CAMBRIDGE O LEVEL

COMMERCE
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CAMBRIDGE O LEVEL

COMMERCE
DR ALAN WHITCOMB
All exam-style questions and sample answers have been written by the author.
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© Alan Whitcomb 2015
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CONTENTS
INTRODUCTION ..................................................................................... viii

1 PRODUCTION ..................................................................................... 1
1.1 The chain of production ..................................................................... 1
1.2 Types of production ........................................................................... 2
1.3 Specialisation and division of labour ................................................ 3
1.4 Commerce ........................................................................................... 4
1.5 Business inter-relationships ............................................................... 7
Things to do ........................................................................................ 9

2 RETAIL TRADE .................................................................................. 13

2.1 The role of the retailer ...................................................................... 13
2.2 Types of retailer ................................................................................. 14
2.3 Large-scale and small-scale retailing ............................................. 16
2.4 Selling techniques and methods ..................................................... 17
2.5 Trends in retailing ............................................................................. 19
Things to do ...................................................................................... 22

3 CONSUMER CREDIT .................................................................... 25

3.1 Use of credit ...................................................................................... 25
3.2 Types of credit ................................................................................... 26
3.3 Suitability of different types of credit ............................................. 29
Things to do ...................................................................................... 30

4 WHOLESALE TRADE .................................................................... 33

4.1 Patterns of distribution .................................................................... 33
4.2 The role of the wholesaler ............................................................... 33
4.3 Functions and services of wholesalers ........................................... 34
4.4 Intermediaries ................................................................................... 36
Things to do ...................................................................................... 37

5 DOCUMENTS OF TRADE ......................................................... 41

5.1 Documents of home trade ............................................................... 41
5.2 Terms of payment ............................................................................. 47
Things to do ...................................................................................... 49

6 INTERNATIONAL TRADE .......................................................... 53

6.1 The importance of international trade ........................................... 53
6.2 Balance of trade and balance of payments ................................... 54
6.3 Customs authorities .......................................................................... 55
6.4 Trading blocs, protectionism and free trade ................................. 56
6.5 Difficulties faced by exporters and importers ............................... 58
Things to do ...................................................................................... 60

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 7 ADVERTISING ................................................................................... 63
7.1 The role of advertising ..................................................................... 63
7.2 Advertising media ............................................................................. 65
7.3 Methods of appeal ........................................................................... 67
7.4 Sales promotion ................................................................................ 67
7.5 Trends in advertising ........................................................................ 68
Things to do ...................................................................................... 69

8 COMMUNICATION ........................................................................ 72
8.1 The importance of communication ................................................ 72
8.2 Methods of communication ............................................................ 73
8.3 Postal services ................................................................................... 79
8.4 Trends in communication ................................................................. 82
Things to do ...................................................................................... 83

9 TRANSPORT ....................................................................................... 88
9.1 The importance of transportation .................................................. 88
9.2 Containerisation ................................................................................ 93
9.3 Ports and airports ............................................................................. 94
9.4 Transport documents ....................................................................... 95
9.5 Developments and trends in transportation ................................. 99
Things to do .................................................................................... 102

10 WAREHOUSING ............................................................................ 106

10.1 The role of warehousing ................................................................ 106
10.2 Types of warehouse ........................................................................ 107
Things to do .................................................................................... 110

11 INSURANCE ...................................................................................... 113

11.1 The purposes of insurance ............................................................ 113
11.2 Business and personal risks ........................................................... 115
11.3 Insurance principles ........................................................................ 117
11.4 Effecting insurance cover .............................................................. 118
11.5 Statistical basis of insurance .......................................................... 120
11.6 Effecting a claim ............................................................................. 120
Things to do .................................................................................... 123

12 BANKING ........................................................................................... 128

12.1 Banking services ............................................................................. 128
12.2 Means of payment .......................................................................... 131
12.3 Trends in banking ............................................................................ 133
Things to do .................................................................................... 135

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13 THE BUSINESS UNIT .................................................................. 139
13.1 Location of business ....................................................................... 139
13.2 Public and private sectors .............................................................. 139
13.3 Private sector business organisation ............................................ 141
13.4 Franchises ........................................................................................ 146
13.5 Multinationals .................................................................................. 147
Things to do .................................................................................... 149

14 FINANCE ............................................................................................. 153

14.1 Sources of finance ........................................................................... 153
14.2 Finance for commercial activity .................................................... 156
14.3 Improving commercial performance ............................................ 159
Things to do .................................................................................... 162

15 THE CHANGING ENVIRONMENT

OF COMMERCE ............................................................................. 167
15.1 Commercial activity and the environment ................................... 167
15.2 Commercial and environmental effects of e-commerce ........... 169
15.3 Commerce and the environment .................................................. 170
15.4 Consumer protection ..................................................................... 174
15.5 Organisations and codes of practice ........................................... 174
Things to do .................................................................................... 177

16 EXAMINATION PREPARATIONS ....................................... 182

16.1 Assessment objectives ................................................................... 182
16.2 The multiple choice paper (Paper 1) ............................................. 182
16.3 The written paper (Paper 2) ........................................................... 183
16.4 Prior to the examination ................................................................. 183
16.5 Examination technique .................................................................. 184
16.6 Examination terminology ............................................................... 185

INDEX ............................................................................................................ 187

ANSWERS ................................................................................................... 189

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INTRODUCTION
For the teacher l Multiple choice questions give experience of
tackling objective tests in preparation for the
This book is intended for use by students preparing examination.
for the Cambridge International Examinations l Structured questions* are provided at the end
O Level Commerce syllabus. of each chapter, many of which are data-based.
The questions are stepped in difficulty so that all
The aim of the book is to present comprehensive students can achieve the introductory questions
coverage of the syllabus in a readable and while more able students will be stretched by
interesting style that will appeal to the full range of later questions. The weighting of these questions
abilities. Wide and constructive use of illustrations is indicated by the mark allocation. They are not
is also an important feature of the book. intended to reflect the weighting in examinations
Each chapter is supported by a variety of but you will note that the scores of each overall
activities that will help the student to compile question always total 20 marks. This should help
revision notes, practise objective tests and tackle you to assess and compare the ability of your
‘stepped’ structured questions. These activities are students whichever questions, or parts of them,
differentiated, allowing the learning material to be you decide to allocate.
geared to the full range of student abilities. *Please note that answers to all of the multiple
l Key words encourage readers to focus on choice questions, as well as answers to selected
important commerce-related terms and to form Structured questions (one for each chapter) appear
their own glossary. at the back of this book. These are not endorsed by
l Search and find work helps students to form Cambridge International Examinations as a mark
their own set of revision notes. scheme but they will provide useful guidance when
assessing student progress.

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 For the student

For the student Multiple choice

Tackle the ten multiple choice questions and
How to use this book identify the correct answers. Note that the
At the end of each chapter you will find a section answers to the multiple choice questions are
called ‘Things to do’. It includes a variety of given at the back of this book. However, don’t
be tempted to look them up before tackling the
activities aimed at reinforcing and testing your
questions! Note also that only one of the four
learning. Your teacher may specify which elements
options will be correct but the exam may use a
they want you to do, but you may also want to tackle different format.
others as additional practice. This important part of
each chapter contains the following elements:

Structured questions
Key words
An important and unique feature of this book
Find out the commerce-related meaning of a that will help you to prepare for your exam. The
collection of words that are important to your questions are stepped in difficulty, as indicated
learning. You are required to use each term in by the number of marks (shown in brackets).
a separate, concise sentence to show that you Many of these are ‘data response questions’, that
understand it in the context of your studies. This is, they are based on given information which
activity will help you to create your own glossary you must study before you tackle the questions.
of relevant terms.

The final chapter focuses on preparing you for

the final examination. While it is at the end of the
Search and find book, you should read it before working through the
chapters and then read it again at the end of your
Copy a series of questions and write down
their answers to formulate revision notes on the course of study. It contains tips and advice to follow
theme of the chapter. throughout your studies, as well as guiding you
through the final preparations for your exam.

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 1.1 The chain of production

1 PRODUCTION
knowledge, into goods and services. For example,
BY THE END OF THIS CHAPTER a farmer prepares the ground, plants seeds, harvests
YOU WILL BE FAMILIAR WITH: the crops and sells this output to others. Similarly,
l the chain of production a manufacturer may buy the harvest of the farmer,
l primary (extractive), secondary process it in some way (for example, put it in cans)
(manufacturing and construction) industries and then sell it to someone else who will market the
and tertiary activities (commercial services end product that eventually reaches the consumer
and direct services) (the purchaser of goods or services).
l specialisation and division of labour
l commerce From the start you should be able to recognise that
l the relationship between industry, there are ‘links’ between the production levels.
commerce and direct services. These links show the chain of production and can
be seen in Figure 1.1, which shows the chain of
production for peaches.
The chain of production refers to the steps that
1.1 The chain of production must be taken to transform the raw materials, ideas
and so on, into a finished product that can be used
All people have two basic needs for survival – by consumers. The stages that the farmer goes
food and shelter. These are essential for us to through are part of the chain of production, and so
function and survive. Many of our activities are is the manufacturer who puts the farmer’s products
aimed at satisfying these needs. Activities that into cans. The retailer who eventually sells the
lead to the satisfaction of our needs are often goods to the consumer is also part of the chain of
referred to as ‘economic activity’ and humans are production, and the consumer is the final stage in
sometimes called ‘economic animals’. We also the chain.
have wants. A want is something a person would
like to have. It is not necessary for survival, but At each stage in the chain of production and
it would be nice to have. For example, we might distribution, the cost of goods or service is
like to have a smartphone, but we can survive increased. In our example, the farmer sells at a
without one. price that includes his profit, the manufacturer
adds to the price when the goods are sold to the
Production is the processes and methods used by retailer, and the retailer adds further to the price
producers to transform inputs such as raw materials, when the goods are sold to the consumer. This is
semi-produced goods, and even ideas, information or demonstrated in Figure 1.2.

PRIMARY PRODUCTION SECONDARY PRODUCTION TERTIARY PRODUCTION CONSUMER

Farmer grows peaches Manufacturer cans peaches Retailer sells peaches Consumer eats peaches

Figure 1.1 The chain of production for peaches

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1 PRODUCTION

PRODUCER WHOLESALER RETAILER

Sells at factor Sells at Sells at retail

price (say $2 wholesale price price (say $4 CONSUMER
each) (say $3 each) each)

MASS QUANTITY BULK SINGLE

QUANTITY ITEMS
Figure 1.2 The price of the product rises at each stage as a product passes along the chain of production and distribution

The chain of production in practice their enterprise. Advertising raises awareness of the
goods and services offered by producers and traders.
Traders such as retailers, wholesalers, importers Financial services provide the money for the capital
and exporters support producers by selling and assets needed by businesses, and also for consumers
distributing goods and bridging the gap between who want to buy on credit. Banking enables the
production and consumption. For example, retailers transfer of payments between buyers and sellers of
and wholesalers order goods from producers and goods and also provides a variety of services that
hold them in warehouses until they are required. encourage payment and production. Insurance
Exporters distribute home produced products reduces some of the risks involved in producing and
overseas. This provides work for producers and also trading, for example the loss or damage to capital
raises foreign capital, which is needed to pay for assets or goods. Transportation creates the physical
the import of raw materials needed by producers. links between producers, traders and consumers, and
Importers buy the raw material and finished goods gets goods to the right place, at the right time and in
from other countries that we cannot economically the right condition.
produce in our own country – this helps our
producers to specialise in manufacturing products
for which they are best suited. 1.2 Types of production
The services provided to traders (aids to trade) Production can be divided into three clear
by some businesses also play a major part in categories: primary production, secondary
coordinating the activities of producers and promoting production and tertiary activities.

PRODUCTION

Primary production Secondary production Tertiary production

Farming Mining Manufacturing Construction Commerce Direct sevices

Fishing

Figure 1.3 Family tree of production

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 1.3 Specialisation and division of labour

Primary production activities are sometimes called the service industry,

but more often they are referred to as commercial
Primary production is about the extraction of basic services (or commerce) and direct services.
materials provided by nature, which are either above or
below the Earth’s surface. The extractive industries We have already seen how the various elements of
are farming, fishing and mining. There would not be the chain of production are interdependent. Primary
much more production without these industries. production needs manufacturers to use their
output, and production cannot take place without
l Farming involves food production in the form the raw materials provided by primary production.
of fruit, fowls, animals and plants and also other Similarly, tertiary services are the important link
produce such as trees and flowers. between all types of producers and the market
l Fishing plays a major part in providing food for for their output. And we, as consumers, could not
countries that have access to the sea, either for specialise in the variety of work we engage in if
domestic use or for selling to other countries. others were not creating the food and clothes we
Deep-sea fishing is carried out in the open sea. need and the mechanism was not there to enable
Protected fisheries are a developing industry that us to buy them. From this you will understand
‘farm’ in inland lakes and reservoirs and even in that industry and production cannot exist without
the coastal waters of some countries. commerce and commerce cannot exist without
l Mining involves the extraction of raw materials production; they are interdependent.
such as fossil fuels, oil and gas, ore and so on,
from below the Earth’s surface.
1.3 Specialisation and
Secondary production division of labour
Secondary production consists of the manufacturing Specialisation occurs when people focus on
and construction industries. They take the materials carrying out a particular task. They do what they
produced by the extractive industries and change do best in exchange for money, and then use the
them into an end product. money they earn to buy the goods and services that
l Manufacturers may be involved in the they need. In this way people become consumers:
production of a complete item, or they may make the buyers of a final service or good (sometimes
parts that will be assembled into a finished article. referred to as a commodity). Many working
l Construction industries take the raw or partly people are specialists of some kind. For example,
processed materials of primary producers and your teacher is a specialist, and so are designers,
change them into buildings, roads, bridges and carpenters, engineers, nurses, drivers and so on.
so on. The list is almost endless, but the essential feature is
that workers are more skilled because they focus on
a relatively narrow field. See Figure 1.4.
Tertiary activities
Specialisation takes place at many levels as well as
Tertiary activities are also a form of production
at the level of individuals, for example:
because they enable the change of ownership
of goods and services. Tertiary activities begin l Businesses tend to specialise in a specific part of
when goods leave the producer (those who make the market.
consumer goods). Such goods do not usually pass l Individual towns in a country may specialise so
directly to the consumer (the ultimate purchaser). they can exploit local resources in a region (for
They have to be transported, stored, insured, example, tourist attractions).
advertised and sold by traders on the open market. l A whole country may specialise in areas where
These and many other activities make up tertiary it has a comparative advantage owing to its
production and make the change of ownership from resources. For example, Pakistan is one of the
the producer to the consumer possible. Tertiary biggest producers of cotton and linen in the

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1 PRODUCTION

Carpenter Nurse

Teacher Mechanic
Figure 1.4 Specialisation

world. Other countries may specialise in other l Jobs become simpler and easier to learn.
natural resources, for example, agriculture, oil l Output per person increases.
or gas extraction, technological developments. l Machinery and automation can be used.
(See Figure 1.5 for other examples of l Workers can change jobs more easily.
international specialisation and their relationship l Unit costs are reduced.
to commerce.)
Disadvantages of division of labour
Division of labour occurs where production, or l Repetitive and limited tasks can become boring.
an aspect of its operations, is broken down into l Individual crafts may be lost through
several tasks or stages. A limited range of tasks is mechanisation.
assigned to workers within the production process. l Greater use of mechanisation can result in
For example, in a clothing factory a complete unemployment.
production line may involve many workers, with l Production can easily be disrupted by strikes.
each one making their individual contribution to l Slower workers may be unable to keep up
the end product (see Figure 1.6). By organising with others.
production into many stages or processes, workers
specialise and become more proficient in their
work through repetition. Consequently, output per 1.4 Commerce
person is raised. This increased productivity can
When goods leave the producer they do not usually
result in lower unit costs and thereby lower prices
pass immediately to the consumer. Instead they
for consumers.
tend to pass through intermediaries. They have to
Can you see the inter-relationships between the be stored, transported, insured, advertised and sold
terms ‘specialisation’ and ‘division of labour’? by traders. This movement of goods and services
through to the final customer is called the chain of
Advantages of division of labour distribution. This and the many other commercial
l Workers become more expert in their jobs. activities that make up tertiary production contribute

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Photocopying prohibited

Types of
production Caribbean Nigeria Brazil Pakistan Canada UK USA
PRIMARY Agriculture Agriculture Agriculture Agriculture Agriculture Agriculture Agriculture
PRODUCTION sugar cane, nuts, rubber gum, coffee, tobacco, cotton, wheat, wheat, oats, barley, oats, barley, wheat,
cotton, timber, timber, cotton, corn, cotton, rice, sugar cane, barley, tobacco, wheat, potatoes, corn, cotton,
(extractive)
rice, arrow-root, coal, peanuts sugar cane, cocoa fruits, vegetables timber, vegetables vegetables, fruit, tobacco, soya
spices, coffee, hops beans, potatoes,
Mining Mining Mining Mining
bananas, citrus vegetables
Mining
tin, coal, oil iron ore, bauxite, gypsum, gold, natural gas,
Fishing Mining
ore, salt, lead limestone, iron copper, nickel, natural gas, coal
Mining ore, copper, iron, zinc, lead coal, oil, natural
sulfur, silver, gold gas, copper, iron
bauxite, ore, oil,
ore
pitch
SECONDARY Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing Manufacturing
PRODUCTION rum, molasses, textiles, leather sugar, processed Cotton, textile, machinery and iron and steel, iron and steel,
fish oil, processed goods and hides, coffee, textiles, apparel, cement, equipment, motor vehicles, processed foods,
(changing
coffee, processed pottery processed foods, fertiliser, sugar, paper and paper transportation machinery and
primary goods foods, milk, pharmaceuticals, edible oil, steel, pulp, petroleum equipment, food equipment, motor
Construction
garments, chemicals, tobacco, food refining, wood processing, vehicles
into finished
asphalt, furniture, buildings, electrical processing products brewing and
Construction
goods) sugar bridges, equipment distilling, leather
Construction Construction
roadways goods, textiles buildings,
Construction Construction
buildings, buildings, bridges,
Construction
buildings, buildings, roadways, bridges, roadways
bridges, bridges, bridges, tunnels roadways buildings,
roadways roadways bridges,
roadways
TERTIARY Commerce Commerce Commerce Commerce Commerce Commerce Commerce
PRODUCTION
(direct services)

1.4 Commerce
Figure 1.5 Comparison of types of production and specialisms of countries around the world
5
1 PRODUCTION

1 Fabric chosen 2 Shapes cut 3 Parts sewn 4 Pressed finish 5 Packaged for sale
Figure 1.6 Division of labour – production of a shirt

to the change of ownership of goods from the can be in home trade or foreign trade. Trade plays a
producer to the consumers, thus promoting and very important role both at home and overseas:
assisting commercial activity. Tertiary production is l It enables specialisation to take place –
sometimes called the service industry, but more often producers can concentrate on what they do best
it is referred to as commerce and direct services. (producing) and leave the marketing of their
Commerce refers to the buying and selling of goods products to others.
and services. It can be divided into two clear areas – l It facilitates increased development so that the
trade and aids to trade: whole economy grows.
l It provides areas and countries with products
l Trade is the process of changing ownership. and services that they would otherwise not have
Traders are businesses directly involved in the access to.
buying and selling of goods and services. Trade l It helps a country to exchange its surplus with
can take place within a country (home trade) or the surplus of other countries.
between countries (foreign trade). Home trade l It encourages cooperation between sectors and
particularly involves the activities of wholesalers also with other countries.
and retailers. Foreign trade involves importers l It facilitates the exchange of technology between
who buy goods from other countries, and industries and between countries.
exporters who sell goods to other countries.
l Aids to trade are the commercial activities that
Aids to trade (indirect services)
directly assist trade in its job of selling goods
and services, for example, banking and finance, The aids to trade are also referred to as indirect
insurance or transportation. services. They are the commercial activities that assist
trade in its job of selling goods and services. The
E-commerce is a relatively recent form of activities that provide these services are as follows:
commerce that refers to the buying and selling
of products (and services) by businesses and Banking and finance
individuals through an electronic medium such as Banking provides short-term finance and facilities
the internet, without using any paper. for easy payment transfer. Finance is sourced
through various commercial institutions (for
Trade example, the stock market) providing long-term
finance for commerce and consumer credit.
As stated, trade enables the change of ownership of
goods, services or information usually in exchange Communications
for money, but it can be in exchange for other goods
Business communication refers to ways of sharing
or services.
information. This can be between people within
The network that allows this exchange to take place the organisation, between organisations, and
is generally referred to as a market, and this market between the organisation and its customers. These

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 1.5 Business inter-relationships

communications can be oral, written, telephonic or of businesses like these in trade or commerce
electronic, including fax, internet, intranet, email, or production?
teleconferencing, and videoconferencing.

Advertising 1.5 Business inter-relationships

Advertising is a form of communication. It Industries need each other for the goods and
provides potential customers with information services each provides. The tourist industry, for
about goods and services and can lead to increased example, depends on the agricultural industry for
sales. Advertising is also used to increase public supplies of food and so some farmers sell their
awareness about issues of national concern, for products – for example, vegetables, citrus fruits –
example, health and safety. to wholesalers or even direct to hotels and other
bulk users. The tourist industry is an important
Transport earner of foreign currency; the banks (including the
Transportation is important to all parts of the chain central banks) depend on the earnings from tourism
of distribution. It is the physical movement of in order to meet the needs of individuals who, like
commodities from one place to another. The aim is businesses, require foreign currency to purchase
to get the goods from one place to another, on time raw materials or machinery from overseas.
and in good condition.
Traders support producers by carrying out the
Warehousing distribution of goods and bridge the time gap
between production and consumption. For example,
Warehousing plays a crucial role in the supply chain as
retailers and wholesalers order goods from
a centre point in the chain of supply, linking flows of
producers and hold the goods until they are required
goods between suppliers and customers. Warehouses
by the consumer.
hold raw materials, component parts, part-finished
products and finished goods at or near where they are Exporters are involved in the distribution of home
needed, in safe and appropriate conditions. goods overseas. This provides work for producers
and also raises foreign capital, which is needed to
Insurance pay for the imports of raw materials used by the
Insurance spreads the risks faced by industrial and producers. Importers buy from other countries the
commercial businesses. It protects businesses from raw materials and finished goods that cannot be
the damaging effects of financial liability arising from produced economically at home. This allows home
unforeseen circumstances such as theft, fire or flood. producers to specialise in manufacturing products
Having the security of insurance means that a business for which they are best suited.
does not need to keep large amounts of money to one The services, or aids to trade, also play a major
side to cover it in the event of such losses. part in combining the activities of producers and
promoting their enterprise. Finance provides the
Direct (personal) services money for the capital assets needed by business,
and also for consumers and businesses who wish
There are many other services that support industry
to buy on credit. Banking ensures the transfer of
and commerce, even though they are not directly
payments between buyers and sellers of goods, and
involved in the chain of production or the change
also provides other services to facilitate payments.
of ownership of goods. These are the people and
Insurance overcomes some of the risk involved in
businesses that provide us with direct services, so
producing and trading, such as the danger of loss
called because the services are offered direct to
or damage to capital assets or goods. Transport
the consumer.
makes the physical link between producers,
Examples are teaching, nursing, hairdressing, traders and consumers and gets goods to the right
consultant services, entertainment and many more place, at the right time and in the right condition.
such direct personal services. Can you see how Advertising helps producers and traders to bring
these support trade? Can you recognise the place their commodities to the attention of their potential

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1 PRODUCTION

customers. The communications systems enable wellbeing and consultants offer advice in a variety
businesses to communicate with each other and of forms. All of these, and many others, contribute
their customers at the various stages of production ‘indirectly’ to the success of industry and commerce
and distribution. by providing ‘direct’ services.
As already stated, direct (personal) services also In summary (see also Figure 1.7), commercial
have an important relationship to industry and activities are essential to production, but many of the
commerce. For example, educators help us to attain commercial activities would not be needed if it were
the skills that are needed by employers in industry not for producers and specialisation making exchange
and commerce, and medical staff help keep us necessary. In other words, primary, secondary and
fit to work. The entertainer contributes to our tertiary production are inter-related and interdependent.

