the maximum number of shareholders allowed is 50.

Scope of expansion is higher because easy to raise capital from financial institutions and the advantage of limited liability.

Disadvantages

Growth may be limited because maximum shareholders allowed are only 50.

The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of other shareholders.

PUBLIC LIMITED COMPANY

 

Public Limited company

Limited companies which can sell share on the stock exchange are Public Limited companies. These companies usually write PLC after their names. Minimum value of shares to be issued (in UK) is £50,000.

Advantages

·         There is limited liability for the shareholders.

·         The business has separate legal entity. There is continuity even if any of the shareholders die.

·         These businesses can raise large capital sum as there is no limit to the number of shareholders.

·         The shares of the business are freely transferable providing more liquidity to its shareholders .

Disadvantages

·         There are lot of legal formalities required for forming a public limited company. It is costly and time consuming.

·         In order to protect the interest of the ordinary investor there are strict controls and regulations to comply. These companies have to publish their accounts.

·         The original owners may lose control.

·         Public Limited companies are huge in size and may face management problems such as slow decision making and industrial relations problems.

MULTINATIONAL COMPANY(MNC)

What are Multinational Businesses?

Businesses which have their operations, factories and assembly plants in more than one country are known as Multinational Business. They are also known as Transnational businesses.

Advantages of being a Multinational

·        Multinational can set up their business operations in countries where the labour and raw material is cheaper, which can give them cost advantage in the international market.

·        Multinational have access to many markets which spreads the risk of failure. If any product may not be successful in a particular market, it might be successful in another.

·        MNCs produce in large quantities thus achieving greater economies of scales.

·        A multinational business is less vulnerable to trade barriers. MNCs set up their local operations in countries where there is potential market for them and get away with import duties and restrictions.

·        MNCs can locate their operations near the potential market which results in lower transportation cost.

Advantages of Multinational to the host country

·        Multinationals create employment.

·        They bring new technology and techniques of production.

·        MNCs usually provide training to their worker which results in better skills for the country’s workforce.

·        Multinational businesses usually produce in large quantities and export to other countries which can result in valuable foreign exchange for the host country.

·        They pay huge taxes to the government which can be used for the development of the host country.

Disadvantages of Multinational company:

The disadvantages of multinational company are as follows:-
(1) High Profit Low Risk Investment: The multinational company prefer to invest in areas of low risk and high profitability. Issue like social welfare, national priority etc. have less priority on their agenda. Mostly they invest in consumer goods industry.

(2) Interference in Political Matters:The multinational company from developed countries interfere in the political affairs of developing nations. There are many cases where multinational company has bribed political leadership for their own economic gains.

(3) Create Artificial Demand: These companies create artificial and unwarranted demand by making extensive use of advertising and ales and promotion techniques.

(4) Exploitation: These companies are financially very strong and adopt aggressive marketing strategies to sale their products, adopt all means to eliminate competition and create monopoly.

(5) Technological Problem: Technology they use is capital intensive so sometimes that technology does not fully fit in the needs of developing countries. Also, multinational company is criticized for transferring outdated technology to developing countries.

(6) Foreign Exchange go outside the Country: The working of multinational company is a burden on the limited resources of developing countries. They charge high price in the form of commission and royalty paid by local business subsidiary to its parent company. This leads to outflow of foreign exchange.

(7) National Threat: Sometimes outdated technology is used by domestic industries which hamper the quality and price of their products so they cannot compete with those multinational company. Hence, there is a threat of nationwide opposition to multinational company. Arrival of these companies creates an atmosphere of uncertainly to the domestic industries.

(8) Impose their Culture: Multinational company impose their culture on developing countries. Along with the products they also indirectly impose the culture of developed nations. These companies have imposed the culture of fast food and soft drinks onto the developing nations. For examples:- burger and coke.

(9) Work for Self Interest: Multinational company work toward their own self interest rather than working for the economic development of host country. They are more interested in marketing of profits at any cost.  

Co-operative Business

What is a co-operative?

A co-operative is a form of business organisation that is owned and democratically controlled by its shareholders / members. The organisation is run for the mutual benefit of its shareholders / members, being the people who purchase goods or use services of the organisation, rather than being established for the purpose of earning profits for investors.