PRODUCTION

Primary production Secondary production Tertiary production

Direct
Farming Mining Manufacturing Construction Commerce
services

Fishing

Trade Aids to trade

Home Foreign

Retail Wholesale Import Export

Banking and
Warehousing Insurance Transport Advertising Communications
finance

CONSUMERS

Figure 1.7 From production to consumers

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 Things to do

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
needs primary production
wants secondary production
production tertiary activities
producers farming
chain of production indirect services
retailer direct services
consumers exporters
profit importers
extractive industry

Search and find

Copy the questions below and write out their 11 Discuss the statement ‘Although there are
answers to form your own revision notes. You can advantages of division of labour, there are
find the answers by referring back to the chapter. also disadvantages’.
1 What are the basic needs we all require 12 Define the term ‘commerce’.
to survive? 13 Describe the two main elements of commerce.
2 How do needs differ from wants? 14 What is e-commerce? Give two examples of it
3 What is the chain of production? in practice.
4 Why does the price of a product rise as it 15 Briefly say how home trade differs from
passes along the chain of production and foreign trade.
distribution? 16 How does trade facilitate specialisation?
5 Primary production is also referred to as the 17 List the main aids to trade.
extractive industries. Why is this?
18 Why are the aids to trade also referred to as
6 In what ways does secondary production rely indirect services?
upon primary production?
19 In what ways can indirect services support
7 Why is tertiary production so important to the both industry and commerce?
other forms of production?
20 Give three examples that demonstrate the
8 What is specialisation? inter-relationships between contrasting forms
9 Explain the term ‘comparative advantage’. of business.
10 In what ways can division of labour increase
productivity?

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1 PRODUCTION

Multiple choice
Choose the one most appropriate answer from 6 A comparative advantage occurs when:
the four alternatives. A one country exports more than others
1 Farming can be referred to as: B a business gains a larger market
A a tertiary activity C a good can be produced at a lower price
B a manufacturing industry D an industry uses division of labour
C an extractive industry 7 Division of labour is most likely to be found in:
D an aid to trade A marketing
2 Teaching is an example of: B manufacturing
A an indirect service C farming
B an aid to trade D foreign aid
C consumers 8 Which of the following is an example of
D a direct service tertiary production?
3 The physical link between producers would be A engineering
made by: B farming
A transportation C mining
B advertising D retailing
C communication 9 Exporters:
D traders A buy goods from other countries
4 The process of exchange of goods and B bring foreign capital into their country
services is made by:
C cause an outflow of capital from their
A sellers country
B buyers D cause unemployment in their home
C commerce country
D transportation 10 Manufacturing is an example of:
5 Industry and commerce are interdependent A secondary production
because they: B tertiary production
A need each other C primary production
B serve the same customers D indirect services
C use the same sources of income
D provide competing services

10 Photocopying prohibited
 Things to do

Structured questions
Answer as many parts of the questions as you can. The marks available indicate the amount of detail
you need to supply/the level of difficulty of each question.
1 a Give one example of a primary industry. [1]
b How do the extractive industries support other forms of production? [2]
c What is secondary production? Name and define the two main categories into which this form
of production can be divided. [3]
d Wholesalers, retailers, exporters and importers are sometimes referred to as the ‘distribution
trades’. Explain why they are referred to in this way. [3]
e ‘Tertiary production is very different from the other forms of production but it is just as
important.’ Discuss this statement. [5]
f Take a particular product and describe its development from primary production through to
the tertiary stage. Explain why each stage is important to the others. [6]
2 a What is the chain of production? [2]
b Briefly describe the three types of production that are normally involved in the chain of
production. [3]
c Why does the chain of production result in interdependence in the economy? [3]
d Draw a simple flow diagram to show comparisons of the contrasting chains of production of
each of the following items: a cotton dress, a china vase, cheese. [6]
e Draw a simple table with three columns headed ‘Primary’, ‘Secondary’ and ‘Tertiary’ production.
Enter six of the following occupations in the appropriate columns, with at least two in each
column: farmer, shopkeeper, road maker, fisherman, builder, bank cashier, lorry driver, miner,
oil driller, market trader, engineer, insurance agent, dressmaker and carpenter. [6]
3 a Name the two basic needs of people. [1]
b State one way that secondary production helps to meet the basic needs of people. [2]
c Describe three ways that tertiary production helps both producers and consumers. [3]
d State two contrasting examples of enterprises you would expect to find in each of the sectors
of production (primary, secondary and tertiary). Give reasons why you have categorised them
in the way you have. [6]
e Clearly explain why all three sectors of production are interdependent. [8]
4 a Primary production is sometimes referred to as extractive industry. Why is it referred to
in this way? [2]
b Name the three elements of extractive industry. [3]
c What is secondary production? Name the two categories into which this form of production
can be divided. [4]
d Name five of the elements of tertiary production. [5]
e ‘Tertiary production is very different from the other forms of production.’ Explain this statement. [6]
5 Refer again to Figure 1.3 on page 2 and answer these questions.
a What is ‘tertiary’ about the tertiary industries? [1]
b How does secondary production differ from primary production? [2]
c State two specific differences between home trade and foreign trade. [2]
d If this diagram were extended where would advertising be shown? Why can advertising be
described as a form of communication? [3]
e Why is trade particularly important to producers? [4]
f In what ways do the aids to trade support trade itself? Give examples. [8]

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1 PRODUCTION

6 The following questions are all related to Figure 1.7 on page 8.

a Give two examples of types of businesses that clearly illustrate the difference
between manufacturing and construction. [2]
b Referring to home trade and foreign trade, which results in an outflow of a country’s currency?
Explain the reason for your choice. [3]
c Use a concise list to summarise the ways that finance supports all three of the stages through
from primary production. [3]
d Take any two of the services to trade shown in Figure 1.7 (other than finance) and explain their
role in supporting both primary and secondary producers. [4]
e What is commerce? [8]

12 Photocopying prohibited
2 RETAIL TRADE
BY THE END OF THIS CHAPTER YOU Producer Wholesaler Retailer
WILL BE FAMILIAR WITH:
l the role of the retailer in the chain Figure 2.3 The retailer sometimes bypasses the wholesaler
of distribution
l types of retailer
l large-scale and small-scale retailing
The functions of retail trade
l selling techniques and methods and the In Chapter 1, you learnt that we all tend to specialise
implications of e-commerce in some way; we cannot satisfy our many needs
l trends in retailing. or wants ourselves. We do a job of some sort and
leave others to provide for our needs and wants, for
which they receive a wage payment. For each of
2.1 The role of the retailer us to be able to specialise in this way requires an
intricate pattern of distribution between producers
Retailers are traders who provide goods and and consumers.
services to the consumer. The position of the In Chapter 1, we explored the many types of
retailer is either between producers and consumers, intermediaries between the producer and the
or between wholesalers and consumers. In other consumer, looking in particular at the commerce-
words, the retailer is the last link in the chain related aspects of this. An important element of
of supply between producers and consumers. this is retail trade: the last stage in the passage
See Figure 2.1. of goods from the producer to the consumer. The
retailer performs a number of important functions,
Producer Wholesaler Retailer Consumer outlined below.
Figure 2.1 Position of the retailer in the chain of supply l Outlet: the retailer provides the producer with
an outlet for their products, thus saving the
The retailer buys in large quantities from the producer from the need to market their own
wholesaler and sells to the consumer in smaller goods (although some producers do deal direct
convenient quantities, as shown in Figure 2.2. If with consumers).
retailers can order in very large quantities they l Stocks: the retailer maintains stocks, which the
may bypass the wholesaler and buy direct from the consumer can buy locally in convenient quantities.
producer as shown in Figure 2.3. It tends to be only l Choice: the consumer can choose from a variety
very large retailers that can do this, although a small of products from different and competing
retailer may, for example, buy produce direct from a producers through the retailer.
local farmer. l Information and advice: retailers have expert
Wholesaler Retailer Consumer
knowledge and experience enabling them to
advise customers on the quality and suitability
of competing products.
l Feedback: the retailer gathers feedback from
its customers and relays this information to the
producer. This helps the producer to understand
what the consumer market wants, and also helps
Figure 2.2 The retailer buys in large quantities from to ensure that consumer wishes are met.
the wholesaler

Photocopying prohibited 13
2 RETAIL TRADE

l Employment: retailers are, of course, an Independent shops

important source of local employment, which in Independent shops are not connected to a large
turn contributes to the income that consumers organisation. They are referred to by a variety of
need in order to make purchases. names including ‘sole trader’, ‘unit trader’, ‘corner
The retailer has to be able to respond to consumer shop’ and ‘convenience store’.
demands and expectations, otherwise they may lose An independent shop is generally owned by a single
customers and end up with unused, out-of-date stock owner (sole trader) or by a small partnership and
on their shelves. Larger retailers gather knowledge of is typically sited away from a town centre and in
customers by analysing data collected electronically a residential area. Independent shops sometimes
at checkout stations. specialise in offering a single commodity, for
Small retailers may find it harder to gather this example, a baker, butcher or confectioner, while
information but watching stock movements closely others offer a small range of basic commodities such
will reveal the information they need. In addition, as daily food supplies and cleaning materials.
the small retailer, through personal contact with The advantages and disadvantages of independent
customers, will learn more directly the customers’ shops are outlined in Table 2.1.
changing requirements.
Table 2.1 Advantages and disadvantages of
independent shops
2.2 Types of retailer Advantages Disadvantages
Small retailers tend to be owned by one person or a Can give personal Cannot buy in large
very small number of people, whereas large retailers attention to customers quantities
are often owned by many shareholders. Saves the customer from Prices often higher than in
travelling into town larger shops
Small-scale retailers Owner has thorough Holds a limited range
knowledge of all aspects of stock
The characteristics of small retailers are of the business
summarised below.
Can sometimes allow Difficulties arise if the
customers a small amount owner is ill
Door-to-door traders
of credit
Door-to-door traders generally deal in relatively
minor goods and services and in an elementary way: Large retailers
l Pedlars carry goods from door to door on foot.
l Hawkers use some method of transport, even as
Multiples (chain stores)
basic as a bicycle. Multiples are chains of shops trading under a single
l Mobile shops are vehicles adapted to serve name and are all owned by one company. They are
as travelling shops, for example, an ice generally controlled from a central headquarters
cream vendor. and the shops tend to be located in town centres and
shopping precincts.
Market traders Multiples enjoy many advantages over smaller
Market traders operate from stalls in open retailers and most of these relate to their size:
or covered areas, sometimes along streets and
sometimes in areas specially kept for markets. Market l Their large size enables them to bypass
traders can often keep prices low because they do not wholesalers and buy in large quantities direct
face the same overhead costs (for example, premises, from the producer or manufacturer.
rent, electricity) as conventional traders. l A single national advertisement can cover all
branches nationwide.
Door-to-door traders and market traders have more l They have the resources to rent or buy stores
disadvantages than advantages because they are in prime central sites with plenty of space for
small and carry a very limited range of products. car parking.

14 Photocopying prohibited
 2.2 Types of retailer

l They can afford to attract customers with ‘loss Department stores

leaders’ (goods sold at below cost price).
A department store is quite a complex form of
Supermarkets retailer. It is sometimes referred to as a ‘shop
A supermarket is a large self-service store. A self- of shops’ because it is divided into separate
service store is defined as a supermarket when it departments, each specialising in a particular area
has more than 200 square metres of shopping area of trade. Each department operates like a single
and three or more checkout stations. Such stores are shop and so is responsible for its own profitability.
often organised as multiples. See Figure 2.4.

Supermarkets deal particularly in pre-packed, Department stores tend to be comfortably equipped,

pre-priced products. Loss leaders are frequently with lifts, a café or restaurant and other facilities
used to attract custom, and customers choose their to make shopping an ‘enjoyable experience’. In
own goods from the shelves. Shopping trolleys addition, merchandise is displayed attractively, and
reduce customers’ awareness of the weight of credit facilities (sometimes interest-free) are given
their purchases and encourage impulse buying to suitable customers. Some department stores even
(unplanned purchases). have their own charge cards.

Because supermarkets are often organised in The advantages and disadvantages of department
multiples, they usually enjoy the advantages stores are outlined in Table 2.2.
mentioned above. They also benefit from Table 2.2 Advantages and disadvantages of
economies of scale. For example, they can employ department stores
specialist staff such as butchers, bakers and Advantages Disadvantages
fishmongers. In addition, they save on staffing levels
Customers can shop Large central sites are
because customers do the work of serving themselves. in comfort expensive
Although this type of shop has many advantages A wide range of goods is They cannot compete
over other retailers, it faces some disadvantages. sold under one roof with the prices
of multiples
l Large premises in prime areas are expensive.
Shop assistants give Comfortable surroundings
l Pilferage (stealing) levels are high.
personal service can be a drain on profits
l Customers receive limited personal contact
with staff. They are sited in towns They are labour intensive
l Shopping trolleys are stolen. and are convenient when compared with
for car parking and some retailers
l E-tailing (which we will come to shortly) affects
public transport
their profitability.

Stairs
Lifts
Storage
Men’s clothing
Administration
Ladies’
clothing
Furniture
Children’s
Display
clothing
Motoring

Main entrance

Display
Grocery
Cosmetics
Photographic

Stationery
Tobacco and
sweets
Figure 2.4 Department stores have separate commodity departments

Photocopying prohibited 15
2 RETAIL TRADE

Hypermarkets E-tailers enable customers to shop via the internet

and buy products that are delivered to their homes
A hypermarket (superstore) is a vast self-service
or premises in a similar manner to shoppers visiting
warehouse store with an extensive range of goods.
a supermarket. The e-tailer is highly convenient
They tend to combine the features of a department
because buyers can place their orders from the
store (that is, they are divided into departments) and
comfort of their homes or business premises and
a grocery supermarket. In fact, some supermarket
pay electronically. It reaches a wider geographical
retail chains may create hypermarkets to extend
base than the conventional retailer. For example,
their share of the market.
customers do not have to be within the area of
Hypermarkets tend to be located outside of towns the retailer, but can make direct purchases from
where the land for large car parks is less expensive. companies in distant places, even overseas. The
Some hypermarkets specialise in particular areas of e-tailer tends to offer very competitive pricing.
trading, for example, DIY and gardening.
They enjoy all the advantages and disadvantages of 2.3 Large-scale and
supermarkets, but they depend on customers being
able to drive to them.
small-scale retailing
The pros and cons of large- and small-scale retailing
Discount retailers
are explored below.
This type of retailer offers a variety of discounted
products. They tend to offer competitive prices Advantages of large-scale
on less fashionable products from a wide range of retailing for the retailer
suppliers, and market ‘end of range’ products at l Buying in bulk direct from the producer or
discounted prices. manufacturer results in lower purchase prices
and, therefore, lower prices for the customer.
Speciality retailers l Large size allows the employment of specialist
Specialising in specific industries or products (for buyers and other skilled staff such as bakers,
example, DIY, kitchens and bathrooms, building butchers and fishmongers.
materials, gardening), this type of retailer offers l The large quantities they buy enable large
customers advice based on expert knowledge and a retailers to brand goods with their own name.
high level of personal service. They also add to their l Some of the very large retailers own their own
services by offering accessories and additional products specialist factories and farms.
related to their specialism. Their important advantage l Buying in bulk results in reduced transport
is their specialist applications, which reduces their costs. Very large retailers may operate their own
competition to only those with a similar knowledge. fleet of vehicles.
l Fewer in-store staff are needed because
Franchise shops customers serve themselves.
A franchise is an agreement made between an l Minimal staff numbers are needed to keep
entrepreneur (a business person) and a franchise shelves filled and operate checkout stations.
house. The agreement allows the entrepreneur to use l Quick turnover of goods results in reduced loss
the name of a well-known company and the exclusive due to ‘ageing’ of stock.
rights to market its products within a specified l Increased use of technological devices, for
geographical area. This form of retailing is particularly example, EPOS terminals.
common in the fast-food (takeaway food) trade.
Advantages of large-scale
E-tailers retailing for the customer
E-tailers are a part of the wider internet activity of l Large retailers can offer more competitive prices
e-commerce. E-commerce facilitates a worldwide to customers.
range of trading activities that includes internet l Customers are offered ‘bargains’ such as below-
auctions and many other forms of buying and selling. cost offers.

16 Photocopying prohibited
 2.4 Selling techniques and methods

l Loyalty cards can reduce overall shopping costs. that wholesalers face – it can contribute to their
l The convenience of one-stop shopping – a full effectiveness in the marketplace where communication
range of goods under one roof. networks are becoming increasingly important.
l Goods are clearly priced so it is easy to compare
competing products. Wholesale trade is addressed further in Chapter 4.
l Self-service allows customers to move around Small retailers
the store and make their purchases at their
own pace. In most retail sectors, small shops are under
extreme pressure from larger businesses. So, how
Disadvantages of large-scale are they still managing to survive?
retailing for the retailer In our modern technology-dependent world,
l Large capital resources are needed – premises, consumers are increasingly recognising that
staffing costs, maintenance. personal service is important and that this is the
l When stores are sited in town centres operating way in which the small trader scores over the large
costs are particularly expensive (but this is retailer. In addition, because small traders are
where the customers are). locally sited, they can often offer more flexible
l The risk of loss is greater for the large retailer. If opening hours to suit their customers.
turnover does not meet expectations, profit will
The small retailer still enjoys the major benefit of
fall fast.
location. It serves a local community and spares its
Disadvantages of large-scale customers from the need to have to ‘go into town’.
retailing for the customer Small retailers are also adept at identifying products
l Large retailers do not give the same personal that the large retailer does not supply. They can spot
service as a smaller retailer. a niche market and mine it.
l Large retailers will stock only those items that
Some small retailers combine their purchases from
are in regular demand. If a customer needs
wholesalers so they can exploit the economies of
something specific he or she may need to go to a
scale achieved through bulk ordering. This involves
smaller retailer.
cooperating with other small retailers who are, of
The effect of large-scale course, their competitors. But local associations
of small traders help to encourage this kind of
retailing on others cooperation.
What effect does large-scale retailing have on other
sectors in the chain of supply?
2.4 Selling techniques
Wholesalers and methods
Wholesale distributors have been squeezed by
the increased size of some retailers. Some larger
retailers have been able to bypass the wholesaler
Sales techniques and methods
and go direct to producers and manufacturers. Retailers employ a variety of techniques, not only
Wholesalers have also been affected by the growth to encourage customers to buy but also to make the
of the internet as a communication and distribution selling process more effective.
channel. The wholesaler has little leverage to l Branding: goods are given a distinctive trade
retain the large retailer as a customer but still has a
or brand name to make it easy to identify them
substantial market with smaller traders.
and to emphasise the name of the retailer. The
Similarly, as with so many other retail-related brand name may be applied by the producer to
businesses, wholesalers are feeling the effects of differentiate between its products and those of
technological developments such as e-commerce, which other producers. However, a large retailer may
is undermining the services they provide. However, purchase its own product from a producer and
technology can be part of the solution to the difficulties then add its own brand name to the product.

Photocopying prohibited 17
2 RETAIL TRADE

Building a successful brand image takes time automate checkout systems. As customers leave
but can result in higher sales and increased the checkout, the barcoded items are totalled by
profit margin. the electronic point-of-sale (EPOS) terminal.
l Own brand: large-scale retailers can have This is a computer-linked terminal that produces
their own brand of product produced to market an itemised bill for the customer. The same
alongside manufacturer’s brands, usually as data can be used to automatically update stock
a discounted alternative. When such own records and to flag when more stock needs to be
brands meet consumer expectations they gain ordered. See Figure 2.5.
customer loyalty. But, conversely, a poor quality
own brand product will taint the retailer’s
overall image.
l Logo: firms will often employ a logo that is quickly
associated with their company and its products. A
logo is a design element consisting of a symbol (or
a specified selection of colours) that acts as a quick
visual representation of a brand message.
l Packaging: retailers may ask producers to package
their products in a distinctive way, for example,
colour style, or incorporating their logo. They must
order in very large quantities to negotiate this.
Effective packaging conveys important
information including weight, contents and
sell by date, but it also protects goods while on
the shelf and helps the consumer to identify a
particular product for repeat purchases.
l Self-service: self-service was introduced by
supermarkets but has rapidly spread to many
smaller types of retail outlet and is now a Figure 2.5 Barcodes help EPOS to operate speedily
common feature of modern retailing.
Self-service facilities enable the customer to l Direct mail: encompasses a wide variety of
take goods from the store shelf at the pace they hard-copy marketing materials, including
prefer. This encourages impulse buying and brochures, catalogues, leaflets and so on, aimed
reduces the retailers staffing levels, but it also at promoting sales and encouraging customers to
results in increased losses through stealing. visit the stores.
l After-sales service: after-sales service is l Loyalty cards: retailers can issue these to their
the periodic, or as required, maintenance of customers as an incentive to return to the store.
equipment by its manufacturer or the supplier Credits are accumulated for future discounts
after the warranty period. There has been an every time a purchase is made.
increasing trend for retailers (particularly larger l Shopping centres: sometimes called malls or
retailers) to provide this facility. For example, shopping precincts, these are shopping areas
a retailer may offer free technical support shut off from immediate traffic, well served
following the sale of a computer. by public transport, road links and car parks,
l Barcoding: a barcode consists of a pattern and often with an information point. They
of vertical lines of varying widths that can be include a wide variety of retail shops, including
read by optical scanners, computers, desktop factory outlets through which producers
printers, smartphones, and many other devices. sell directly to the consumer, along with
In retailing, barcodes are typically used to restaurants and cafes.

18 Photocopying prohibited
 2.5 Trends in retailing

Computer aids to retailing The implications of e-commerce

The uses of computers in retailing are almost We have already examined e-commerce and
endless and more applications are continually e-tailers and identified the convenience for
being introduced. We have already seen their use at consumers of buying from their own homes, and the
checkouts (EPOS) and how they contribute to the scope of this purchasing facility.
recording of stock movements and consumer trends.
The recent expansion of e-commerce has had a
Many retailers now use such technology to effect
serious effect on retailing. Consumers can buy
online sales, delivery schedules and, of course,
many products via the internet (see Figure 2.6)
marketing information.
that they would previously have purchased from
a retailer – leading to a serious loss of business
Home shopping for many retailers. In other words, e-commerce
Consumers can make purchases from the comfort has reduced some of the demand for certain goods
of their own homes in many ways. This enables the from the traditional retailer. Some retailers have
busy person to shop without the inconvenience of encompassed e-tailing into their operations while
travelling to a store. This is obviously helpful to others have been forced to rethink the product range
the elderly and the infirm, but also appeals to many they sell. Grocers, for example, may be forced to
people who live a busy lifestyle. reverse their expansion into electrical products
and concentrate more on their traditional function
l Online shopping: provided by many retailers. of providing household supplies. The effect of
Customers are encouraged to purchase from e-commerce on retailing is still evolving.
the retailer via the internet and the retailer then
delivers direct to the consumer, thus saving the
customer the need to actually visit the store.
l Mail order shopping: typically, the customer
chooses products from a catalogue or via
the internet, orders and pays for the goods
electronically and then awaits delivery.
l Television shopping: speciality television
channels target home shoppers by broadcasting
product demonstrations and explanations, and
inviting the viewer to buy by telephone or online.
l Telesales: the selling of a particular commodity
or service by a salesperson who makes an
initial approach by telephone (also called
telemarketing or telephone selling). In the
case of telesales it is the seller who is trying to Figure 2.6 E-commerce allows consumers to buy goods
initiate a sale rather than the buyer. Sometimes and services through the internet
this can be counter-productive if potential
customers see an unsolicited call as an invasion
of their privacy.
2.5 Trends in retailing
l Internet auctions: online auctions on the
Throughout this chapter we have explored the ways
internet. The seller sells the product or
that retailing has changed relatively recently and the
service to the highest bidder. For sellers (both
implications this has had. Here we summarise more
individuals and businesses), online auctions
of these developments.
provide channels for new products as well as
‘end of range’ stocks. For example, a large l Omni-channel retailing: a method of
retailer (or manufacturer) may offer its end marketing where potential customers are
of range products and receive bids from approached through all available shopping
speciality retailers. channels, that is, mobile internet devices,

Photocopying prohibited 19
2 RETAIL TRADE

television, radio, direct mail, catalogues and goods and services, purchase them through their
so on. phones and make a payment through the phone
l Self-service checkouts: personal checkouts as a form of online buying.
are being provided for customers so that they
These technological methods of selling and buying
can process their own purchases from a retailer.
provide facilities for shopping anywhere, at
These checkouts are an alternative to cashier-
any time.
staffed checkouts, with the customer assuming
the job of the cashier by scanning purchases and
processing payments. Selling through the internet
l Loyalty programmes: an incentive plan that Selling and buying via the internet (e-commerce)
aims to build up repeat business by offering is a relatively new but rapidly growing method
participating customers incentives to buy of trading. Customers can access a shopping
continuously from the retailer. Customers are channel through their internet service provider,
offered product discounts, coupons, points enabling them to make purchases from participating
towards future purchases, or some other reward companies (e-tailers) that sell through the system.
for their loyalty to the seller. The overall aim is The potential customer can view data related to
to motivate the customer to return to the seller products that sellers are offering. Having compared
on a regular basis. the products and prices of competing sellers and
l Click-and-collect: many retailers have made their choice, customers can place their order
introduced ‘click-and-collect’ sales whereby and pay directly by credit or debit card. Delivery
customers buy from the store online and then is then carried out without the buyer needing to
pick up their goods from a collection point at a go and collect. In many cases it is even possible
time that is convenient for them. to track the goods on their journey and predict a
l Quick response codes (QR codes): many delivery time.
manufacturers and retailers now put a QR code
on their products and within advertisements. The advantages of e-commerce to the consumer
A QR code is a machine-readable label are obvious – it expands consumers’ options and
consisting of an array of black and white gives them ease of access to goods and services.
squares. The labels are typically ‘read’ by the They can compare the products and prices of many
camera of a smartphone. The code can be used competing sellers online before placing their order
to give a quick connection to a company’s and executing payment electronically. There is no
website or to give more information about the time restriction for making purchases – the internet
product on which the code is displayed. is there 24 hours a day and 7 days a week. It is
l Home delivery: many retailers have usually possible to track purchases, and it could be
argued that buying through the internet reduces the
introduced free home delivery services.
carbon footprint. In addition, of course, retailers
Although there are cost implications for
that embrace this form of marketing gain access
retailers, they can establish a minimum value
to a wider geographical marketing area, and even
purchase for free delivery, or a nominal delivery
worldwide.
charge for smaller orders.
l Virtual retailing: an online store provides a list But, as we have already seen, e-commerce is having
of merchandise and an order form. In effect it a profound effect on traditional retailing. While
uses a digital virtual environment to facilitate a many retailers are embracing this relatively new
purchase by a consumer and often delivery to the development (and some actively participating in it),
customer. Sometimes a customer may choose to many have found their income to be dramatically
collect the purchases at a convenient place. reduced. The smaller retailers in particular cannot
l Mobile retailing (m-commerce): consumers use compete in this new retailing environment. Only
their mobile phones to seek information about time will tell who will survive.

20 Photocopying prohibited
 2.5 Trends in retailing

Below-the-line promotion the price of one) is another technique that draws on

the consumer’s natural desire to ‘get something for
These are techniques that are used to encourage nothing’. Similarly, loss leaders (selling something
consumers to buy, in a similar way to loyalty cards, at cost price or below) are used to entice people
but are not a direct sale as such. For example, into the shop in the hope that they will buy other
point-of-sale displays and in-store demonstrations items too.
make customers aware of products without actually
selling to them. Giving away free gifts encourages A business might also use a competition as part of its
customers to enter the store and perhaps encourages below-the-line promotion. For example, customers
customer loyalty when linked to a ‘token system’, could be entered into a draw for a major prize when
where the customer receives tokens or vouchers in making purchases above a stated value.
relation to the amount spent that can be exchanged Below-the-line promotions are almost endless
for gifts or money off future purchases. This and they go beyond retailing. For example, a
encourages the customer to return to the store in personality promotion (using famous people to
order to obtain more tokens. endorse products) not only sells goods and services
but also raises the profile of the celebrity.
Other below-the-line promotions include free
samples, which potential customers are given to test, Obviously, all these techniques have cost
in the hope that they will be convinced enough to implications. The retailer has to decide whether the
make purchases. Buy one get one free (or two for costs involved will be recouped from increased sales.

Photocopying prohibited 21
2 RETAIL TRADE

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
chain of supply loss leader barcode
retail trade e-tailer economies of scale
market traders e-commerce carbon footprint
impulse buying brand name

Search and find

Copy the questions below and write out their 11 In what ways do e-tailers use the internet?
answers to form your own revision notes. You can 12 Describe three selling techniques used
find the answers by referring back to the chapter. in retailing.
1 Define the term ‘retailer’. 13 How does barcoding rely on computer
2 What is the position of the retailer in the chain technology?
of supply? 14 ‘Computer technology has both helped and
3 Why are retailers important to us all? harmed retailing.’ Discuss this statement.
4 Describe two functions of retailers. 15 Describe two forms of home shopping.
5 What are the advantages and the 16 List three advantages of large-scale retailers.
disadvantages of small retailers? 17 What effect has large-scale retailing had on
6 Multiples are also referred to as chain stores. other aspects of the chain of supply?
Why do you think this is? 18 Describe two elements of omni-channel
7 What advantages does a supermarket have retailing.
over small retailers? 19 What is the similarity between virtual retailing
8 Department stores are also referred to as a and selling through the internet?
‘shop of shops’. Why? 20 Briefly describe three below-the-line
9 How does a hypermarket differ from a promotion methods.
supermarket?
10 Compare discount retailers and
speciality retailers.

22 Photocopying prohibited
 Things to do

Multiple choice
Choose the one most appropriate answer from 6 In the chain of production, which of the
the four alternatives. following is not a supplier?
1 A retailer buys $200 of goods from a A retailer
wholesaler and is entitled to a 25 per cent B consumer
discount. The retailer will pay:
C wholesaler
A $50
D producer
B $250
7 The practice of giving products a particular
C $150 identifying name is known as:
D $100 A branding
2 A market trader is selling an article for $10 that B identification
he bought for $8. The amount of profit will be:
C marking
A 40 per cent
D advertising
B 30 per cent
8 E-tailing is different from other forms of
C 25 per cent retailing because:
D 20 per cent A there are no delivery charges
3 A loss leader is: B purchases can only be made by mobile
A a free gift phone
B an item sold cheap to attract custom C customers cannot view the goods in advance
C an item priced wrongly D the seller and the buyer do not meet
D a stock item that has been lost 9 Retailers can be considered as part of the
4 Which of the following is the best example production chain because they:
of retailing where potential customers are A add to the value of goods
approached through all available shopping B sometimes own factories
channels?
C tell producers what to produce
A self-service
D offer services as well as products
B click-and-collect
10 Which of the following would be the best
C mobile retailing example of a product that would be sold
D omni-channel retailing direct by the producer to a consumer?
5 A retailer may give credit to a: A meat
A wholesaler B groceries
B producer C fitted furniture
C customer D milk
D manufacturer

Photocopying prohibited 23
2 RETAIL TRADE

Structured questions
Answer as many parts of the questions as you c Compare any two of the following
can. The marks available indicate the amount of types of retail outlet: market trader;
detail you need to supply/the level of difficulty of cooperative; independent shop;
each question. discount retailer. [4]
1 Answer these EPOS-related questions. You d How does a ‘brand’ differ from a
can also refer to Figure 2.5 to help you answer ‘logo’? In what ways do they have
the questions. a similar aim? [4]
a What do the letters EPOS stand for? [1] e In spite of the fact that small retail
b Where is EPOS typically located in traders face considerable competition
a supermarket? [2] from the larger forms of outlet, many
c What is a barcode? [2] still survive. Give reasons why this is so. [8]

d How do barcodes help EPOS to 4 Answer these questions related to

operate speedily? [3] department stores. You can also refer to
Figure 2.4 to help you.
e In what way can EPOS terminals
help facilitate stock control speedily a Define the term ‘department store’. [2]
and accurately? [6] b State three ways in which the
f In what ways can data collected via physical layout of a department
EPOS terminals help a large retailer store differs from the layout of a
identify information that will help it supermarket. [3]
to plan its future purchasing and c Department stores are divided into
selling strategies? [6] ‘commodity departments’. Explain the
2 This question tests your understanding of meaning of this term. [3]
supermarket retail trade. d Give two advantages and two
a Supermarkets are also referred to as a disadvantages of department stores. [4]
‘self service’ stores. Why is this? [1] e ‘Hypermarkets are divided into
b Classify the main category of goods departments, but they are not
sold in supermarkets. [1] department stores.’ Discuss
c Why is a supermarket able to operate this statement. [8]
with fewer staff than smaller retailers? [2] 5 The following questions are all related to
d Name two smaller types of retailer buying and selling via the internet.
that are adversely affected by a What is the internet? [2]
supermarkets. [2]
b Define the terms ‘e-commerce’,
e Supermarkets are often part of a multiple ‘e-tailing’ and ‘m-commerce’. [3]
chain. What is a multiple chain and how
c Why are e-tailers often able to offer
does it benefit the large retailer? [4]
more competitive pricing compared
f Briefly describe four below-the-line with conventional retailers? [3]
strategies that supermarkets employ. [4]
d Describe two ways that consumers
g Explain why supermarkets have been benefit from an e-tailer, other than
forced to change their marketing keen prices and home purchasing
strategies as a result of the expansion convenience. [4]
of e-commerce. [6]
e E-tailing is one way for consumers to
3 a State two services that a retailer buy from home. Briefly describe two
provides for: other methods of home shopping. [4]
i the producer f What steps are conventional retailers
ii the consumer [2] being forced to take to compete with
b Name two types of small retailer that e-commerce? [4]
do not trade through shops. [2]

24 Photocopying prohibited
3 CONSUMER CREDIT
not paid previous loans; that is, they have defaulted
BY THE END OF THIS CHAPTER YOU on repayment). Based on their information, such
WILL BE FAMILIAR WITH: agencies allocate a credit rating to individuals.
l use of credit A finance company will obtain an individual’s
l types of credit credit rating from a credit reference agency before
l suitability of different types of credit. granting a loan.
From this, you will realise that a borrower’s credit
rating will have an influence on whether the lender
3.1 Use of credit will provide him or her with credit. A credit rating
is an assessment of a person’s or an organisation’s
ability to meet their financial commitments and
What is credit? the likelihood that they might default on the debt.
The term credit refers to the ability of a customer A credit rating is assessed on the basis of a person’s
to obtain goods or services before paying for them, past credit history and will also be influenced by
based on the trust that payment will be made their job and their income.
at some future date. The provider of credit (for
example, a finance company) receives interest Summary
from the borrower as a reward for making l Consumer credit is the money that is loaned to
funds available. consumers to enable them to make purchases
and pay later.
The amount of interest charged varies from one l The cost of borrowing is interest; the charge
form of credit source to another, but lenders
lenders make for the loan they have made.
have a legal obligation to make the borrower l APR expresses the interest charged as an
aware of the cost of the credit they are seeking.
annual figure.
Annual percentage rate (APR) is the standard
l A credit rating is an assessment of the credit
way of showing the cost of borrowing (see Figure
worthiness of a borrower (see Figure 3.2).
3.1). APR is the annual rate that is charged for
borrowing. It is expressed as a single percentage
number that represents the actual yearly cost of the Why is the use of credit
funds borrowed over the period of the loan. APR increasingly popular?
includes any fees or additional costs associated with
Credit use tends to increase when consumers feel
the transaction.
richer, for example, when the economy is strong.
Cost of purchase + Cost of credit = True purchase cost People feel less guilty about using credit cards and
Figure 3.1 The true cost of borrowing other forms of credit. Similarly, the use of credit
will increase when people have higher aspirations,
When someone applies for a loan, or some other which in turn is influenced by changing society
type of credit, such as a credit card, a lender has to values, education and the economic climate.
decide whether or not to lend. Lenders (or creditors) More practically, using a credit card is often more
use different things to help them decide whether or convenient than paying with cash, and also saves the
not the applicant is a safe risk. Credit reference need to carry too much cash and the risks that entails.
agencies are companies that are legally allowed to This is particularly useful for busy households
keep information about consumers’ borrowing and and busy individuals. We have moved into what is
financial behaviour (for example, if a person has sometimes referred to as a ‘cashless society’.

Photocopying prohibited 25
3 CONSUMER CREDIT

CREDIT REPORT
ie
CREDIT SCORE 480 Name: Aurelie Jul

CREDIT RATING
Excellent
Good
Fair
Average
Poor

Name: Aurelie Julie

CREDIT GRANTED

Figure 3.2 A credit rating gives an indication of how reliable a potential borrower is

Advantages and disadvantages interest charges mean that the overall cost of buying
of using credit is going to be higher and goods may be used, lost
or worn out before they are fully paid for. Note
Making credit available to consumers is obviously that using a credit card gives the purchaser some
beneficial to the retailer. Credit can raise sales levels protection because if goods bought via a credit card
because consumers can make purchases easily, even do not arrive, or turn out to be faulty after delivery,
for high-value goods. Increased sales enable retailers the cost is met by the credit card company who will
to buy more stock, leading to even more sales. refund the card holder the money paid for the goods.
However, if the retailers themselves give credit to
customers this results in less capital being available
for other projects. Therefore, it is not surprising 3.2 Types of credit
that retailers prefer their customers to obtain credit
Consumer credit can be divided into two
elsewhere. However, this still has cost implications for
broad categories:
the retailer. Credit card companies charge the retailer
between two and three per cent for transactions they Formal credit consists of credit institutions that
process. There is also a delay between the retailer are regulated by government regulatory controls
making a sale and then receiving the actual income such as interest rate limits, loan ceilings, collateral
from the credit provider, for example, the credit card requirements (that is, repayment guarantees) and so
company or the finance company. on. However, these regulations, and their associated
costs, do not meet all the credit needs of consumers;
An obvious disadvantage of credit for the buyer
for example, sometimes consumers need credit only
is that not only are there cost implications (for
under special and limited circumstances.
example, interest charges), but it is easy to spend
more than you can afford, particularly through Informal credit facilities fill this gap because
impulse buying. If you spend cash, it is obvious they provide short-term loans and more flexible
when you are running short of it, but by using collateral requirements than formal forms of credit.
credit, especially a credit card, it is less obvious Informal creditors are not legally registered, but this
when you are spending more than you can really does not mean that they are illegal. Many belong to
afford. Nonetheless, credit buying does enable reputable registered associations that license and
the consumer to forward budget, if they have the regulate their activities but they are not regulated in
ability and the discipline to do this. However, the manner of formal credit.

26 Photocopying prohibited
 3.2 Types of credit

Formal credit on trade premises, for example, in a shop, then

no withdrawal is permitted.
Hire purchase l Although the goods can be repossessed by
Hire purchase (HP) is a form of instalment the finance company if the buyer defaults
credit whereby the purchaser pays a deposit (or on repayments (fails to pay), there is some
down payment) that is a proportion of the price. protection for the buyer too. If one-third or more
The purchaser can then use the goods, although of the total amount due has been paid, then the
the seller or the granter of the finance remains the lender will need a court order for repossession.
owner. The purchaser pays the balance of money The lender will also need a court order to enter
owed (including a fixed charge of interest) in fixed the buyer’s home, or premises in the case of a
monthly instalments over an agreed repayment business defaulting.
period, although the purchaser can pay off the l Government legislation protects the buyer from
outstanding balance at any time. The buyer can unfair terms in an agreement. Unfair terms are
return the goods to the seller, but at least half of the those that unfairly favour the lender over the
total owed must have been paid before he or she buyer. For example, a statement that the buyer
can do so. must immediately repay the full amount of the
There are a number of other legal implications purchase price if he or she is late in making one
for the seller and the buyer related to this method repayment, or making charges for late payment
of purchasing: reminders, could be classed as unfair because
the terms are heavily weighted against the buyer
l When purchasers buy by HP they do not become and cannot take into account all circumstances.
the owners of the goods until they have paid
back all the money they owe. They ‘hire’ the Advantages and disadvantages
goods from the finance company and purchase of hire purchase
them with the final payment. The buyer cannot The HP method of consumer credit can lead to
sell the goods until full repayment has been higher sales for the retailer without the need for the
made (because the buyer is not the owner – the retailer to provide credit. It also makes it easier for
seller or finance company is the true owner). the consumer to buy and ultimately own products,
l The buyer’s contract (the hire purchase with relatively convenient repayment methods. In
agreement) is not with the retailer but with addition retailers are not charged for assisting the
the finance company that brokered the finance consumer to access HP. (This is unlike the charge
arrangement, and who owns the goods until the imposed on retailers by credit card companies when
final payment is made. The finance company can a credit card is used.) However, HP is not suitable
repossess the goods if the buyer does not keep for financing the provision of a service. This is
up the repayments. If the goods are damaged, because a service that has been provided cannot be
the buyer is legally responsible for that damage. ‘repossessed’ if a customer defaults on repayment.
l Before the buyer signs a hire purchase contract,
the lender must give the buyer ‘pre-contract’ As with all forms of credit, there is a danger that
information. This information must be worded the ease of HP might encourage consumers to buy
in plain language that is easy to read and which more than they can afford, leading to default on
makes the full implications of the agreement repayments. However, defaults on repayment may
clear to the buyer, including the APR. Buyers not occur just because the buyer has overestimated
are also allowed a ‘cooling off period’ (a period his or her capacity to repay – circumstances can
in which they can change their mind) when the also change. A consumer may enter into a HP
agreement has been made in their homes. This is arrangement with the wherewithal to pay but
designed to protect buyers from being pressured then become unemployed. There is also a cost
into signing a credit agreement. The cooling off implication for the consumer because interest is
period allows time for the buyer to cancel the charged by the finance company for the use of the
agreement. However, if the agreement is signed credit, thus increasing the final cost of the item.