There are a number of forms of co-operative or mutual organisations, including friendly societies, credit unions and building societies as well as co-operative companies and industrial & provident societies. The key feature of all those businesses is that their main purpose is mutual support for members or the promotion of a specific purpose or social benefit.

(FEATURES OF CO-OPERATIVE)

·        Every members contributes equal amount of capital.

·        Every members get equal share of profit.

·        Every members has a single voting right.

·        Every members has equal control & benefit.

·        The business will trade for a social purpose not for  profit.

·        Co-operatives are based around the concepts of self-help, self-responsibility and self-organization.

·        It is their objective to first and foremost serve members’ interests, rather than that of capital invested.

A co-operative business may be the most appropriate form where:(Advantages)

• Co-operatives are organizations for mutual benefit, where members equally control and benefit from the operation.
• It is their objective to first and foremost serve members’ interests, rather than that of capital invested. This is one of the main distinctions between cooperatives and other forms of business.
• Co-operatives are based around the concepts of self-help, self-responsibility and self-organization.

• The business will trade for a social purpose over and above the profit motive.

• People want to determine for themselves what makes a business

successful

• There is a joint need that cannot be met by outside providers

• People’s particular needs are unlikely to be met through conventional

business structures eg people who want to work in a certain way or

certain hours.

• Collaboration will strengthen the ability of the business to succeed or continue, eg by pooling purchasing power, or employees purchasing assets from a company closure.

• You want to protect the business for the future – members managing the business can be seen as managing it on trust for future members.

Arguments against protectionism (Disadvantage of free trade)

Other countries will retaliate with trade barriers

If one country introduces trade barriers to restrict imports of goods and services from other countries, those affected may introduce barriers in retaliation. A trade war may develop. The result is higher prices and fewer goods and services will be traded. This is clearly bad for consumers but if it continues it can also mean higher unemployment and slower economic growth as firms are forced out of business.

It protects inefficient domestic firms

By protecting inefficient producers at home, consumers will face higher prices and possibly lower-quality products because they will be unable to buy from more efficient, lower- cost firms overseas. If, as a result, more efficient overseas producers are forced out of business then consumers in many more countries will suffer from the inefficient allocation of global resources. Fewer goods and services will be produced globally as a result and fewer wants

The loss of domestic jobs from overseas competition will only be temporary

Many economists argue that the loss of domestic jobs as a result of competition from lower-cost firms overseas will only be temporary anyway because other firms will develop in the economy and grow to employ more workers.

Trade barriers have increased the gap between rich and poor countries.

Subsidies paid to protect farmers and other firms in rich countries have increased the  supply of agricultural and other products on the global market. Subsidies have therefore forced down world prices of many goods and producers in less developed countries have not been able to compete. As a result, sales, incomes and jobs have been lost in their countries and increased their poverty and hardship.

Reasons for Protectionism

Protection of a young industry

New and small firms known as ‘infant industries’ will be unable to benefit from the economies of scale enjoyed by larger foreign competitors. These infant industries will have higher prices than foreign firms and so will be unable to sell their goods. Tariffs or other forms of protection can be used to make foreign goods dearer and so allow infant industries to grow.

To prevent unemployment

Due to cheaper imports, people may not buy the goods produced within the country and as a result of this, the home industries decrease production due to lack of demand, this further leads to workers becoming redundant and industries closing down. This leads to structural un- employment so in order to prevent unemployment, protectionist policies are carried out.

To prevent dumping

Protectionism is carried out in order to prevent dumping of goods. Dumping occurs when  one country  floods the market in another country with a product at a price far less than it costs to produce in order to force rival firms in that country out of business. Eg: Japan was accused of using  dumping  to take over  a global lead in the production of television screens and motorbikes, forcing producers of these products in many other countries out of business.

Balance of payments problem

If a country is persistently spending more on imports than it is earning from exports, it is getting into debt with the rest of the World. if it  finds difficulty in increasing its exports it may be forced to remedy the situation by placing  limits on its imports. So protectionism may be used to overcome a deficit in the balance of payments.

Strategic arguments

Some industries may be regarded as essential to secure a country’s survival in time of war. It may be necessary to protect agriculture, steel, chemicals and several types of engineering industries by tariffs and quotas to prevent firms from being driven out of business by foreign competition.

Because other countries use barriers to trade

Before any country removes barriers to trade on foreign goods it needs to be sure that foreign countries will remove barriers to trade on their goods. With many dozens of trading countries, it is very difficult to get agreement on removal of barriers to trade.