Photocopying prohibited 27
3 CONSUMER CREDIT

Extended credit charge interest for the use of their money and this
adds to the cost of the goods (or services) in a
Extended credit (also called a credit sale or deferred
similar way to HP.
payment) is similar to HP because the buyer:
The buyer must be able to repay the regular
l uses credit to make the purchase
repayments owed. If the buyer does not, his or her
l agrees to pay a deposit followed by regular
reputation and credit rating will be harmed.
repayment instalments
l makes repayments including a fixed rate of Store cards
interest
l can end the agreement by paying the Many stores issue loyalty cards that customers
outstanding balance. can use to save up ‘points’, which they can redeem
against future purchases. Whilst the consumer
However, there are important legal differences benefits from ‘getting something for nothing’, the
between extended credit and HP. Under an extended retailer must meet the cost when the ‘points’ are
credit agreement the buyer: retrieved by their customer. However, this can result
l owns the goods as soon as the agreement is made in increased overall sales.
l can sell the goods at any time, but must still pay A store charge card is a credit card issued by a
the full amount outstanding trader that can be used only in that store, or other
l can be sued only for the amount owing if stores in the same chain. It allows the shopper to
instalments are not paid make immediate purchases with payment being
l cannot cancel the agreement and return the made to the trader at a later date. Retailers also
goods to the seller or the finance company. issue store linked cards. These are also credit
cards that bear the name of the chain of stores that
In effect, an extended credit agreement is essentially
issued it. In this case, the card can be used in other
a loan for the purchase of a product or service with
places (in a similar way to using other forms of
the loan being repaid over a fixed period of time –
credit card).
the buyer borrows money to make the purchase and
it is a straightforward loan of finance, quite separate The use of store credit cards encourages consumers
from the goods or service being sold. to buy, especially to ‘impulse’ buy, and therefore
increases sales. Consumers can take advantage
Advantages and disadvantages of of special offers and special discounts when they
an extended credit agreement occur. But, increasing spending today implies
An extended credit agreement is more suitable than reduced spending power in the future.
HP when a service is being purchased, because the
loan is not related to goods; it is a purely financial Credit cards
arrangement of a loan and, therefore, is suitable for Credit cards are issued by banks and credit
services as well as goods. card companies to people who they recognise
as trustworthy. As stated above, large retailers
Extended credit sales are ideal for retailers. They make
sometimes operate their own personal form of
a sale, the lender pays the purchase price to the seller,
credit card. Credit cards enable the holder to buy
and the buyer pays the lender. All the seller must do
goods or services from a trader without using
is go through the contractual obligations carefully
cash or cheques. The cardholder presents the card
with the buyer and help the buyer to complete the
when making purchases, often at the point-of-sale
application forms. However, sellers must wait for the
checkout terminal, and verifies the card with a
payments to come to them from the lender and this
personal identity number (PIN) known only to
will not be as quick as with a cash sale.
the cardholder. The credit card company eventually
Similar to HP, an extended credit agreement means charges the holder with the cost. The cardholder
that buyers are using someone else’s (the lender’s) has the option of making a full immediate payment
money to buy goods and they have the use of the or a delayed payment, for which an interest
products while they repay the debt. But the lenders charge is levied.

28 Photocopying prohibited
 3.3 Suitability of different types of credit

Advantages of credit card/ 3.3 Suitability of different

store card purchasing
l Increased sales for the retailer – encourages
types of credit
impulse buying because consumers can buy now
For the most part, retailers are in a no-lose situation
and pay later. Increased sales enable retailers to
when they provide credit to their customers, especially
buy in larger quantities and, therefore, reduce
when the credit is provided by others. In the case of
their purchasing costs.
the buyer, there are advantages and disadvantages.
l Convenience for the consumer – ease when
shopping, less need for immediate cash and The types of credit available meet different
consumers can purchase bargains on offer even circumstances:
if they don’t need them immediately. l Credit cards: a very flexible facility and are
l Customers create credit history – by
particularly suitable for relatively short-term
shopping with a credit card, and subsequently buying when there is a need to buy now, for
repaying on time, the consumer builds up a good example, weekly household shopping, buying
credit rating. online, buying petrol, paying hotel charges and
other costs while travelling. Credit cards are
Disadvantages of credit card/
best used when the borrower intends to pay back
store card purchasing
the principal sum quickly (keeping the interest
l Retailers incur charges – the charges that
charge as low as possible).
banks and finance companies make reduce the l Hire purchase: not flexible in the manner of
retailer’s profit. credit cards where a variety of goods and services
l Buying on credit can become a habit –
can be purchased with one card. Hire purchase
consumers get used to having what they is related to a specific item and is not suitable for
want, when they want it, without considering multiple items. It is best applied to longer-term
the consequences. borrowing (that is, one to two years). It is suitable
l Comparing product costs can seem less for more substantial items such as furniture,
important – the consumer may be less inclined white goods, televisions and other items that are
to compare prices of other retailers because it is not likely to become obsolete before they are paid
easy to purchase with a credit card. for. In addition, it must not be forgotten that the
finance company could repossess the goods if
Informal credit repayments are not maintained. HP is not suitable
as payment for services.
Informal credit refers to credit arrangements
l Extended credit: also suitable for longer-
that are sometimes provided by small retailers,
term borrowing and for substantial items, but
usually for low-priced goods involving no
there is an important proviso to remember.
documentation or security. Repayment of the
If payments are not maintained the finance
loan is usually on a weekly or monthly basis and
company will not only repossess the item
without the payment of interest. Obviously, such an
purchased, but also any other goods you own
arrangement relies considerably on the experience
in order to recoup fully the loss. For this reason
of the retailer and their knowledge of the reliability
the item purchased by this method should be
of their customer.
substantial and long lasting, for example, a
An obvious advantage of informal credit is that new car or an extensive service such as a new
it gives the consumer access to goods that would fitted kitchen.
otherwise be unavailable to them at that time and the l Moneylenders: extremely expensive and only
retailer gains additional trade. However, the retailer suitable for very short-term borrowing. They
will have reduced their cash flow and they take the should only be used as a ‘temporary stop-gap’
risk that the consumer does not repay the debt. until other guaranteed funds become available.

Photocopying prohibited 29
3 CONSUMER CREDIT

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
credit informal credit instalment credit store card
interest APR deposit credit card
credit rating finance company PIN collateral
formal credit unfair terms deferred payment

Search and find

Copy the questions below and write out their 11 List the advantages and disadvantages of
answers to form your own revision notes. hire purchase.
You can find the answers by referring back to 12 Explain the similarities and the differences
the chapter. between an extended credit agreement and a
1 What is consumer credit? hire purchase agreement.
2 Why does interest increase the overall cost of 13 List the advantages and disadvantages of an
credit purchases? extended credit agreement.
3 How does APR help to identify the true cost 14 ‘There are varied forms of store cards.’ Explain
of borrowing? this statement.
4 What part do credit reference agencies play in 15 Why are credit cards mostly suitable for
the provision of credit? relatively short-term buying?
5 How does a consumer’s credit rating influence 16 How can a consumer use a credit card and
his or her ability to obtain credit? avoid charges?
6 In what way is a credit rating established? 17 List the advantages and disadvantages of
7 Why do you think that the use of consumer credit card purchasing.
credit has increased? 18 Why is it best to only use informal credit for
8 List the advantages and disadvantages of ‘stop-gap’ borrowing?
buying on credit. 19 Take any two forms of informal credit and
9 Summarise the differences between formal show how they demonstrate the need to
credit and informal credit. restrict their use to short-term needs.
10 In what way does the title ‘hire’ reflect the 20 ‘Differing forms of consumer credit are suitable
function that hire purchase carries out? for varying circumstances.’ Explain this statement.

30 Photocopying prohibited
 Things to do

Multiple choice
Choose the one most appropriate answer from 6 Which of the following relates to an extended
the four alternatives. credit agreement?
1 Which one of the following should be used to A if you fail to make payments, the goods
compare the cost of credit? can be taken back
A the flat rate of interest B you have no option but to pay the full price
B the deposit required as agreed
C the yearly rate of total charge C you can sell the goods at any time
D the monthly repayments D you own the goods on the last
repayment
2 Using credit is better than paying by cash:
7 Which of the following is true about
A often
moneylenders’ loans?
B always
A they are suitable for long-term
C rarely borrowing
D sometimes B no collateral is required
3 Which one of the following relates to hire C they are suitable for short-term
purchase? borrowing
A you own the goods on payment of the D they are the cheapest method of credit
last instalment
8 Consumer credit is the:
B you can sell the goods at any time
A interest charged on a loan
C you have no option but to pay the full price
B money lent to shoppers to make
as agreed
purchases
D you own the goods on payment of the
C the interest charged for borrowing
first instalment
D the total amount of consumers’ credit
4 Which of the following describes the functions
of a credit reference agency? 9 Informal credit benefits:
A loans customers money A finance companies
B controls the interest charged for credit B hire purchase companies
C refers borrowers to the best finance C banks
company D retailers and their customers
D formulates consumer’s borrowing records 10 Collateral is:
5 You lose your right to cancel a credit A the borrower’s credit rating
agreement if you: B the amount of interest charged
A signed the forms on trade premises C something of value used to guarantee
B signed the forms in your own home a loan
C took the form home to study it D similar to credit rating
D signed the form on your doorstep

Photocopying prohibited 31
3 CONSUMER CREDIT

Structured questions
Answer as many parts of the questions as you can. 3 Consumer credit has become a prominent
The marks available indicate the amount of detail you feature of modern society.
need to supply/the level of difficulty of each question. a What is consumer credit? [1]
1 Referring to the text and Figure 3.2, answer b Why are there cost implications of
these questions. consumer credit? [2]
a What is a credit rating? [2] c How does formal credit differ from
b What part do credit reference agencies informal credit? [3]
play in determining credit ratings? [3] d Give one example of informal credit
c What sort of information do you think and two examples of formal credit. [3]
would be contained in a credit report that e Why do so many people use consumer
would help determine a credit rating? [3] credit to make purchases when there
d Mariam applied for a loan for a are no cost implications of using cash? [3]
purchase by extended credit but was f ‘The consumer needs to be able to
turned down. Give reasons why this has budget sensibly to wisely use consumer
occurred and describe some alternative credit.’ Discuss this statement. [4]
arrangements Mariam might consider. [6]
g In what ways do both retailers and
e Why is credit rating important to finance companies benefit from the use
consumers, retailers and also finance of credit by consumers? [4]
companies? [6]
4 The following questions test your knowledge
2 Mr and Mrs Patel and their two children are of buying using formal types of consumer
going on a ‘once in a lifetime’ holiday to credit.
London. They will go in 10 weeks’ time. Their
flights and hotel were booked through a travel a What is meant by the word ‘hire’ in
agent. The travel agent even arranged their relationship to hire purchase? [2]
holiday accommodation. They have bought some b Under what circumstances might it be
holiday currency in a money exchange bureau. more appropriate for a consumer to buy
Mrs Patel visited a moneylender to obtain the using an extended credit agreement
cash for the currency. But they are going to have rather than by hire purchase? [2]
to obtain more currency while they are in London. c Tariq wants to compare the cost of
Today, all the family members are going to borrowing by hire purchase with other
a superstore to buy suitcases and holiday types of consumer credit. Identify three
clothes. They are financing parts of their sources of information that will help him
holiday with an extended credit agreement to make this comparison. [3]
and their credit card for other parts. d With some forms of consumer credit it
a What are the implications of the loan is necessary to pay a deposit. Explain
Mrs Patel has obtained from a what a deposit is and identify two forms
moneylender? [2] of buying on credit that require the
b Why is the use of a credit card safe and buyer to pay a deposit. [4]
appropriate for some aspects of this e A retailer is offering a one-day sale of
situation? [3] bicycles. Ali wants to take advantage of
c Why was it appropriate to use an the sale but does not have the cash, nor
extended credit agreement rather than does he have the funds in his bank
hire purchase in making these holiday account. Explain two ways he could take
arrangements? [3] advantage of the offer. [4]

d What are the overall implications for f Noor wishes to buy a new washing
Mr and Mrs Patel of using consumer machine on hire purchase and she is
credit for their holiday arrangements? [4] filling in the application form. Where
her signature is required she reads this
e For which elements of the holiday would wording: ‘Sign only if you agree to be
it be most appropriate to use an bound by the terms of this agreement.’
extended credit agreement and which What are the full implications of signing
parts are suitable for using a credit the form? [5]
card? Give reasons for your choices. [8]

32 Photocopying prohibited
4 WHOLESALE TRADE
l The value of the product – might dictate that
BY THE END OF THIS CHAPTER YOU distribution will be better sold direct to the
WILL BE FAMILIAR WITH: final user.
l the role of the wholesaler in the chain l Geographical location – where the intended
of distribution customers are located could influence the
l functions and services wholesalers distribution route. For example, the distribution
l intermediaries. of a product to another country would almost
certainly involve a different route to a home
country customer.
l Technological factors – highly specialised or
4.1 Patterns of distribution technological items may require direct contact
between the producer and the customer.
Businesses involved in trading have two important l Scope of the retailer – where the orders of
concerns – where to sell their products and how to the retailer are sufficiently large the need for a
get them to their customers. wholesaler becomes unnecessary and delivery
The term channel of distribution refers to the route direct to the retailer more practicable.
by which products are distributed from the producer From this list, you will have recognised that,
(or manufacturer) to the consumer. Figure 4.1 shows although not always used as part of the chain of
examples of channels of distribution, but bear in distribution, the wholesaler is an important factor.
mind there are other variations. We will now give more attention to the wholesaler.

1 Producer Wholesaler Retailer Consumer 4.2 The role of the wholesaler

2 Producer Wholesaler Consumer In the chain of distribution the wholesaler lies
between producers and retailers. The wholesaler
3 Producer Retailer Consumer buys in bulk from producers and sells in smaller
quantities to the retailer, who in turn sells in even
4 Producer Consumer smaller quantities to the consumer. In other words,
wholesalers bridge the gap between producers and
Figure 4.1 The main distribution channels
retailers and play a part in breaking down the mass
From the examples in Figure 4.1 it can be seen that quantities created by producers (mass production)
the producer (or manufacturer) might use a number into more manageable quantities for those further
of intermediaries to distribute their goods so that down the chain.
they eventually reach the consumer. General wholesalers are the most familiar and
There are many factors that will influence method traditional of wholesalers. They operate within
of distribution chosen and some of these are as very large warehouses and buy from producers and
follows: manufacturers in large quantities, selling to retailers in
smaller quantities. Similar to retailers, wholesalers may
l Who the product is for – is the product to be
specialise in a particular class of goods, for example,
sold to other producers, or to consumers?
groceries, fresh farm products, electrical goods.
l The type of product – a perishable product
could be required to bypass the wholesaler to get Cash and carry wholesalers are similar to general
to the retailer quicker. wholesalers but are self-service and require

Photocopying prohibited 33
4 WHOLESALE TRADE

immediate payment for purchases. Transport is not distribution. They have to focus more carefully
usually provided for the retailer, who has to collect on those elements of the market they still retain,
the goods from the wholesaler’s premises. for example, the smaller retailers and a more
limited range of products. They need to exploit
The wholesaler’s premises usually comprise a large
the communication networks that have made them
warehouse. The warehouse is divided into sections
dealing with specific commodities rather like a vulnerable by communicating more effectively with
department store or a very large supermarket. Some their retailer customers.
warehouses require special provision, for example, In order to survive, wholesalers will have to
perishable or hazardous goods, or high-value encourage smaller retailers to combine their
goods that need special security, or goods awaiting purchases from the wholesaler into larger quantities.
customs clearance. Alternatively, wholesalers themselves will need to
Retailers may visit a wholesaler’s warehouse to organise such cooperation so that larger orders lead
choose their purchases in a similar way to consumers to economies of scale and reduced purchasing costs.
shopping in a supermarket. Retailers may also place
their orders with the wholesaler by telephone or 4.3 Functions and
online, having selected from a catalogue or online
listing. Alternatively, the wholesaler’s representative services of wholesalers
or agent will visit the retailer periodically and collect
orders which will be delivered to the retailer by the Wholesalers aim to meet the needs of both
wholesaler’s own vehicles. producers and retailers in the chain of production.

Elimination or survival The functions of wholesalers

of the wholesaler Breaking of bulk
Increasingly, wholesalers are being bypassed by The wholesaler is in contact with many producers
larger retailers who can buy direct from producers. and can offer their retailer customers a wide
Some of these large retailers even establish variety of products from competing producers.
their own form of wholesale warehouse, thus The wholesaler uses the collective orders of
jeopardising the future existence of the independent many retailers to create large bulk orders that are
wholesaler. beneficial for the producer. Alternatively, we could
also say that the wholesaler buys in bulk from the
Like retailers, wholesalers have also been affected
producer and sells to the retailer in smaller and
by the new and highly successful development
more convenient quantities (see Figure 4.2).
of e-commerce and e-tailing, where both the
conventional retailer and the wholesaler are being In summary, the wholesaler helps to make large-
bypassed. Independent wholesalers are being scale production possible by gathering together the
forced to reappraise their position in the chain of many small orders of retailers.

PRODUCER WHOLESALER RETAILER

Sells at factor Sells at Sells at retail

price (say $2 wholesale price price (say $4 CONSUMER
each) (say $3 each) each)

MASS QUANTITY BULK SINGLE

QUANTITY ITEMS
Figure 4.2 Wholesalers make mass production possible

34 Photocopying prohibited
 4.3 Functions and services of wholesalers

Taking on risk Offering credit

The wholesaler not only consolidates the Wholesalers supply goods to retailers, often allowing
many small orders of retailers, but also places payment to be made at a later date. Generally, this is
orders for amounts that the retailers predict over a period of four weeks, but the wholesaler may
will be demanded at some future time. The give further extended credit, even enabling sale before
wholesaler gathers information from the retailers payment, and possibly on a sale or return basis. This
and makes its own predictions, thus accepting some credit means that smaller retailers can offer their
aspect of risk. customers a larger and wider range of products.
Wholesalers will also try to influence future
demand by retailers through trade advertising and The services of wholesalers
promoting products. But the wholesaler still has to
Reducing transport costs
take calculated risks, and if they are not accurate in
their predictions they stand to lose money. Wholesalers can help to reduce transport costs
(and pollution). For example, a farmer delivers his
Warehousing products direct to six retailers which involves six
Wholesalers provide large warehouses for the delivery journeys. If we introduce a wholesaler
storage of goods. This relieves producers of some of as an intermediary between the producer and
the need to store products and similarly reduces the the wholesaler, the farmer (the producer) makes
storage facilities needed by retailers. only one journey to the wholesaler, thus reducing
transport costs and allowing the farmer to get on
In effect, a wholesaler’s warehouse bridges the with producing crops. See Figure 4.3.
gap between the time when goods are completed
by the producer and the time they are demanded Producer = farmer
by retailers and eventually bought by consumers.
This allows producers to produce at times that are
convenient and beneficial to them and also enables
consumers to buy when it suits them.
Products have many different storage needs.
Some products have to be stored at a particular
temperature while others may be particularly Retailers
fragile or hazardous. Such products need special
precautions. It is part of the function of the
wholesaler to provide this facility.
Some wholesalers operate bonded warehouses.
Producer = farmer
These are special secure warehouses where
imported goods are stored awaiting payment of
duty (tax) to the customs authorities. Examples are
alcohol and tobacco – they would be securely stored
until the due tax has been paid.
The owners of bonded warehouses are legally bound
not to release bonded goods until the tax has been
Wholesaler
paid. While in the warehouse, the goods may be
processed in some way, that is, repackaged and
labelled, and then released when the duty has been
paid, or they may be re-exported.
Warehousing is explored in greater detail Figure 4.3 Saving transportation costs and
in Chapter 10. reducing pollution

Photocopying prohibited 35
4 WHOLESALE TRADE

The wholesaler will still deliver to retailers but, l Brokers: arrange deals for buyers and sellers.
by making smaller journeys and incorporating the For example, importers might employ brokers
products of many producers and manufacturers, to sell commodities for them. It is important to
overall costs will be reduced dramatically. This will realise that brokers do not own the goods they
be very apparent if you take the scenario shown in are dealing in and they are not responsible for
Figure 4.3 and then multiply it by many producers their delivery. They cannot arrange contracts
and manufacturers and a multitude of retailers. in their own names but carry out transactions
in the name of their principals. The broker’s
Providing advice reward is commission (also referred to as
Wholesalers give advice to both the producer brokerage).
and the retailer. They will advise the producers l Factors: responsible for the selling but not the
of current and predicted consumer demand buying of goods for their principals. Unlike
(information gleaned from their retail customers). brokers, factors actually possess the goods
They will also make retailers aware of what in which they deal and can make contracts
products are available from producers, and any in their own names. A factor’s reward is
special offers. Throughout this process, the also commission.
wholesaler helps to identify for the benefit of both l Del credere agents: take on the additional
the producer and the retailer: role of guaranteeing that customers are solvent
and that they will pay for goods bought. If the
l latest trends in fashion and demand
customer does not pay, then the Del credere
l bargains to be obtained
agent is liable for the debt. Such an agent is paid
l best value for money.
an additional commission as a reward for the
Branding, grading and packing extra risk undertaken.
l Export merchants: wholesale companies that
Wholesalers sometimes give products their own
buy, on their own account, unpackaged products
brand name or that of their retailer customers. In this
from producers for resale overseas under their
way, retailers can display products that appear to have
own brand name. Export merchants purchase
been produced especially for them. Similarly, the
goods directly from producers, then brand and
wholesaler may repack products into, for example,
package the goods using their own specifications
smaller lots (such as cheese) and price the items, thus
and preferences. Then, under their own names,
benefiting both the producer and the retailer. They
they sell these products and assume all risks.
will also grade bulk produce such as fruit or eggs
Because of the high level of risk involved,
into appropriate categories of quality or size.
export merchants primarily deal in staple
commodities – essential major items of trade
4.4 Intermediaries that are in steady demand.
l Forwarding agents: pack goods securely, usually
An intermediary acts as a ‘go-between’ between for export, and then arrange all the formalities
parties involved in transactions. Thus a wholesaler of transport, for example, booking shipping
is an intermediary and so are agents. An agent is space and raising necessary transportation
someone who acts on behalf of others when business documentation, customs declarations and so on.
is conducted, particularly where specialist knowledge These type of agents earn fees.
is required. In trade, there are specialist agents:

36 Photocopying prohibited
 Things to do

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you
for your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
wholesaler bonded warehouse broker
warehouse bonded goods commission
commodities sale or return brokerage
mass production intermediary distribution
factors agent

Search and find

Copy the questions below and write out their 6 Why are wholesalers in danger of
answers to form your own revision notes. being eliminated?
You can find the answers by referring back to 7 Describe three functions of wholesalers.
the chapter.
8 What is special about a bonded warehouse?
1 Why does the channel of distribution vary?
9 How do wholesalers reduce
2 Give examples of different distribution routes transportation costs?
and explain why they exist.
10 What kinds of advice do wholesalers provide?
3 In what way does the wholesaler bridge the
11 How do brokers earn brokerage?
gap between the producer and the retailer?
12 How does a factor differ from a broker?
4 Explain the difference between general
wholesalers and cash and carry wholesalers. 13 Del credere agents have a special role. What is
that role?
5 How is a wholesale warehouse organised?
14 Describe the work of export merchants.

Photocopying prohibited 37
4 WHOLESALE TRADE

Multiple choice
Choose the one most appropriate answer from 6 A retailer buys goods valued at $200 from
the four alternatives. a wholesaler and is entitled to a 25 per cent
1 Which of the following statements is untrue in trade discount. What will be the discount?
relation to wholesalers? A $50 C $20
A they allow trade credit B $150 D $25
B they offer retailers a wide choice of products 7 Which of the following statements is untrue?
C they help mass production to take place A wholesalers are the last stage in the chain
D they bypass the producer of distribution
2 Which of the following is a service the B wholesalers are part of the chain of
wholesaler gives to the retailer? distribution
A sells to consumers C producers sometimes bypass the wholesaler
B buys from retailers D wholesalers are part of tertiary production
C sells in convenient quantities 8 Which of the following is a service the
wholesaler gives to the retailer?
D produces goods the retailer needs
A sells to consumers
3 The practice of giving products a particular
identifying name is known as: B buys from retailers
A advertising C branding C produces goods retailers need
B marketing D standardising D sells in convenient quantities
4 Chain stores are often able to bypass the 9 Brokers are agents who:
wholesaler because: A guarantee buyers are solvent
A of their practice of bulk buying B arrange deals for buyers and sellers
B producers only sell to chain stores C deal primarily in staple commodities
C they own the factories D ensure transport arrangements are
D chain stores do not trade with wholesalers organised
5 In which of the following types of production 10 Export agents are engaged in:
would a wholesaler be engaged? A selling to other countries
A primary C secondary B managing bonded warehouses
B tertiary D service C giving advice to consumers
D buying from other countries

38 Photocopying prohibited
 Things to do

Structured questions
Answer as many parts of the questions as you can. The marks available indicate the amount of detail you
need to supply/the level of difficulty of each question.
Figure 4.4 The chain of distribution

1 Look at Figure 4.4 illustrating the chain of distribution and answer these questions.
a What is the chain of distribution? [2]
b Name the four elements of the chain depicted in the illustration. [2]
c Why is every element of the chain dependent on another? [3]
d What do you see as the main functions of a wholesaler? [3]
e Who are the wholesalers’ customers? Why has the number of these customers declined
over relatively recent years? [4]
f What are cash and carry wholesalers? How do both the retailer and the wholesaler benefit
from this kind of trading? [6]
2 The following questions are also related to Figure 4.4.
a What is the position of the consumer in this illustration? [1]
b What is the position of the wholesaler and the retailer in relation to this illustration? Why are
they sometimes referred to as ‘middlemen’? [2]
c Why are there fewer wholesalers than retailers? [2]
d Explain each of the terms: producer, wholesaler and retailer. [3]
e Some people argue that goods are cheaper when the wholesaler is bypassed by retailers.
To what extent do you agree with this view? [6]
f In what ways does wholesale trade differ from retail trade in terms of:
i suppliers and customers;
ii time of purchasing and size of purchases;
iii methods of selling? [6]

Photocopying prohibited 39
4 WHOLESALE TRADE

3 Sellright is a cash and carry wholesaler. Its main selling lines are canned goods and related
kitchen food products. Recently, Sellright has experienced a drop off in demand from its customers.
It has decided to introduce a credit provision whereby it will allow its customers 28 days’ credit on
orders in excess of $500, for which it will charge a nominal two per cent interest for the 28 days.
a Who are the customers of Sellright? [1]
b Define the terms credit and interest in relation to the way they are used here. [2]
c State two possible reasons why Sellright may have taken the decision to make this change in
its trading procedures. [2]
d Give an example of how the change Sellright has implemented might benefit some customers
but not others. [2]
e A retailer, Buywise, makes a purchase to the value of $1,000 from Sellright. It has decided to
take advantage of the credit facility offered by Sellright. How much will Buywise pay in total
for this single purchase and, assuming its purchase is the same each month, what will be its
total inclusive bill for six months? How much of this final total would consist of interest paid
to Sellright? [3]
f Buywise has introduced its new credit initiative for a six-month period. After this period
Buywise will review the arrangement and decide whether to adjust it or abandon it. What
considerations will it take into account in making its decision? [4]
g ‘Both Sellright and Buywise face a similar problem – a shift in the nature of demand from
consumers. This may result in the ultimate demise of the wholesaler.’ Discuss this statement
and include actions that wholesalers in particular will need to take if they are to survive. [6]

40 Photocopying prohibited
5 DOCUMENTS OF TRADE
a letter or email, or a standard printed form with
BY THE END OF THIS CHAPTER YOU blanks left for ease of completion (often using a
WILL BE FAMILIAR WITH: computer). Apart from prices and specifications, a
l documents of home trade quotation will give details of discounts offered.
l terms of payment. Where it is not possible to quote a precise price the
seller will give an estimate, which is an expected
cost. Builders, for example, will often give an
5.1 Documents of home trade estimate for a job as they might not know the true
cost until they begin the work.
Home trade refers to trading that takes place within
a country. Foreign trade is trading that takes
Catalogue/price list
place outside the home country, that is, importing Sometimes, instead of a specific quotation, a
and exporting. Foreign trade and the documents catalogue or price list will be sent out in response
associated with it are addressed in Chapter 6. to an enquiry. A catalogue will be sufficient if it
contains all the information the prospective buyers
The complete process of exchange of goods and need to make their decision: photos or diagrams
services for payment is called a transaction. A of products, specifications, prices, any delivery
transaction may be for cash or credit. By cash we charges and estimated delivery periods. A price list
do not mean hard cash (although this is acceptable) contains all the same data as a catalogue but without
but payment with immediate effect, which can be by illustrations, so it is briefer. The use of a catalogue
cheque or electronic bank transfer. All transactions or price list is only acceptable if the prospective
require documentation to be raised at various stages buyers’ requirements are not specific. If they need
from the initial enquiry through to final payment; more specific supplies, a more detailed or ‘tailor
this involves several documents, each of which will made’ quotation will be provided. An example of a
be raised at a particular stage in the transaction. price list is shown in Figure 5.1.
These documents, and the order in which they occur
in a transaction, are outlined below. Carriage terms
A quotation will also include the carriage terms that
Enquiry apply, for example:
The enquiry is usually the first stage in a l carriage paid: the price quoted includes
transaction. Prospective purchasers send a letter or transportation (delivery) costs
standard form, to the seller, indicating what they l carriage forward: the price does not include
are interested in buying. They may send this to a transport costs (the carriage must be paid by the
single supplier (seller), or to many of them, inviting buyer on delivery)
a quotation. The enquiry will be quite specific about l ex-works: price does not include delivery (price
what is required, for example, number of goods, at factory).
specifications, colours, grades and so on, and also
packaging and delivery requirements. Tenders
Sometimes, instead of approaching sellers for a
Quotation quotation, buyers invite tenders to supply goods
or services. They may invite tenders from any
Quotations are sent to the potential purchaser potential suppliers by advertising what is required
by the firm(s) interested in supplying the goods and inviting anyone to quote or bid for the work in
required. The quotation may take several forms: question. It is usual to supply special envelopes and

Photocopying prohibited 41
5 DOCUMENTS OF TRADE

CANDYSTORE (Pvt) Ltd

CONFECTIONERY MANUFACTURING
19-B, Rahat Park, Karachi, Sindh, Pakistan
Tel: 92-333-2793844 Email: [email protected]

PRICE LIST

Cat. No. Description Quantity Price $

AB343 Almond Bars 48 singles 8.64

BB349 Banana Boats 100 singles 18.00

CC362 Choco Chips 50 singles 12.00

CA364 Coated Almonds 40 packs 12.00

CC367 Coconut Cakes 100 singles 15.00

JJ377 Jamboree Jellies 60 packs 15.00

BG385 Bubble Gums 100 singles 5.00

SS396 Sherbert Sundaes 48 singles 8.64

TT398 Cherry Toffees 40 packs 9.20

All prices exclude VAT

TRADE DISCOUNT: 20% on orders $50 or over.
DELIVERY: immediate availability.
TERMS: 5% 7 days, 2% 28 days, otherwise net.
CARRIAGE: carriage paid on orders $50 and over.

1 January 20_ _ (this cancels all previous price lists)

Figure 5.1 Example of a price list

to specify a latest submission date. All envelopes l when the delivery is require by
are opened at the same time and the various l any special packing or labelling requirements
tenders are compared before a decision is made. l where the consignment should be delivered to.
It is not always the case that the cheapest bid is
An official order (sometimes called a purchase
accepted. Other factors may make a higher bid more
order) is usually signed by someone with authority
acceptable. As an alternative to ‘open’ invitations to
to make such a commitment on behalf of the
tender, the buyer may invite tenders from a limited
buyer. An example of an official order is shown in
number of chosen suppliers. Whatever the case,
Figure 5.2.
tendering to supply is a very competitive method
of quotation.
Acknowledgement of order
Order When the supplier receives the official order
they will check carefully to ensure that all the
If a potential buyer is happy with a quotation the
information is acceptable and that the required
buyer will send an official order stating:
delivery time can be met, and then confirm this to
l what the buyer wishes to order the buyer either by post or email. Arrangements will
l how much the buyer expects to pay now be made to compile the items required by the

42 Photocopying prohibited
 5.1 Documents of home trade

ORDER JW 017986
TUCK SHOPS (Pvt) Ltd
Head office: Naurus Chorangi, Karachi, Sindh, Pakistan
Tel: 92-21-9468981 Email: [email protected]

Candystore (Pvt) Ltd

19-B, Rahat Park
Karachi
Sindh 10 February 20_ _

QUANTITY DESCRIPTION PRICE $

200 Banana Boats BB349 (singles) 18.00 per 100

100 Choco Chips CC362 (singles) 12.00 per 50

120 Jamboree Jellies JJ377 (packs) 15.00 per 60

200 Bubble Gums BG385 (singles) 5.00 per 100

Delivery to: Miss Rose Patel

The Gumshop
Bilal Plaza
Karachi
Sindh

SHiraj
S. HIRAJ
(Chief Buyer)

E&OE
Figure 5.2 An official order is usually signed by someone in authority

customer and get them ready for despatch by the carrier a copy of the delivery note (or consignment
seller’s own transport or that of another firm. note) is presented to the consignee to sign. This is to
confirm that the goods have been delivered.
Advice note and delivery note
An advice note is sent from the seller to the buyer
Invoice
by post or email when the goods are despatched. The invoice represents the charge made by a seller
It tells the purchaser to expect the goods’ arrival, for goods sold to a buyer. As goods are despatched
especially if the journey takes several days or longer. an invoice is sent from the seller to the buyer. The
The delivery note (often in duplicate) accompanies invoice states:
the goods when they are sent in the seller’s own l details of the goods supplied
vehicles. The purchaser retains one copy and signs l how they were carried to the buyer
the other copy (to acknowledge receipt of goods) and l how much each item costs (unit price)
gives it to the transport driver to return to the seller. l how many of each item were supplied
If the seller uses another agency’s transport (that is, l total cost of the transaction consignment.
a carrier other than its own vehicles), the goods are
In a cash transaction the invoice is often given to
accompanied by a consignment note, which serves a
the customer in return for immediate payment. In
similar purpose to the delivery note and contains the
the case of a ‘hard cash’ payment it may be that no
same information. When goods are delivered by the
invoice is issued at all and just a receipt is given in

Photocopying prohibited 43
5 DOCUMENTS OF TRADE

acknowledgement of payment received. Otherwise, month when the seller sends a statement of account
the invoice informs the buyer how much is owed to the (discussed later). This will summarise all the
seller, but it is not necessarily a demand for payment. transactions that have taken place. An example of
an invoice is shown in Figure 5.3. The labels clearly
Although the buyer may pay the invoice at once,
identify key aspects of invoices.
the buyer will sometimes wait until the end of the

INVOICE INVOICE NO. 10876 Serial number of seller’s invoice

CANDYSTORE (Pvt) Ltd Name and address of seller

CONFECTIONERY MANUFACTURING
19-B, Rahat Park, Karachi, Sindh, Pakistan
Tel: 92-333-2793844 Email: [email protected]

Tuck Shops (Pvt) Ltd Terms: 5% 7 days Cash discounts offered for
Naurus Chorangi 2% 28 days prompt payment
Karachi Otherwise net Name and address of buyer
Sindh Date: 15 February 20_ _ Date of invoice

Despatched 2 Cartons – CBS Transport 15 February 20_ _ Method of despatch

Customer’s Order No. JW 017986 dated 10 February 20_ _ Details of buyer’s order

Quantity Description Price $ Amount $

Details of goods ordered

200 BB349 Banana Boats (per 100) 18.00 36.00
100 CC362 Choco Chips (per 50) 12.00 24.00
120 JJ377 Jamboree Jellies (per 60) 15.00 30.00
200 BG385 Bubble Gums (per 100) 5.00 10.00

Gross invoice 100.00 Before deduction of discounts

Less 20% trade discount 20.00 Discounts given to other traders

Net invoice 80.00 After deduction of discount

Plus 15% VAT 11.40 VAT added to net invoice amount

less the 5% cash discount offered
Total $91.40 Amount to be paid by buyer

Carriage paid Transport costs paid by seller

Delivery to: Miss Rose Patel

The Gumshop Delivery address can be different
Bilal Plaza from invoice address

Karachi
Sindh

E&OE – Errors & Omissions

E&OE Excepted – seller reserves the
right to correct any mistakes at
Figure 5.3 An invoice a later date

44 Photocopying prohibited
 5.1 Documents of home trade

Credit notes and debit notes l an invoicing error that has resulted in the
customer being overcharged (for example, the
Sometimes financial records need to be amended or wrong price applied)
corrected owing to changes in invoice values. The l some of the delivered goods have been returned
documents used for this process are the credit note as faulty
and the debit note. l goods have been returned as unsuitable for
Credit notes are issued when too much has been purpose – for example, damaged goods
paid (an overcharge) on an account. Credit notes l the goods were sold on a sale or return basis
are often printed (and sometimes also keyed) in red l too few goods were delivered
to distinguish them from an invoice or debit note l a refund is given on returned packaging – for
(which are printed in black). The effect of a credit example, pallets.
note is to reduce the charge made. Examples of An example of a credit note is shown in Figure 5.4.
situations when a credit note might be issued include:

CREDIT NOTE CN 566

CANDYSTORE (Pvt) Ltd
CONFECTIONERY MANUFACTURING
19-B, Rahat Park, Karachi, Sindh, Pakistan

Tel: 92-333-2793844 Email: [email protected]

Tuck Shops (Pvt) Ltd Date: 12 February 20_ _

Naurus Chorangi Credit against
Karachi Order no. 017979 dated 3 February
Sindh Invoice no. 10862 dated 9 February

Quantity Price $ Amount $

10 by allowance against packing cases returned 2.42 24.20

E&OE

Figure 5.4 Example of a credit note

Photocopying prohibited 45
5 DOCUMENTS OF TRADE

Debit notes are used when the seller has statement and also includes any amount outstanding
undercharged the buyer in some way. This is from the previous statement of account.
usually a mistake on the part of the seller. The debit
An example of a statement of account is shown in
note increases a charge already made and, therefore,
Figure 5.5. The marginal notes explain how the
it is sometimes referred to as a supplementary
cumulative balance is arrived at.
invoice. A debit note will be issued if:
l an invoicing error has resulted in the buyer Receipt
being undercharged
l too many goods were delivered and the buyer When payments are received from the buyer, the
has agreed to keep them. seller will issue a receipt. It is basically a written
acknowledgment that the payment has been received.
Statement of account In summary, trading documents pass between the
seller and the buyer in a particular order, with the
At monthly intervals the seller will send out to its
majority of the flow from the seller to the buyer.
customers a statement of account, which is the
This sequence is illustrated in Figure 5.6.
demand for payment. The statement of account
is basically a reproduction of that customer’s You may have noticed E&OE displayed in the
outstanding account (what is owed) in the trading documents shown in some of the Figures in
company’s accounts books. It shows all purchases this chapter – often in the lower left-hand corner of
and payments made by the customer since the the document. These letters stand for Errors and
last statement was issued, and it includes any Omissions Excepted. Traders include this on their
adjustments for discounts and returns. It is a list of documents so that if they have made an error, they
all transactions with that customer since the last reserve the right to correct it at some later date. For

STATEMENT OF ACCOUNT
CANDYSTORE (Pvt) Ltd
CONFECTIONERY MANUFACTURING
19-B, Rahat Park, Karachi, Sindh, Pakistan
Tel: 92-333-2793844 Email: [email protected]

Tuck Shops (Pvt) Ltd Terms: 5% 7 days

Naurus Chorangi 2% 28 days
Karachi Otherwise net
Sindh Date: 1 March 20_ _

Date Details Debits Credits Amount $

1 February To account rendered January 460.27 Amount outstanding from

previous statement
9 February To invoice 10862 103.80 564.07
All amounts that increase the
12 February By credit note 566 24.20 539.87 buyer’s debt are entered in
the debits column and added
15 February To invoice 10876 91.40 631.27 to the cumulative total in the
amount column. All amounts
23 February To debit note 195 11.60 642.87
that reduce the customer’s debt
are listed in the credits column
28 February To invoice 10933 84.32 727.19 and taken away from the
cumulative total
28 February By cheque payment 500.00 227.19

Amount outstanding $227.19 Amount outstanding to be

carried forward to next account

E&OE

Figure 5.5 Statement of account

46 Photocopying prohibited
 5.2 Terms of payment

2 QUOTATION

3 ORDER
1 ENQUIRY TRADING DOCUMENTS
pass between the
BUYER and the SELLER
Enquiry
Quotation 4 ACKNOWLEDGEMENT
9 PAYMENT Order
Acknowledgement
Advice note
Delivery note
Invoice 5 ADVICE NOTE
8 STATEMENT
Statement
of account
Payment

7 INVOICE 6 DELIVERY NOTE

Figure 5.6 Trading documents pass between the buyer and the seller in a
logical sequence

example, if they have forgotten to include an item a manufacturer to a wholesaler, or by a wholesaler

that has been purchased, they will still be able to to a retailer. The trade discount influences the
charge for it. reseller’s profit margin and is often linked to the
quantity of items purchased.
5.2 Terms of payment Example:
Trade discount = list price × discount rate
Terms of payment are the conditions agreed
between a seller and a buyer for goods sold or $499 × 30% = $149.70
services rendered. They specify the period the Net price would be $499 – $149.70 = $349.30
buyer has to pay off the amount due. The terms
may demand cash in advance, cash on delivery, or a A quantity discount is an incentive offered by a seller
deferred payment (for example, 30 days or more) and to a buyer for purchasing or ordering a greater than
other similar provisions such as those that follow. usual quantity of goods or materials to be supplied at
one time, or within a specified period of time.
A cash discount is an incentive offered by a seller
of goods or a provider of services to customers to Mark-up – traders need to make a profit to
motivate them to pay within a specified period of make their trading worthwhile. They do this by
time. For example, if the cash discount is 10% for buying goods at one price and then selling them
immediate payment and the invoice amount was at a higher price. This can be demonstrated in the
$100, immediate payment would attract a discount following way:
of $10 resulting a in a required immediate payment Cost Price (CP) + Profit (P) = Selling Price (SP)
of $90.
or it can be shown as
A trade discount is an amount or rate (for example,
SP – CP = P
a percentage) by which the catalogue or list price
of an item is reduced when sold to another trader The difference between cost price (CP) and the
for resale or to encourage a bulk purchase to retain selling price (SP) is called the mark-up (MU), often
loyal customers. For example, a discount offered by shown as in the following example:

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5 DOCUMENTS OF TRADE

CP MU SP CP MU SP MU as % of SP
$50 $50 $100 $50 $50 $100 50%
The mark-up is usually computed as a percentage of This method misrepresents the true percentage of
the cost price: the profit made because it was actually double the
cost price (100 per cent).
CP MU SP MU as % of CP
Of course, a firm may not necessarily stick rigidly
$50 $50 $100 100%
to one mark-up format. For example, it will look at
The example above is the normal method of the prices charged by its competitors and may make
showing the percentage of profit. However, some its price more competitive. This is called market-
businesses may show the mark-up as a percentage of orientated pricing.
the selling price instead of the cost price, as shown
in the example below.

48 Photocopying prohibited
 Things to do

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
home trade quotation tenders overcharge
foreign trade estimate bid undercharge
catalogue carriage paid consignment note E&OE
price list carriage forward cumulative balance receipt

Search and find

Copy the questions below and write out their 11 What is the difference between an advice note
answers to form your own revision notes. You can and a delivery note?
find the answers by referring back to the chapter. 12 Explain four items of information contained in
1 What is a transaction and who are the main an invoice.
parties involved? 13 ‘Credit notes and debit notes correct error.’
2 Why do businesses need trading documents? Explain this statement.
3 In what way do trading documents follow 14 What is the function of a statement of account,
a sequence? and what is the purpose of the debits and
4 What is the purpose of an enquiry? credits columns?
5 Briefly describe the different forms a quotation 15 Explain the purpose of the part shown as
may take. ‘Terms’ on several trading documents.
6 How does an estimate differ from a quotation? 16 What is the significance of the letters E&OE on
a trading document?
7 What is meant by ‘carriage terms’? Give
three examples. 17 Explain the difference between a cash discount
and a trade discount.
8 What are tenders?
18 Give examples that illustrate how a trade
9 What factors would a potential buyer take into
discount and a cash discount is calculated.
account when deciding which quote to accept
from many offers received? 19 What is mark-up and how is it calculated?
10 State four items of information contained within
an official order.