To prevent overspecialization

Free trade encourages countries to specialize in the goods in which thay have a comparative advantage. Yet specialization in one or two products can be dangerous in the modern World.

The demand for goods & services is always changing and if a country relies on just on or two goods it risks a huge fall in its income if demand moves away from these goods to others. Protectionism allows a country to keep a wider range of industries alive and so prevents dangers of over-specialization.

Why do economists favour free trade

Free trade is trade taking place without restrictions and free flow of goods from one country to another removing all barriers to enable mutual benefit to both countries engaged in free trade.

The great advantage of free trade is that consumers can buy the products that are most competitive, whether they are produced at home or abroad. It helps to improve the standard of living of the people and economic well being. Many economists argue that free trade rather than protectionism is the way to create jobs and prosperity. Their view is that protectionism encourages protected industries to be inefficient. They have no incentive to become efficient and produce goods that consumers want to buy at the keenest prices. Such industries are unlikely to develop into strong industries capable of conquering export markets. Free trade on the other hand forces firms to be efficient or else they go bankrupt. If a firm can beat off imports at home, then it stands a good chance of being a successful exporter. Competition brought about by free trade produces efficient industries and thus leads to jobs and prosperity. What is more if countries  follow free trade policies, each country will specialize in those products in which it has a comparative advantage  and this produces gains to consumers in all countries.

CONSUMERS’ SPENDING, SAVINGS & BORROWING

* TYPES OF PERSONAL INCOME

There are several ways of measuring personal income:

1. Gross personal income: This is the total personal income from all sources of an individual.
2. Disposable personal income: This is the amount which remains after income tax and national insurance contributions have been deducted from gross personal income. Disposable personal income = Gross personal income – Income Tax & NI contribution.
3. Real disposable personal income: This refers to the quantity of goods & services which disposable income can buy. It is the purchasing power of money income.

* WHY DO PEOPLE SAVE?

People save money because:                   

1. It is good social attitude.
2. It is helpful for future.
3. For any particular objective.
4. For security purpose.

5. Of increasing disposable income.
6. High rate of interest attract to save more.
7. They are attracted by different saving schemes.

* FACTORS INFLUENCE CONSUMER SPENDING

1. Increase in real income ( more real income more spending )
2. Amount of wealth held ( more wealth held more spending )
3. Easy borrowing ( easy borrowing, easy spending )
4. Hire-purchase facilities ( easy installments, more spending )
5. Rate of interest ( low rate of interest more spending )
6. Changes in the rate of income tax ( decrease rate of interest, more spending)
7. Changes in the distribution of income ( lower income household spend a greater proportion of their income then higher income households )

* EFFECT OF CHANGES OF INTEREST RATE

Changes in interest rate may have a number of effect.

A rise in the rate of interest may:

1. Increase savings
2. Discourage spending
3. Reduce investment.
4. Raise firms’ cost of production.
5. Raise the exchange rate.
6. Discourage  borrowing.

A fall in the rate of interest may:

1. Decrease savings.
2. Encourage spending.
3. Increase investment.
4. Decrease the exchange rate.
5. encourage borrowing.

*HOW & WHY DIFFERENT INCOME GROUPS HAVE DIFFERENT EXPENDITURE PATTERN:

People spend more as their income increases; they also tend to save a large

percentage of their income. When incomes are very low, there will be no savings- the whole of the disposable income will be required to buy the basic necessities of life. As income increases, however, and the most urgent needs can easily be satisfied, it becomes possible to spend more & save more. When incomes  increase in developed countries, much of the extra spending goes on durable consumer goods(e.g. cars, videos) and on a variety of services (e.g. holidays abroad).

*How does the pattern of  spending change as living standard improve?

Pattern of spending changes  mainly due to the increase of real incomes.

Food :                   As real incomes rise, people tend to buy a greater variety of better quality foodstuffs but share of income spent on food tends to fall.

Transport & vehicle :  The rise in real incomes induce growth of private transport & vehicles.

Housing:                The rise in real incomes increases home ownership, better housing facilities.

Durable household goods : As real incomes rise, people possess more and more durable consumer goods like air condition, T.V., fridge, mobile phones etc.

Services :              As real incomes rise, people spend more on holiday, air travel, catering services etc.