Photocopying prohibited 49
5 DOCUMENTS OF TRADE

Multiple choice
Choose the one most appropriate answer from 6 An advice note is sent to advise the:
the four alternatives. A seller what the buyer requires
1 A statement of account is a: B buyer how much they must pay
A list of the goods sold to a customer C buyer that the goods have been sent
B summary of all transactions over a given D seller that an order has been
period of time short delivered
C letter sent to customers who have not 7 The unit cost of an item a trader is selling is
settled their account £8.00. With a mark-up of 30% the selling price
D refund of an overcharge made will be:
2 If a customer receives a credit note from a A $7.70
supplier, this means: B $8.30
A their account is no longer in credit C $10.40
B they are required to make a further payment D $10.80
C they have been overcharged by the supplier 8 Which of the following would be the most
D they have been undercharged by the supplier likely reason to issue a debit note?
3 Which of the following forms of discount will a A too few goods were delivered
business allow to those who pay promptly? B a refund on returned packaging material
A prompt discount C some of the goods were returned as faulty
B trade discount D the invoice undercharged the buyer
C quantity discount 9 A statement of account records:
D cash discount A a complete period of several transactions
4 A firm sells goods to the value of $180. The B what goods were dispatched
terms of sale are: 5% 7 days; 2% 28 days. The
C the total of what a customer ordered
buyer completes payment in 21 days. The total
amount to be paid by the buyer is: D when goods have been paid for
A $171.60 10 The document that will be sent from the seller
to the buyer to record a complete transaction
B $180.60
would be:
C $183.60
A a transaction report
D $189.60
B an advice note
5 The whole process of supplying goods or
C a statement of account
services is correctly known as a:
D an invoice
A complete delivery
B transaction
C full agreement
D completed order

50 Photocopying prohibited
 Things to do

Structured questions
Answer as many parts of the questions as you h The figure in the amount column is
can. The marks available indicate the amount of sometimes called a cumulative balance.
detail you need to supply/the level of difficulty of Why is it referred to in this way? Use
each question. examples from this statement to
1 Refer to the invoice shown in Figure 5.3 and illustrate your answer. [4]
answer these questions related to it. 3 Look again at Figure 5.6 and answer these
a The invoice has a number in the top questions.
right-hand corner (10876). What is the a What is a transaction and who are the
purpose of including this number? [1] parties involved? [2]
b Explain the reason for the b In what ways can this diagram be said to
difference between the gross and net illustrate a transaction? [2]
invoice amount. [2] c What is the purpose of an enquiry? [2]
c Explain the meaning of the words d How does a tender differ from a
‘carriage paid’ on this invoice. [2] quotation? [3]
d Why are there three different dates e How does an estimate differ from
shown on this invoice? [3] a quotation? [3]
e How does the function of an invoice f Where in the chain shown in the
differ from that of a statement diagram would a debit note and a
of account? [4] credit note be likely to be shown?
f Clearly explain the meaning of: Give two possible reasons why these
terms; 5% 7 days; 2% 28 days; documents might occur in a transaction. [4]
otherwise net. [8] g The last stage in the diagram refers to
2 Refer to the statement of account shown payment. What are the implications of the
in Figure 5.5 and answer the following date when the payment is made from
questions. the point of view of both the seller and
a How frequently are statements of this the buyer? [4]
sort sent out? [1] 4 The following questions are all related to
b What purpose does this document serve? [2] the application of mark-up.
c What is the meaning of the term ‘to a Define ‘mark-up’. [2]
account rendered’? [2] b i If the cost of an item is $5 and the
d What will be the amount shown as profit made is $2.50, what is the
‘to account rendered’ for the month selling price?
following this statement? [2] ii If a product is sold for $100, marked
e Why does this statement show three up from $75 cost, what profit has
months: January, February and March? [3] been made? [2]

f Give three possible reasons for the c What do the letters CP, MU and
entry dated 12 February. [3] SP represent? [3]

g What was the total amount actually d i If the MU on an article is $10, how
spent by the buyer during the much profit has been made on the
period covered by this statement? sale of 10 articles?
Give reasons for the figure you ii If CP = $20 and SP = $30, what is the
have chosen from the many totals profit made on the sale of 12 items?
displayed. [3] iii If SP = $100 of an item with a CP of $70,
what profit will be made on five items? [3]

Photocopying prohibited 51
5 DOCUMENTS OF TRADE

e Imagine a situation where a business 5 a State two reasons why traders need
chooses to give mark-up as a percentage trading documents. [2]
of the selling price instead of the cost b Briefly explain the difference in the
price. Complete the data and answer the functions of a delivery note and a
question that follows the example. consignment note. [2]
CP = $40 MU = ? SP = $50 c Give two reasons why a seller might
MU on CP = ?% MU% on SP = ?% issue a debit note and say what is the
effect of this document. [3]
Use the data you have formulated
to explain how this illustrates that d What is a tender and what advantage
this method misrepresents the true does it have over a normal quotation? [4]
percentage of profit made. [4] e ‘An invoice is not necessarily a demand
f Copy and complete the columns for payment.’ Explain this statement
below, calculating the mark-up as a including mention of what is a demand
percentage of the cost price in each case. for payment. [4]

CP MU SP MU % of CP
f What is the function of a credit note?
Give four reasons why a credit note
$100 $50 $150 ?% might be issued. [5]
$ 10 $10 $ 20 ?%
$100 $? $120 ?%
$ ? $5 $ 15 ?%
$ 20 $? $ 30 ?%
$ 7.50 $? $ 15 ?% [6]

52 Photocopying prohibited
6 INTERNATIONAL TRADE
produced goods to other countries and importing
BY THE END OF THIS CHAPTER YOU goods from other countries and reselling them at
WILL BE FAMILIAR WITH: home. The overseas market is also important to
l the importance of international trade individuals and countries because it is by selling
l balance of trade and balance of payments overseas that the home country can earn money to
l customs authorities buy things from other countries. In this way the
l free trade, trading blocs and protectionism living standards of all the countries involved can
l difficulties faced by exporters and importers. be improved. See Figure 6.1.
Resources are unevenly distributed across the
surface of the Earth, so no country has all the
6.1 The importance of resources it needs. Similarly, skills are also
unevenly distributed. For this reason countries
international trade must trade with others. This results in global
International trade is the change of ownership interdependence (sometimes referred to as
of goods and services across international borders globalisation), because for a country to obtain the
or territories. Because the trading takes place in raw materials, goods and services it needs, it must
the overseas market it is often also called ‘foreign sell to other countries to earn the money to buy
trade’ and because this happens on a worldwide what it lacks.
basis we often refer to a global market. International trade also contributes to geographical
peace – if conflicts occur, access to resources can
Coming in and going out be lost. It also enables countries to specialise and
do ‘what they do best’, rather than waste resources
Foreign trade involves goods and services going out trying to produce something that can be produced
of the country and also coming in. more economically by another country.
l Imports are bought from other countries
(for example, food supplies) leading to an Comparative cost
outflow of funds.
l Exports (such as home-created products, for Countries have different skills, climates and
example, fabric or clothing) are sold to other natural resources, so they must trade to obtain the
countries leading to an inflow of funds. goods they cannot produce themselves, or find
l Visible trade refers to the import and export of it uneconomic to do so. One country may have
goods we can physically see (for example, food, natural deposits of oil or gas, while another may
raw materials, machinery) – sometimes referred have deposits not found in other countries. If each
to collectively as ‘visibles’. country concentrates on producing those products
l Invisible trade is the importing and exporting in which it has an advantage, greater output can be
of services that we cannot physically see in the achieved more economically.
same manner as a commodity (for example, There are two types of advantage in this respect:
tourism, transport, insurance, banking) – absolute and comparative.
sometimes referred to collectively as ‘invisibles’.
Absolute advantage refers to a country’s ability
to produce a certain product more efficiently than
The benefits of international trade another country. Comparative advantage refers to
The overseas market is important to businesses a country’s ability to produce a particular good with
because it provides income from exporting home a lower product cost. We can see this in Figure 6.2.

Photocopying prohibited 53
6 INTERNATIONAL TRADE

Bacon
Milk/Eggs (Denmark)
Wheat/Corn (Great Britain)
(Canada) Oranges
Sugar (Spain)
Rice
(Jamaica) (Pakistan)

Coffee
(Brazil)
Butter
(New Zealand)

Figure 6.1 International trade improves the quality of life

Computers Mobile phones

When exports exceed imports the balance, or trade
gap, is said to be favourable because a surplus has
Country A $600 $80
been created which has resulted in a net flow of
Country B $500 $100 funds into the country.
Country C $300 $150
($ million)
Figure 6.2 Absolute and comparative advantage
Visible exports +48 440
Visible imports
6.2 Balance of trade and –47 322
Balance of trade +1 118 surplus
balance of payments Visible exports +47 322
Visible imports –48 440
Balance of trade
Balance of trade –1 118 deficit
A country should aim to keep its spending within
Figure 6.3 Examples of hypothetical balance of
the limits of its income. It will record the difference
trade figures
in the value between imports and exports. The
difference between the value of goods a country When imports exceed exports, the balance is said to
imports and exports is recorded in the balance be adverse (unfavourable). A deficit (loss) has been
of trade. Because the goods can be seen they are created which has resulted in a net outflow of funds.
collectively called visibles. See Figure 6.3.

54 Photocopying prohibited
 6.3 Customs authorities

($ million) other countries and the total payments received

from them. This balance includes both the visible
Visible exports +48 440
and invisible trade and it shows whether a country
Visible imports –47 322 is making a profit or a loss in its dealings with other
Balance of trade +1 118 surplus countries. See Figure 6.4.
Invisible exports +25 650
Invisible imports –23 120 6.3 Customs authorities
Invisible balance +2 530 surplus The primary function of a customs authority is the
Balance of payments assessment, collection and accounting for import
+3 648
on current account duties (also referred to as customs duties). Customs
duties are a tariff or tax levied on goods entering
($ million) into a country. They can also be applied to items
being exported, although this is quite rare. Customs
Visible exports +47 322
authorities are also responsible for controlling the
Visible imports –48 440 flow of goods such as hazardous items, animals and
Balance of trade –1 118 deficit personal effects. (Note that the movement of people
Invisible exports +25 650 into and out of a country is normally monitored by
Invisible imports –23 120 immigration authorities.)
Invisible balance +2 530 surplus Each country will have its own laws and regulations
Balance of payments for the import and export of goods into and out
+1 412 surplus of the country. The regulations may include a
on current account
restriction on the import or export of certain goods.
The customs authority enforces these laws.
($ million)
Visible exports +48 440
Commercial goods that have not yet been cleared
through customs are held in a customs area,
Visible imports –47 322
often called a bonded store. This is referred to as
Balance of trade +1 118 surplus entrepot trade. (See Chapter 10.)
Invisible exports +23 120
The work of the customs authorities can both
Invisible imports –25 650 help and hinder trade. Obviously the faster the
Invisible balance –2 530 deficit authority processes paperwork and movement
Balance of payments of goods, the better it is for traders. But some of
–1 412 deficit
on current account their responsibilities deliberately restrict trade. For
example, where the movement of certain goods is
Figure 6.4 Hypothetical balance of payments figures
restricted through tariffs, quotas, embargos and
import licences, the work of customs authorities can
Balance of payments repress free trade.
In its trade with other nations, a country will buy
and sell a number of services, as well as products. Customs authority statistics
Because these services cannot be ‘seen’ in the
Statistics compiled by customs authorities are
way that goods can be seen they are collectively
obtained from the declarations of goods and other
called invisibles. For example, many countries earn
documentation submitted to the customs authorities
considerable income from tourism; we can see the
by importers. The statistics are based on the
tourists of course, but tourism itself cannot be seen
date of release of the goods by the authority. The
in the same manner as a product.
information collected is published by the authorities
The balance of payments is a statement of the in statistical booklets and brochures and on official
difference in total value of all payments made to websites. Quite apart from providing statistical

Photocopying prohibited 55
6 INTERNATIONAL TRADE

transparency, the statistics give credibility to South African Development

government data related to the overall economic Community (SADC)
status of the country. SADC was initiated in 2000. It is an inter-
governmental organisation that aims to further
6.4 Trading blocs, socio-economic cooperation and integration as well
as political and security cooperation among the 15
protectionism and free trade southern African member states. (It complements
the role of the African Union.)
Trading blocs
In 2008, SADC joined with the Common Market
A trading bloc is a group of countries within a for Eastern and Southern Africa and the East Africa
geographical area that protect themselves from Community to form the Africa Free Trade Zone,
imports from non-members. A trading bloc could be including all members of each of the organisations.
viewed as a form of economic integration. There are The three trading blocs agreed to form a single free
several types of trading bloc: trade zone – the African Free Trade Zone – consisting
of 26 countries. The aim of the African Free Trade
l Preferential trade area (PTA) – when
Zone is to ease access to markets within the zone and
countries within a geographical area agree to
create greater harmony between the member countries.
reduce or eliminate tariff barriers (customs
duties) on selected goods imported from European Union (EU)
member countries.
The EU was initially established as the European
l Free trade areas (FTAs) are created when two
Economic Community (EEC) in 1958 by six
or more countries in a region agree to reduce or
founder member states. In 1993, the current
eliminate barriers to trade on all goods coming
economic and political union was established and
from member countries.
has expanded to include a total of 28 member states.
l Customs unions involve the removal of
tariff barriers between members, plus the The establishment of the EU had the effect of
acceptance of a common external tariff expanding the scope of the EEC, especially in the
against non-members. area of foreign and security policy. The EU has
l A common market occurs when member developed a single market through a standardised
countries trade freely in all economic resources, system of laws that apply in all member states. Within
and not just tangible goods. All barriers to goods the EU, passport controls have been abolished, and
and services, capital and labour are removed. free movement of goods, services, capital and people
In addition, non-tariff barriers are also reduced now exists. A common currency (the euro) has been
and eliminated. established and a common Foreign and Security
Policy is being followed.
Most trading blocs include more than one of the
above principles. Advantages for members of trading blocs
l Free trade exists within the bloc.
Examples of trade blocs l Market access and trade creation are easier.
Association of South East Asian l Economies of scale (large size) lead to lower

Nations (ASEAN) prices for consumers.

l Employment opportunities are increased.
ASEAN is a trade bloc agreement, formed in 1967,
l Firms inside the bloc are protected from cheaper
supporting local manufacturing in all current
10 member states. ASEAN operates the ASEAN imports from countries outside the bloc.
Free Trade Area (AFTA) that aims to: Disadvantages of trading blocs
l increase ASEAN’s competitive edge in the world l The benefits of free trade with countries of other
market through elimination of tariffs and non- blocs are lost.
tariff barriers l Trading blocs can distort world trade and
l attract increased foreign investment into ASEAN. possibly lead to reduced specialisation.

56 Photocopying prohibited
 6.4 Trading blocs, protectionism and free trade

l Inefficient producers, and even whole countries, Reasons for protectionism

can be protected and not encouraged to become Protectionism:
more effective against competitors outside
the bloc. l protects home businesses from external competition
l The development of a bloc encourages other l protects foundling businesses enabling them to
blocs to form, possibly resulting in disputes develop before they face competition
between blocs. l protects home-based jobs
l prevents other countries from ‘dumping’ cheap
imports into the country
Protectionism l prevents the import of harmful or undesirable
Protectionism takes place when a trading bloc, goods.
or indeed just a country, takes action to protect
against outside competition. There are four means Free trade
of protectionism:
Free trade refers to trade without protectionism, that is,
l Tariffs (import duties) are taxes imposed on no trade barriers (see Figure 6.5) between countries, or
imported goods. They raise the prices to home groups of countries (as in a trading bloc).
consumers thus making the imported product
less attractive to consumers, but they aim to The benefits of free trade are outlined below.
protect home industries. l It encourages firms to become more efficient
l Quotas are limits on the quantity of a product because they face competition.
that can be imported into a country, for example, l It forces producers to produce high-quality
100,000 washing machines per year. goods in the face of competition.
l Embargoes are a straightforward government l Retaliation is avoided – if a country puts up
ban on trading between one country and another. trade barriers, other countries will do the same.
An embargo is usually created as a result of l Free trade encourages businesses to export
unfavourable political or economic differences and import. This results in increased choice
between countries. for consumers.
l Import licences are documents issued by l Trade barriers increase the cost of trading, for
the government authorising import of certain example, a tariff results in higher costs for
goods into a country. They can be seen as consumers.
a barrier to free trade if they are used to
discriminate against another country’s goods Free port
in order to protect home industries from A free port (free zone) provides a place through
foreign competition. which a group of countries that have agreed to

ASEAN

SADC

EU

Figure 6.5 Trade barriers

Photocopying prohibited 57
6 INTERNATIONAL TRADE

reduce or eliminate trade barriers can pass goods l Transport is obviously more complex to arrange
without customs intervention. and manage in foreign trade than in home trade.
l Distance to delivery point must be taken
A free port is organised as a zone around major
into account, for example, in relation, to
seaports, international airports and national
perishable products.
frontiers. It can be a complete port, or a section of
l Damage during transit must be taken into
a port that has been set aside to act as a free port.
account; this may be more likely in overseas
They are sometimes referred to as customs areas or
trade.
international zones.
l Packaging may need to be stronger (and more
Goods may be landed, handled, manufactured costly) than in home trade.
or reconfigured and re-exported without the l Documentation will be greater and more
intervention of the customs authorities. Only when complex than in home trading.
the goods are moved to consumers within the l Payment arrangements can be complicated and
country in which the zone is located do they become involve delay and greater potential for defaults
subject to the local customs duties. in payment.
l Use of agents: in the overseas country, agents
6.5 Difficulties faced by may be necessary to act on behalf of the trader
to make contracts for the sale or purchase
exporters and importers of goods.
l Exchange rate fluctuations can adversely affect
We know that it is important for countries to export the market price of goods:
in order to generate income and to import to obtain A rise in the value of currency in one
things that the country cannot economically create. country can result in a fall in the cost of
But companies that engage in international trade imports and a rise in the price of exports.
face many difficulties, which can be summarised A fall in the value of currency in a country
as follows. can result in a fall in the cost of exports and a
l Language: the trader needs to be conversant rise in the price of imports.
with the language of the countries it wishes to
trade with.
l Customs of other countries may be different
from those of the home market; they must
be taken into account within the marketing
strategy.
l Measurements differences such as weights,
measures and sizes have to be considered, for
example, metric and non-metric.
Tran
l Suitability of products must be considered sit r
T is
owing to differing regulations related to Imp ransp ks
ort ort
safety standards. re
Lan gulati
l Competition will be more difficult to research Is t Foreig guag ons
he e
pro n exc
and assess in an overseas market. du han
ct a ge
l Import regulations must be observed, cce
pta
ble
together with knowledge of those of other ?
countries.
l Customs duties must be paid and have to be
taken into account when costing prices. Figure 6.6 Difficulties faced by international traders

58 Photocopying prohibited
 6.5 Difficulties faced by exporters and importers

International trade documentation More documents that are particularly related to

the transportation of goods and meeting customs
Documentation can help to solve some of the regulations are outlined below.
difficulties of international trade. The main
documentation is outlined below. l Bill of lading: Used in the shipping of goods,
a bill of lading represents the title to ownership
l Bill of exchange: The bill of exchange is a of goods. It shows details of the goods, their
document that is sometimes used in home destination and the terms under which the
trade, but it is most commonly used in foreign shipping company agrees to carry the goods.
trade. It is particularly used in the settlement Three copies of the bill of lading are raised. One
of international debts. The bill of exchange is copy is retained by the exporter, one is given
made out by the seller/exporter of goods (the to the ship’s captain and one is given to the
creditor). It requires that the buyer/importer importer, who has to produce its copy to take
(the debtor) pay a sum of money on demand, possession of the goods on arrival.
or on an agreed future date (usually after three l Air waybill: Used in connection with air
months). Both the buyer and the seller benefit transport, an airway bill serves as a receipt
from the use of the bill of exchange. The buyer for goods carried by an airline. It is a kind
(importer) obtains credit on the transaction of bill of lading for air transport. But it is
because instead of waiting for the payment the not a document of title and the sender of
buyer can either sell the bill at a ‘discount’, or the goods does not have to be given a copy.
‘negotiate’ it by using it to pay off debts, or use Because air transport is so fast, the goods could
it as collateral against a bank loan. The seller, of arrive before any documentation relating to
course, makes a successful trade and is assured the goods does.
of payment. l Manifest: A manifest is a summary of all the
l Documentary bill: This is a bill of exchange bills of lading and cargo a ship is carrying.
with all documents of title attached, including l Freight note: The bill or charge for shipping
the invoice and insurance policy. With it, a bank goods, the freight note is sent to the exporter by
has the right to take possession of the goods the shipping company.
if the bill of exchange is not honoured when it l Certificate of origin: This document certifies
matures (when payment is due). the country of origin of goods. It is sometimes
l Documentary credit: An exporter can required by the importing country if it has been
request that a customer (the importer) makes agreed that the goods of a particular country are
payment for goods by ‘documentary credit’. allowed to enter at a more favourable tariff rate.
This enables the exporter to obtain payment l Import licence: Issued by the importing
before the documents of title/ownership are government, the import licence gives permission
released to the importer. The importer arranges to bring certain commodities into the country.
for their bank to guarantee that the payment It can be used to enforce quotas (government
will be made when the documents of title are limits on particular goods allowed to be
handed over. imported).
l Letter of credit: A letter of credit is an l Export licence: An export licence is needed
assurance given by an importer’s bank of the before certain goods are allowed to leave a
financial standing of the customer, undertaking country, for example, works of art or items of
to make the payment required in due course. The historical value.
letter of credit is sent from the importer’s bank l Indent: An indent is a document that is used to
confirming this arrangement. order goods from another country.

Photocopying prohibited 59
6 INTERNATIONAL TRADE

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you
for your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
imports trade gap trading bloc embargo
exports adverse protectionism free trade
visibles surplus tariff creditor
invisibles deficit quota debtor

Search and find

Copy the questions below and write out their the latter is included within the balance
answers to form your own revision notes. You can of payments?
find the answers by referring back to the chapter. 12 Summarise the work of the customs authorities
1 Define ‘foreign trade’. in relation to international trade.
2 Explain the difference between imports 13 What are trading blocs?
and exports. 14 Make a comparison between two trading blocs.
3 How do countries benefit from international 15 List the advantages of trading blocs.
trade?
16 Trading blocs have disadvantages. What are
4 Explain the term ‘principle of comparative the disadvantages?
costs’.
17 What is protectionism?
5 Give one result of following the above principle.
18 Describe three methods of protectionism.
6 Why is international trade particularly
19 List four reasons why a country may want to use
important to your country?
protectionist measures.
7 Define ‘balance of trade’.
20 What is free trade?
8 What are ‘visibles’? Give three examples.
21 List four benefits of free trade.
9 Explain the terms, ‘trade gap’, ‘surplus’
22 What are the main functions of a free port?
and ‘deficit’.
23 Describe six difficulties faced by those
10 What are ‘invisibles’? Give three examples.
engaged in international trade.
11 How does the balance of payments differ
24 Describe the function of six documents used in
from the balance of trade, even though
international trade.

60 Photocopying prohibited
 Things to do

Multiple choice
Choose the one most appropriate answer from 6 A tax placed on imports is called:
the four alternatives. A a quota
1 The balance of payments is the: B a subsidy
A same as the balance of trade C a tariff
B total value of payments from D an embargo
other countries
7 In a country’s balance of payments accounts,
C difference in total value between payments which of the following would be shown with a
into and out of a country minus sign?
D total value of all payments made to A money spent by tourists visiting
another country their country
2 An adverse balance of trade occurs when: B money spent by its citizens as
A the value of exports exceeds the value tourists abroad
of imports C exports sold
B the value of imports exceeds the value D money received from overseas investors
of exports
8 Which of the following is not an invisible item?
C the value of exports and imports are equal
A tourism
D taxes are imposed on imported goods
B transport
3 Which one of the following would create
C insurance
invisible income on the balance of payments of
a country? D machinery
A export of goods 9 Which of the following represents the title to
ownership of goods?
B investing money overseas
A bill of lading
C imports of cars
B certificate of origin
D subsidies
C import licence
4 When a government gives finance towards
home-produced goods this is called: D freight note
A dumping 10 Which of the following is not an example of a
trade barrier?
B duties
A a tariff
C a tariff
B an import licence
D a subsidy
C a quota
5 When a government puts a straightforward
ban on trading with another country this D an embargo
is called:
A an embargo
B a tariff
C a quota
D an exchange control

Photocopying prohibited 61
6 INTERNATIONAL TRADE

Structured questions
Answer as many parts of the questions as you b Which country has the most favourable
can. The marks available indicate the amount of balance? [1]
detail you need to supply/the level of difficulty of c Explain clearly the difference between
each question. exports and imports. [2]
1 a Define the term ‘trading blocs’. [2] d Explain the terms ‘visible’ and ‘invisible’
b Name two trading blocs in full and and give three examples of each. [4]
also with their abbreviation. [2] e Use examples from the figures given
c Give two examples of trade barriers to help you explain the difference
with a simple description of each. [2] between the balance of trade and the
d List four advantages of trading blocs. [4] balance of payments. [6]

e List four disadvantages of trading blocs. [4] f Describe the effect on your country’s
balance of payments if there was:
f Describe two trading blocs and
explain their similar functions, but also i a decline in the number of tourists
their differences. [6] visiting your country
2 a What are visible exports? Give an ii a devaluation of your currency in
example. [2] comparison with other countries
that your country trades with.
b Give two examples of invisible imports. [2]
Give reasons for your answers. [6]
c Describe the likely effect of the
following on your country’s balance 4 Look at this data related to the balance of
of payments: payments of the country of Noland.
i Increased expenditure by your $m
country’s citizens on holidays Visible exports 71 840
abroad. [3]
Visible imports 80 090
ii An increase in the production of
food by your home producers. [3] Invisible exports 74 880
d Explain the significance of each of the Invisible imports 67 720
following to foreign trade: a What is the visible balance? [2]
i tariffs b What is the invisible balance? [2]
ii quotas c What is the current balance? [3]
iii embargoes d How does international trade
iv subsidies benefit consumers? [3]
v wars. [10] e What problems are faced by businesses
3 Look at the hypothetical balance of that trade internationally, which are
payments figures shown in Figure 6.4. not faced by those engaged only in
Imagine that these relate to Country 1, home trade? [4]
Country 2 and Country 3. Answer these f Considering the importance of
related questions. international trade, why do countries
a Which country has the poorest trade implement protectionism? [6]
balance? [1]

62 Photocopying prohibited
7 ADVERTISING
Functions of advertising
BY THE END OF THIS CHAPTER YOU
WILL BE FAMILIAR WITH: The functions of advertising are:

l the role of advertising

l to introduce new products or services
l advertising media
l to highlight the unique features of a product or
l methods of appeal (devices) service
l sales promotion l to create a firm’s image in relation to its products
l trends in advertising. or services
l to draw attention to special events, such as sales,
late opening times and concessions
l to increase demand and thereby market share
7.1 The role of advertising l to educate consumers about products, services
and issues, for example, health issues.
Why advertise?
Advertisements are messages, paid for by those Types of advertising
who send them (advertisers), with the aim of Advertising can be divided into a number of
informing and influencing the people who receive broad areas.
them (prospective customers). An advertisement
is a message that uses words, pictures, or Informative advertising
sound, or a combination of these – it is a form Informative advertising gives information
of communication. about the goods or services and leaves
Advertising is used by businesses to make other firms consumers to decide, without persuasion,
and potential customers, such as consumers, aware of whether they want to take action. An example
the products and services they sell. It is one of the aids is shown in Figure 7.1.
to trade that help trade to take place (see Chapter 1). It
is a means for sellers of goods or services to encourage
potential buyers to purchase from them, thus increasing
their sales. Sellers achieve this by communicating with breathing
potential buyers, telling them about the nature and other
characteristics of their products, to persuade them to
buy. If successful, the seller’s rewards are increased people’s
demand and increased sales, and possibly higher profit. smoke…

Aims of advertising
The aims of advertising are:
l to encourage customers to buy
l to inform customers about the product and where
it can be bought
l to promote a brand name to distinguish the
product from other similar items
l to increase sales and income, and hopefully gain KILLS!
economies of scale that result in increased profit. Figure 7.1 Informative advertising

Photocopying prohibited 63
7 ADVERTISING

Persuasive advertising a firm will try to establish a unique style of name

While still giving information about the product or or logo for its products. Once it has done this,
service, most advertising is also ‘persuasive’ and the business can then publicise just the name or
encourages consumers to buy. logo in some circumstances. Think of the logo of
businesses where you only need to see the logo to
The persuasive advertiser uses visually attractive know what company it represents, for example,
advertisements to appeal to deep-seated Apple, Mercedes, Starbucks, Shell or the letters BP.
motivations, both physical and psychological.
Persuasive advertising aims to encourage Mass advertising
consumers to purchase, irrespective of whether they Mass advertising aims to reach many people
need to or not (see Figure 7.2). through mass media, such as television, national
If the advertisements appeal sufficiently, they newspapers and the internet.
will encourage both initial purchasing and repeat Sometimes a group of advertisers (or a whole
buying. This results in brand loyalty and increases industry) will combine to collectively advertise a
the firm’s market share. product in which they all have a common interest, for
example, promotion of ecological methods of energy
Live life – conservation, eating more healthily and so on.
don’t stop! Specific advertising
Specific advertising refers to targeted approaches
through ‘special interest’ channels like specialist
magazines or journals. For example, a company
that sells sports equipment will focus its advertising
in sports or keep-fit-related magazines, whereas a
company selling engineering products will advertise
in a completely different place. Similarly, classified
advertising in local newspapers meets a general
advertising need but is still specific in its own way.

Corporate advertising
Also referred to as institutional advertising,
corporate advertising is more concerned with public
relations than sales promotion. Its objective is to
Figure 7.2 Persuasive advertising
build a business’s corporate image and reputation,
and raise name awareness, within their industry, or
Competitive advertising among the general public.
Competitive advertising encourages potential buyers
to purchase the goods or services of the advertiser
in preference to those of their competitors. This
Benefits of advertising
method will often include elements of persuasion, The desired effect of advertising is increased
but it can also be informative. For example, it can demand – leading to increased economic activity
make a price comparison between the advertiser’s resulting in economic growth and greater
prices and those of competitors. Competitive employment opportunities.
advertising also aims to create new markets for a
Advertising also stimulates competition in the
product in the face of competition.
marketplace when businesses are forced to compete
Collective advertising for their share of the market. Competition means
that companies have to keep improving the quality
Collective, or generic, advertising relates to a of their products while also keeping down their
particular firm or a specific brand. For example, prices – thus benefiting the consumer.

64 Photocopying prohibited
 7.2 Advertising media

Social aspects/criticisms are expected to follow. The basic premise is that

of advertising advertisements should be legal, honest and truthful.
Advertisements that breach this code of conduct
Alongside benefits, some aspects of advertising must be withdrawn.
activities can be criticised as being socially suspect.
Typically, codes of practice of any country will
l Deception: Sometimes the profit motive include the following:
becomes more important to the advertiser
than the truth. When a product’s aspects are
l Observe the laws relating to advertising.
overemphasised during promotion or if, at worst,
l Do not make claims that cannot be substantiated.
false or deceptive images and/or information are
l Do not disparage others through advertising.
used, questions must be raised.
l Take care not to offend individuals or groups.
l Subliminal advertising: Such advertising uses
l Always act with responsibility.
‘hidden persuaders’, techniques that appeal to our
l Do not exploit the vulnerable.
subconscious, our emotions, and even prejudices.
In such circumstances we can justifiably question 7.2 Advertising media
whether this is good for the consumer.
l Effect on our values: Another hidden persuader Main types of advertising media
is the use of celebrities to endorse a product and
influence us to buy. If this method is used to Advertising uses a wide variety of media. Some are
persuade us to engage in unhealthy activities (for suitable for a particular aspect of advertising while
example, overeating or smoking) it cannot be others meet all requirements. Similarly, some forms
justified. It can be argued that a product should of media will only be affordable to a large, wealthy
advertise itself – if it is good enough, why does trader, whereas others will be more suitable for a
it need a personality to promote it? small trader or even an individual.
l Offensiveness: Some advertising uses techniques l Television and radio: both are very expensive
or images that have no relevance to the product, and so only suitable for high volume products,
and may even be offensive to some consumers. but do reach the widest of audiences.
l National press: also expensive, especially in
Dangers of advertising comparison with local press, but reaches a wide
audience. However, it would not be suitable
Clearly, false or deceptive advertising is unfair and
for promoting a local convenience shop, for
wrong. For example, encouraging consumers to buy
example.
food that is overloaded with sugar, salt or fat cannot
l Local press: offers cheaper advertising than
be justified. Similarly, the promotion of cigarettes or
national press and is suitable for displaying
items that have a harmful effect on the environment
details of a business within a limited location.
is dangerous. Is it acceptable to advertise a car, when
l Magazines: consumers tend to keep them
we know that vehicles are contributing to global
for much longer than newspapers (which are
warming? Advertising can raise many moral issues.
discarded daily). A magazine will also generally
have a wide circulation. But it is another costly
Codes of practice form of advertising generally suitable only for
All countries will have some form of legislation larger businesses.
that aims to protect consumers from exploitation l Catalogues/brochures: have a very long life,
by traders, but in addition there are self-regulating tend to be highly coloured and illustrated, and
codes of practice. These codes describe the are particularly used for home shopping. Hard-
standards of conduct and good practice expected of copy catalogues have particularly been criticised
those in a particular profession or industry. Most for being wasteful of natural resources and are
countries have some form of self-regulating body expensive to produce. Online advertising has
or advertising standards authority that promotes reduced this criticism and are cheaper in that
such ethics and sets out the rules that advertisers they don’t incur printing costs.

Photocopying prohibited 65
7 ADVERTISING

l Trade journals: publications covering, and probably one of the cheaper and most
intended to reach, a specific industry or type honest forms of advertising. The advertiser
of business. They contain news and items of relies on consumers to make personal
interest (and advertisements) that will appeal to recommendations based on their experience of
the intended audience, but are only suitable for the product or service.
those engaged in the trade to which they apply. l Giveaways: businesses might give away items
l Point-of-sale: refers to using eye-catching shop such as key rings or free samples in a bid to
counter displays to influence the shopper to buy encourage recommendation by word of mouth.
on impulse. Window displays, printed signs and Obviously there are cost implications because
neon signs are also point-of-sale techniques. even the most elementary ‘giveaway’ will add to
The cost of this form of advertising can be sales expenses.
relatively cheap to implement and is an obvious l Sponsorship: advertising which involves
economical choice for those engaged in retailing a company paying to be associated with a
and similar trading. particular event such as a sporting activity.
l Packaging and transport: can be used as a Sponsorship tends to be particularly used by
very effective form of advertising and similarly large organisations. It can enhance a product
signs on the side of transport vehicles attract or service and raise awareness but there are
attention. This method of advertising is relatively dangers. For example, if the chosen sponsor
inexpensive and effective – items have to be receives negative publicity this will affect the
packaged, vehicles have to be painted, so it reputation of the company or product they are
makes sense to incorporate advertisements. intended to promote.
l Cinema: tends to reach a relatively small
audience; used to advertise local shops, Internet advertising
restaurants and businesses. Internet advertising or online advertising is a
l Trade fairs and exhibitions: attract a relatively recent development but it has expanded
good number of people who have already quickly to become a major force in advertising.
demonstrated an interest by attending the Online advertising uses the internet for the express
exhibition. Exhibitions tend to centre on a purpose of delivering marketing messages to attract
particular field or trade (trade fairs/shows), for customers on a worldwide basis.
example, home decorating and furnishing.
l Billboards: can be simple posters or hoardings Online advertising gains access to website ‘traffic’
(extremely large posters), but billboards can to target and deliver marketing messages to the
also include elaborate electronic displays with right customers. For example, a sportswear seller
changing and animated features and digital can target suitable customers by placing their
displays such as those used at large sporting advertisements on websites visited by people with
events. The high cost of this media tends to an interest in sports.
restrict its use to larger, wealthier advertisers,
perhaps with a market in many countries. Search engines
l Circulars: such as leaflets, flyers and other Search engine results pages use the information
hand-delivered advertisements, tend to be aimed pages to identify and target appropriate consumers,
at a narrow, locally based audience. for example, if you search for information about
l Direct mail: unsolicited commercial literature keeping fit, you will find advertisements related
that is sent to prospective customers through to it.
the post. Direct mail is highly targeted making
it suitable for businesses that know their target Social networking
market well. However, it is costly and a large Advertisers on sites such as Twitter and Facebook
proportion is not read. take advantage of the user’s demographic
l Word of mouth: sometimes referred information, for example, their age or gender, to
to as a ‘whispering campaign’ this is target their advertisements.

66 Photocopying prohibited
 7.4 Sales promotion

Email advertising
This form of direct selling uses email to send
commercial or fundraising messages to an audience.
The marketeer uses various legal means of obtaining
email addresses (for example, you might be invited
to fill in a questionnaire). Once the marketeer has
an email address it can send promotional messages
whenever it wishes.

E-commerce
Electronic commerce or e-commerce refers to
carrying out business transactions, including
advertising, and electronic data exchange such as
internet banking.

7.3 Methods of appeal

Advertisers use many devices to attract the attention
of buyers and encourage them to purchase.

Advertising’s ‘hidden persuaders’

Sometimes advertisers use advertisements to
encourage consumers to buy products or services
Figure 7.3 Hidden persuaders
by convincing them that the products or services
will make them better off in some way. This
kind of advertising uses techniques that are far 7.4 Sales promotion
from obvious and this is why they are sometimes
Sales advertising and sales promotion are two
referred to as ‘hidden persuaders’ (see Figure 7.3).
related but different aspects of marketing. Sales
Some of the methods used by persuasive
advertising conveys a message to consumers,
advertisements, and the emotions they appeal to,
encouraging them to buy. Sales promotion refers
are outlined below.
to strategies used by businesses, designed to offer
l Music: used as part of the advertisement to purchasers an extra incentive to buy, for example:
excite or relax the consumer.
l buy one, get one free (or two for one)
l Colour: can also be used to influence people –
l loss leaders – selling products at cost price or lower
think of colours that excite or relax.
l giving away ‘freebies’ or money-off coupons
l Emotions/social acceptability: for example, the
l offering product samples
product claims to make the user more attractive
l running competitions and the chance to win prizes
to the opposite gender or just generally more
l lowering prices and holding sales
appealing/socially acceptable to others.
l using point-of-sale promotion by displaying
l Ambition: the advertisement implies that, if you
goods attractively at the point where we buy them
use the product, you will be successful.
l sponsorship whereby a business supports an
l Personality appeal: celebrities are shown
event, another organisation or a charity in
using the product to give it an acceptable and
exchange for publicity. For example, a company
attractive image.
may provide money or resources for an event in
l Work simplification: the product claims that a
return for advertising space at the event.
task will be made easier by using it.
l Health: the advertisement suggests that using Sales promotion targeted at consumers is called
the product will contribute to good health. consumer sales promotion. Sales promotion targeted

Photocopying prohibited 67
7 ADVERTISING

at other businesses, for example, wholesalers or

retailers, is called trade sales promotion.
7.5 Trends in advertising
Sales promotions can have both positive and We have looked at a variety of methods used by
negative effects on the target customer. The advertisers to make consumers aware of the products
following lists of advantages and disadvantages and services they are selling, and we have also
highlights some of these. examined media that are used to communicate the
advertisers’ message to the consumer. Let us look at
Advantages of sales promotion: some of these more closely to establish current trends.
l Draws attention to a particular product or The now almost universal use of digital technology,
service being offered. It helps to distinguish a widespread use of mobile phones, tablets and so
business from its competitors. on, and increased use of social media has led to
l It is a demand creator – it stimulates the attitude an explosion of people communicating while on
of consumers towards the product and creates an the move and around the clock. This change in the
incentive in the consumer to make a purchase. way we live can be referred to as connected living.
l Keeps trade flowing and stock moving between Advertisers have been quick to spot this opportunity
distributors and retailers. This is particularly to get their message across to the consumer and
important in avoiding stock becoming ‘dated’ now use website browsers to communicate through
and too long on shelves and enabling stock to be content displayed on digital media.
replenished regularly.
Digital video advertising (also called internet
Disadvantages of sales promotion: advertising) encompasses online advertising where
l Message miscommunication can occur. businesses use internet technologies to deliver
Sales promotions are usually aimed to inform promotional advertisements to consumers, before,
customers of a special offer. If there is a during, or alongside some streamed information. Digital
discrepancy between what is published and the video advertising includes promotional messages
real facts, then it will be viewed negatively by delivered through email and social media websites.
the public, with possible long-term harm to the While busy internet users can block unwanted
reputation of the seller. emails and delete them, it is not possible to block
l Price sensitivity can develop if sales promotions advertisements when visiting a website. Such
are offered too regularly. The key technique is advertising can be targeted at identifiable people
to offer them infrequently, thus surprising and with suitable interests. For example, if you search
exciting the customers’ interest. a website for information related to natural
l Brand image can be adversely affected by too medicines, the pages will almost certainly contain
many sales promotion activities if consumers advertisements related to your interest. This form
form the opinion that sales promotion offers are of targeted advertising that appears on websites or
due to lack of popularity of inadequate or second other media is called contextual advertising.
grade products.
Sometimes, people will do something because other
The choice of the method of sales promotion will people are doing it, regardless of their own beliefs –
take into account: this is known as the bandwagon effect and it is a
1 The aim of the promotional effort, e.g. to raise common aspect of consumer behaviour. People will
awareness or to achieve higher sales. use social media and websites that are recommended
2 The characteristics of the product; uses, by others. Website designers will create media that
people want to access and where advertisers will
features, weight, hazards, etc.
pay to advertise, thus funding the site.
3 The target market – gender, age, income,
location, buying patterns, etc. Digital technology has benefited advertising
4 Distribution channels available and their in many ways and brought it to the forefront of
suitability, e.g. resellers. communication. Digital billboards in stadiums and
5 The competitive forces currently in the market. other public areas now allow changing displays that

68 Photocopying prohibited
 Things to do

show the moving images of one advertiser closely pay online – demonstrating how television and the
followed by another, and another. In this way many internet have become closely related for the benefit
advertisers can use the same billboard. Advertisers of both advertising and consumers.
can also double their exposure if a sporting event
Television also contributes to building brand recall
is televised. Digital billboards can even be solar
– the ability of consumers to correctly recognise a
powered allowing them to be positioned away from
brand. When a brand name (or associated logo) is
a conventional power source, for example, beside
readily recognised, less valuable advertising time
motorways.
is needed to preach the qualities of a company or
Television advertising has become more proactive its goods. Once favourably established, the name of
with the advent of channels that are dedicated to the company or its logo goes a long way to promote
advertising and sales promotion. Consumers can its products or services. A brand name that is well
watch the channel, see products being demonstrated, known to the majority of households is sometimes
learn about features and price, and then buy and referred to as a household name.

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
market share subliminal advertising digital technology
brand loyalty media contextual advertising
corporate image whispering campaign sales promotion
billboard email advertising

Search and find

Copy the questions below and write out their 8 Take any four contrasting forms of advertising
answers to form your own revision notes. media and explain how each meets different
You can find the answers by referring back to advertisers’ needs.
the chapter. 9 What is internet advertising?
1 What are advertisements? 10 How do advertising’s hidden persuaders
2 Why can advertising be said to be a form influence consumers to buy?
of communication? 11 Why is it necessary to have laws to protect
3 What are the aims of advertising? consumers from some aspects of advertising?
4 How do the functions of advertising 12 What are codes of practice, and what are the
benefit consumers? basic rules related to advertising?
5 What is the difference between informative and 13 In what ways does sales promotion differ
persuasive advertising? from advertising?
6 Describe four other forms of advertising. 14 What factors influence the choice of sales
7 Why can some aspects of advertising be promotion method?
criticised? 15 How has digital technology transformed advertising?

Photocopying prohibited 69
7 ADVERTISING

Multiple choice
Choose the one most appropriate answer from 6 Hidden persuaders are:
the four alternatives. A prices not shown in an advertisement
1 Which of the following is an advantage gained B products bought unseen
by a trader advertising on the internet?
C goods delivered that were not ordered
A guaranteed large profit
D subtle advertising techniques
B not necessary to design an advert
7 Which of the following types of advertising
C wide potential market media generally displays the largest size
D there is less competition of advertisements?
2 What is the prime aim of advertising? A television
A to encourage customers to buy B magazines
B to reduce costs C billboards
C to provide employment D newspapers
D to reduce competition 8 The advertising method most likely to catch
3 Why has internet advertising become the fleeting glances of passers-by would be:
so successful? A television
A it faces little competition B billboards
B it is very convenient for purchasers C internet
C it is the cheapest form of advertising D newspapers
D no transport costs are involved 9 Which of the following statements is an
4 Techniques used in informative advertising example of wording that might be included in
include: an informative advertisement?
A desire to appear prosperous A used by the stars
B social acceptability B keeps you young and attractive
C provision of product information C used by the band ‘The Whatsits’
D romantic associations D the route to good health
5 Happy Day is a microwaveable, instant 10 Advertising that is more about public relations
porridge. The best time of the day to advertise than sales promotion is:
it on television would be: A corporate advertising
A early morning B specific advertising
B mid-day C collective advertising
C late afternoon D competitive advertising
D late evening

70 Photocopying prohibited
 Things to do

Structured questions
Answer as many parts of the questions as you d Explain, with examples, circumstances
can. The marks available indicate the amount of when it would be more appropriate to
detail you need to supply/the level of difficulty of place an advertisement in a magazine
each question. rather than a newspaper. [6]
1 These questions are related to the illustrations e Roti World (Pvt) Ltd is a large bakery
shown in Figures 7.1, 7.2 and 7.3. that sells its products through a chain
a Who do you think pays for the of outlets throughout a countrywide
informative advertisement in area. How might the advertising
Figure 7.1? [1] undertaken by Roti World differ from
that used by a small local shop? [6]
b What is the message that is being given
in Figure 7.1 and who is the message 4 a Why is television advertising more
intended for? [2] expensive than advertising in the local
press? [1]
c Why can informative advertising be
said to be beyond criticism? [2] b Give two contrasting reasons why firms
advertise their goods or services. [2]
d What elements of persuasion are used
in Figure 7.2? [2] c Advertising is generally directed at
consumers but consumers themselves
e What aspects of persuasion can
also advertise. State three relatively
be seen in the advertisement in
inexpensive methods that a consumer
Figure 7.3? [3]
may use to advertise, and give examples
f Summarise the differences between of what they might want to sell to other
informative and persuasive advertising. [4] consumers. [3]
g What are the possible harmful d In what ways can it be said that
effects of advertising? How can advertising is not always in the best
these be controlled? [6] interests of consumers? [4]
2 a State one of the functions of advertising. [1] e State with reasons why there are fewer
b Briefly state two ways that advertising criticisms of informative advertising
benefits consumers. [2] than there are of persuasive advertising. [4]
c State three criticisms of advertising. [3] f What are the possible harmful effects
d Television is one of the most expensive of advertising? How can a code of
of the advertising media, but it is also practice help to prevent such effects? [6]
one of the most effective. Why does 5 a Why do businesses advertise? [1]
television play such an important role b Name two contrasting forms of
in advertising? [6] advertising media used in your country. [2]
e Describe four of the main methods c How does a poster differ from
of advertising and give different a billboard? [2]
examples when each might be used. [8]
d What is a ‘whispering campaign’? How
3 a Advertising is often concerned is such a campaign encouraged? [3]
with creating the right ‘image’ for
e Explain the difference between direct
products. What is meant by ‘image’ in
and indirect advertising, giving
this context? [2]
examples to illustrate your answer. [4]
b Why might a manufacturer of a new
f Why is online advertising so popular?
soft drink use a billboard for its
Describe four types of online advertising
advertisements? [2]
in your answer. [8]
c How would the advertising methods
of a small local business differ from
those of a large manufacturer? [4]

Photocopying prohibited 71
8 COMMUNICATION
There are four elements common to all forms of
BY THE END OF THIS CHAPTER YOU communication (see Figure 8.1):
WILL BE FAMILIAR WITH:
l the transmitter is the person or organisation
l the importance of communication in trade that is sending the communication
and the global market l the message is the information that needs to be
l methods of communication, internal and communicated
external l the medium is the method used to send
l postal services
l trends in communication.
the message (for example, letter, email,
telephone call)
l the receiver is the person or organisation for
whom the message is intended.
8.1 The importance If any of these elements of communication do
of communication not work effectively then the message will not
be effective.

What is communication? Global importance of communication

Communication is the process of making contact
Today’s methods of communication are very
between two points, for example it can mean the
sophisticated. They are essential for the global market
transportation of goods from one place to another,
because, for trade to take place on a global scale,
or advertisements which send messages to potential
information must be passed accurately and rapidly.
customers. Generally, we think of communication
as the transfer of messages and information from The ability to communicate with anyone on the
one person to another or from one place to another planet at any instant and the various means of doing
by speaking, writing or using some other medium so, have led to a global economy and a worldwide
such as email or telephone. It also includes non- marketplace. Effective global communication has
verbal signals (for example, body language). become a major aspect of business activities.

We have received
your quotation…

1 Transmitter 2 Message 3 Medium 4 Receiver

Figure 8.1 There are four elements to communication

72 Photocopying prohibited
 8.2 Methods of communication

Global business communication has led to the and effective running. The purpose of internal
increased ability to do business with other countries communication is to inform, organise, direct and
and areas. Firms have access to a wider market negotiate within the business.
because they are less constrained to geographic
Different parts of the organisation must be informed
regions or countries that speak the same language.
of the activities of other sections so that they
It is also easier to search for cheaper raw materials
can contribute to achieving the organisation’s
or sources of finished goods and services. This is
aims and objectives. These aims are sometimes
because a business can rapidly locate countries that
communicated to a wider audience through the
may provide a product or service at a lower cost
mission statement of the business. This is a
than within its immediate geographic locale.
summary of what the organisation hopes to achieve
Global business communication enables businesses in the short and the long term.
to source, purchase and resell new product lines that
Policies have to be formulated, changes
they might not have discovered without the facility
implemented and communicated between members
to search inter-continentally.
of the organisation, often on an inter-departmental
In summary, global communication by businesses: basis. At times there will be conflicts of interest,
which have to be resolved, often by face-to-face
l broadens the scope of marketing potential
direct discussions or through formal business
worldwide
meetings. Communication can also be an important
l promotes the expansion of international trade
motivation tool.
l connects businesses with customers worldwide
l enables cross-continental transactions to
take place External communication
l facilitates fast communication of inter- It is through external communication that a
continental trading documentation business not only makes contact with its suppliers
l speeds up the payment process. and customers but also aims to create a good
public image. The latter has become increasingly
8.2 Methods of important in a highly competitive global market.
It is also the way that a business tells potential
communication customers about the goods or services it is selling
(for example, through advertising).
Communication should be a two-way process where
a mutual understanding is reached, and during
which participants not only exchange information, Ways of communicating
news, ideas and feelings, but also create and share The methods of communication can be divided into
meaning. One-way communication exists when the five broad categories – oral, written, telephonic,
receiver of a message cannot respond to it. While electronic and visual.
this can occur, the best and most effective form of
communication is two-way. Oral communication
Within business, communication is a key function l Interviews: a direct form of oral
of management and a means of promoting communication, useful for individual
commercial activity. It is through communication discussions, for example, appointing new
that a firm manages the internal parts of the employees or considering a person for
organisation and makes contact with its external promotion, or disseminating ideas.
agencies such as suppliers and customers. l Meetings: where individual discussions are
not convenient or practical, meetings provide a
convenient method of communication between
Internal communication
groups of people.
The systems of internal communication within l Conferences: held to impart and exchange
an organisation play a crucial part in its smooth information of mutual interest to groups of

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8 COMMUNICATION

people. Although conferences can be less formal made by email unless invited to do so. Many
than meetings, the underlying principles of organisations are not comfortable when formal
control and order must be observed for them to communications do not include a genuine
be constructive. Conferences can be face to face handwritten signature.
or electronic. l Notice of meetings: some form of written
l Radio and television: an important method of communication will be sent to those
communicating, particularly with prospective expected to attend a meeting. This will convey
customers, and of conveying an image of the the date, time and place of the meeting.
business to the general public. Email is generally acceptable, but again there
l Intercom and paging: a way of making contact are exceptions.
between members of an organisation when l Agenda: communicates to the parties of a
face-to-face contact is not possible. An intercom meeting the items that are to be discussed.
provides audible contact between one office This is usually given to the participants ahead
and another – and it can leave the participants’ of the meeting so that they can prepare for the
hands free while they are talking. A pager (used discussions, but sometimes it is handed out at
mostly in hospitals these days) is used to contact the start of a meeting.
people when they are out of their office, with a l Minutes: a summary of what has taken place
signal alerting them to make contact with the at a meeting. Minutes provide a record of the
office as soon as possible. discussions and can be used to inform absentees
l Public address system: allows messages to be about what took place.
broadcast over loudspeakers. For example, such l Reports: sometimes individuals or small groups
a system may be used in a stadium, theatre or are required to investigate a particular issue
in public areas or factories where the message or problem and provide a written summary
is meant for a wide audience, although it can of their findings. A written report of these
also be used for paging. The system does not findings can be circulated to other members of
facilitate two-way conversations. the organisation.
l Telephone: an important aspect of oral l Questionnaire: a structured list of questions
communication, which is examined below. used to obtain information from a number of
people, for example, staff views, marketing
Written communication research and clients’ opinions.
l Letters: generally letters will be used only l Itineraries: a personal programme of events
internally for formal communications such as and times related to, for example, a visit.
notices of appointment, promotion, discipline An itinerary informs the person for whom it
or dismissal. See Section 8.3 for information on is intended of the stages to be followed, for
postal services and other facilities which display example, when travelling.
some letter functions. l Notices: displaying information on notice boards
l Memorandum: often abbreviated to memo, can be a useful way of keeping employees in
this is an internal communication method used touch with the firm’s developments. Notices can
for passing information between members also help to inform employees about jobs being
of the same firm. A memo tends to contain advertised internally, or safety notices and social
relatively brief notes, without formal opening or welfare information.
or closing, and is often keyed into a standard l Press release: usually compiled by a senior
form or template as a hard copy, or for email member of an organisation, this is a carefully
purposes. worded announcement or account of a news item
l Email: although email is a familiar and to be circulated to the press.
rapid method of written communication,
it is not accepted as a formal method of Telephonic communication
communicating in many circumstances. For Telephonic communication refers to communication
example, applications for jobs should not be that takes place through telephone facilities.

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 8.2 Methods of communication

Telephone signed letters, contracts, and other documents such

One of the oldest of the telecommunication as official orders). Important fax messages received
facilities, the telephone remains the major means of should be photocopied as the original fax fades after
communication between individuals and businesses. a period of time.
It is used within the organisation (internally) for Facsimile transmission is rapidly being replaced
contact between members of the firm, and to make by facilities such as email, but it still has a place in
contact with suppliers and customers (externally). business-related communication.
The telephone readily allows voice contact, which
gives a personal element to the communication. It Teleconferencing
is also used as a link between computer terminals During teleconferencing a number of phone lines
and other communications equipment by the use of are ‘bridged’ so that they are interconnected to
modems, which allow computers to communicate enable several people to talk to each other across
via telephone links. The use of mobile phones (cell all the phone lines at the same time. Typically,
phones) and their increasing versatility has extended participants will be given a phone number to dial on
telephonic communications dramatically. Mobile a particular date and time to make connection to the
phones are addressed further shortly. conference call.
Telephone answering machine Electronic communication
This is a recording device connected to the
telephone line, which intercepts incoming calls Mobile phones (cell phones)
when no one is available to answer. A pre-recorded
message invites the caller to leave a message. In Whilst mobile phones facilitate voice contact while
due course the recorded message is played back and the user is away from their home or their workplace,
dealt with. making calls is not the foremost use made of them.
In fact, a recent survey revealed that making a call
Voicemail is only sixth in a list of priority of uses. The most
Voicemail is an extension of the telephone common uses in order of priority at the time of
answering machine. Spoken messages can be writing are as follows:
recorded into the voicemail system if no one is 1 Texting (SMS): using the phone to send an
available to take an incoming call. Each member electronically transmitted written (keyed)
of staff is allocated a voice mailbox within a voice message to others.
bank, where all the messages are stored until they 2 Surfing the internet: navigating the World
are accessed. To access their voicemail messages, Wide Web.
members of staff dial the voicemail bank, give 3 Downloading applications (apps):
their personal identity number (PIN) and listen to computerised programs that can be downloaded
their messages. to run on mobile devices such as smart phones
Voicemail also incorporates a variety of functions (or tablet computers).
that can be activated when a call is received. 4 Download and play games: there are many
For example, it can automatically give the caller apps that provide an infinite range of games that
information, or ask the caller for information and enable the user to ‘pass time’.
store this in the voice mailbox to be dealt with later. 5 Download and listen to music: music, videos
and news channels can be listened to via many
Facsimile transmission (fax) forms of mobile phone. Even radio and television
Fax is a rapid method of transmission of a copy of programmes can be accessed in some countries
a prepared document direct from one fax machine via mobile phones.
to another. Faxes can also be sent by computer. The 6 Making calls: a mobile phone accesses a
fax machine can handle a wide range of black and cellular radio system so it can be used to make
white documents, including photographs, diagrams voice contact over a wide area without a physical
and detailed artworks and signed copy (for example, connection to a network.

Photocopying prohibited 75
8 COMMUNICATION

There are many other mobile phone uses other than l accounting – creation of ledger records, such
the ‘top six’. For example, emails can be sent and as sales ledger and purchases ledger, using
received and the mobile phone can also act as a software packages like spreadsheets
barcode reader, be used to pay for purchases like l spreadsheets – applications which enable data
a credit card or debit card and can even act as a to be analysed in columns and rows; they are
navigation device (GPS). Other applications include: particularly effective in financial analysis
video and teleconferencing, acting as a digital l computer-aided design (CAD) – using
camera and as a video or audio recorder, acting computers to design components or products and
as a games platform, calculator, alarm clock and in the redesign of existing products
calendar. l computer-aided manufacture (CAM) – the use
of computers to numerically control machines
Electronic notice boards and robots used in production processes
These typically consist of an LCD display screen l internet – an important aspect of business (and
mounted either portrait or landscape, connected to a personal) communication, relying on computers
PC or some form of digital signage apparatus. They to access the World Wide Web
have many commercial usages including: l electronic mail (email) – a major force in
l point-of-sale advertising computer-generated communication used by
l outdoor advertising businesses and individuals to send messages,
l window frontage displays memos, letters and other communications via
l interactive touchscreen kiosks the internet
l exhibition and special events signage l e-commerce – accessing internet-based
l directional way-finding signage retailing, which allows users to reach the global
l hospitality screens in reception areas. market.

Computers Internet communication

A computer manipulates alphabetical and numerical The internet is a global network of connected
data according to a set of instructions contained in a computers – a means of connecting a computer
computer program. Personal computers (PCs) come to any other computer anywhere in the world via
in a variety of forms and are what most people think the World Wide Web (WWW or simply the Web).
of as computers. They store data and execute lists of When two computers are connected via the internet
instructions called programs. they can send and receive all kinds of information
such as text, graphics, voice and video and
The term hardware encompasses all those parts of computer programs.
the system that are tangible objects, for example,
circuits, power supplies, cables, central processing An intranet is an internal or private network of an
unit (CPU), keyboard, flash drive, scanner, printer, organisation based on, and accessed via, internet
mouse, monitor (screen), web camera. Software technology. An intranet is used by an organisation
refers to the parts of the computer that do not have a and its associates, for example, employees,
material form such as programs, data and protocols. suppliers, customers, and unauthorised access is
(A protocol is a set of rules used by computers to blocked by security systems. Intranets provide
communicate with each other across a network.) services such as email, data storage and search and
retrieval functions.
Computer applications are almost limitless, and
new ones are emerging all the time. Applications The internet has developed rapidly, and is still
that are of particular importance to commerce evolving, to play an increasingly important role in
include: communication. Internet communication can be
divided into seven categories:
l word processing – presentation and analysis
of management of information; creating letters, l Instant messaging (IM): a text-based computer
reports, minutes, memoranda and similar text- conference between one person and another –
related documents like a telephone call but using text format. An

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 8.2 Methods of communication

IM communications service enables participants computer networks to transmit audio and video
to create a kind of private ‘chat room’ with data, using an application such as Skype. The
another individual in order to communicate in participants each have a video
real-time over the internet. It can, of course, be camera (webcam), microphone and
useful for chat between family and friends, but speakers connected to their computer. As the
it has business applications also. For example, participants speak to one another, their voices
a trader can operate a helpline service via IM are carried over the network and delivered to the
whereby a customer types in his or her problem other participants’ speakers. Whatever images
or a request for information and receives appear in front of the video camera appear in a
an instant online response from the firm’s window on the screen of the other people’s
representative. monitors. In this manner it is possible to hold a
l Internet relay chat (IRC): a multiple-user text- conference between two or more people. (See
based chat system that enables people to gather Figure 8.2.)
on ‘channels’ or in ‘chat rooms’ to talk in groups
or privately (unlike IM, where the chat is one to
one). Those who are ‘live’ (that is, online) are
listed so other users can see they are there. If a
‘chat’ is taking place they can join the discussion
if they wish and those chatting can accept them
into the discussion.
l Internet telephony: allows users who have Discussion
free or fixed price internet access to use their Two-way (or more) sound
computers to make free phone calls to anywhere Two-way (or more) vision
in the world.
l Electronic mail (email): the transmission of
messages over communication networks, which
can also include attachments such as documents,
photos, diagrams and other electronic files. The
message can be entered via the keyboard or sent
from electronic files held within a storage device.
The user keys a message onto a standard form
provided by the user’s ISP. This blank email Presenting
consists of the message header and the message Two-way (or more) sound
Two-way (or more) vision
body. The header shows the originator’s email and partial monitoring
address and one or more recipient addresses.
Usually additional information is added such as a
subject heading. The message body is the area in
which the user keys the information he or she
wants to transmit. The intended recipients of an
email do not need to be online for a message to
be sent to them, and they can pick up the mail
from their ISP when they next go online.
l Spam is electronic junk mail (an email
advertising a product or service) that is sent out
to millions of people automatically. Sadly, spam
perpetrates the spread of email viruses that can
Debate
cripple a computer system. Email users need a Three-way (or more) sound
good anti-virus program to protect their system. Three-way (or more) vision
l Videoconferencing: a conference between two Figure 8.2 Videoconferencing links distant sites by sound
or more participants at different sites using and vision

Photocopying prohibited 77
8 COMMUNICATION

l Short message service (SMS): a global

service that enables the transmission of
alphanumerical messages between mobile
subscribers and external systems such as 1 2 3 4
email, paging and voicemail systems. SMS is
used to send short text messages of up to 160
characters to mobile devices, including cell
phones, smartphones and so on. Although most
commonly used for text messaging between
friends and co-workers, weather forecasts, travel 5 6 7 8
alerts, news, sports updates and many other
one-to-many services can also be transmitted.
SMS can also be used to alert sales personnel of
sales enquiries.
Importantly, the recipient’s phone does
9 10 11 12
not need to be active for a message to be
successfully transmitted. SMS will hold the
message until the recipient turns on his or her
phone and then the message will be sent.

Visual communication 13 14 15 16
(You will find this of interest but it is not part of Figure 8.3 Safety notices have to be brief and clear
the syllabus.)

Advertisements into segments. A pie chart is less useful when

Any public notice used as a display is an a large number of segments are required
advertisement, whether it is displayed on a notice (Figure 8.4a).
board, in a newspaper or magazine, or on television. l Bar chart: where there are a large number
Its purpose is to convey information relatively of statistics to be shown, a bar chart is more
briefly but with much visual impact. appropriate than a pie chart (Figure 8.4b).
l Histogram: pie charts and bar charts are
Pictures used to display data related to a particular
The term ‘pictures’ includes drawings, photographs moment in time; if we want to represent
and moving graphics. These can be very effective information in the form of a measurement that
communicators because they convey information changes over a period of time, the histogram is
rapidly, and sometimes without the need to read more suitable (Figure 8.4c).
text. Safety notices are good examples of this. l Line graph: can be formed from data similar
to that of a histogram by joining the mid-
Charts and graphs points of the top of each bar of a histogram
Pie charts, bar charts, histograms, line graphs and to form a solid, broken or coloured line(s)
pictograms are some of the main types of graphs (Figure 8.4d).
and charts used in business to display numbers l Pictogram: the presentation of numbers can
in a different and more interesting format. They be made more interesting by using symbols
can be readily produced using computer software instead of bars or lines (for example, using little
and displayed in a number of ways using a variety figures or characters). Sometimes difficult to
of media including leaflets, notice boards and make an accurate representation of proportions
multimedia equipment. and, therefore, tend to be restricted to very
l Pie chart: the simplest picture that can be small numbers and simple representations
made from numbers. It resembles a pie divided (Figure 8.4e).

78 Photocopying prohibited
 8.3 Postal services

a DVD sales Television

While television is a source of entertainment and
information, businesses and traders also use it to
Age 15–20 30% convey messages and advertisements, particularly
Age 21–25 45% to consumers. Closed-circuit television (CCTV)
Age 26–30 25%
is another form of visual communication. Used as
a security device, it can deter shoplifting (stealing)
from stores, or from vehicles in car parks. It can
also be used for in-store advertising, to feature
items being sold.
b Sales costs
50 000 Multimedia presentations
40 000 Multimedia refers to the use of a combination of
30 000 different content forms to communicate including
text, audio, still images, animation, video and
Distribution

20 000
Marketing

Advertising

10 000 interactivity. Multimedia is usually recorded

Sales

0 and displayed or accessed by processing devices

such as computerised and electronic devices.
c Home and overseas sales For example, a store could display images on
50 000 screens (as in-store advertising) to show current
40 000 special offers.
30 000
20 000 Multimedia is also used in meetings or other group
10 000
0
presentations, where a speaker uses a computer
J F M A M J J A S O N D and a display screen to emphasise aspects of their
Home Overseas
presentation. Multimedia is not only popular in the
d Sales – North and South business environment but in many other situations
where there is a need to clarify communication, for
50 000
example, in the classroom.
40 000
Body language
30 000
This is a form of visual communication that many
20 000 people are completely unaware of, even though
10 000
they experience it all the time. Body language
refers to the non-verbal passing of information
0
J F M A M J J A S O N D
through conscious or subconscious gestures, facial
Sales North Sales South expressions or postures. We should try to be aware
of the signals our body communicates to others even
e Exports when we are not speaking.

8.3 Postal services

Sugar The importance of

1 kg postal communication
Sugar
Although modern technology has given us new
1 kg
communication systems that are speedier and more
versatile, postal services still remain widely used by
Figure 8.4 Charts and graphs have limitations businesses. This is because:

Photocopying prohibited 79
8 COMMUNICATION

l postal services are relatively cheap compared l Special delivery service: businesses that
with most of the alternatives and are simple in generate large volumes of mail for dispatch use
their application .
this service. The postal authority collects the
l in some circumstances postal services are clients’ mail at regular, agreed intervals and also
suitable when others are not. For example, makes large deliveries to them for an agreed fee.
it is not possible to send a parcel by This saves the clients time and money because
telecommunication. In addition, sometimes only they do not have to make their own arrangements.
an original of a document, bearing an original l Business Reply Service: used mainly by
signature, may be used for legal reasons. businesses to encourage people to write to them.
In most countries, the postal services are controlled The person sending the letter does not have to
by a government-operated post office system, pay any postage because the envelope or postcard
while some countries are transferring some has a licence number on it. The number refers to
aspects of ownership to the private sector. The the business/person to whom the communication
charges for postal services provided can be found is being sent – that person will eventually be
on the internet or within a central directory or charged the postage cost (plus an additional fee).
mailing guide. Commonly, companies send out leaflets or
brochures showing products they wish to sell,
Mail services enclosing a printed business reply card (or
Each country will offer its own postal services envelope) so that customers can just fill it in and
but many of the following will be available in put it in the post without having to pay postage.
most countries. The service is also used for the completion of
questionnaires and surveys.
l Two-tier services: in many countries there is l Bulk postings: many businesses send out
a two-tier basic postal service for letters and large quantities of the same letter (a circular)
small packets. Sometimes identified as first- and to many addresses at the same time. Many
second-class post, with one providing a faster postal services offer special provisions for bulk
service than the other, for a higher postage charge. postings including discounts, lower charges for
l Registered mail: items that require special mail franked in a particular way and so on.
handling because of the value of their contents l Franked posting: franking machines stamp
should be sent using this service because an envelope (or a parcel label) with a code that
compensation is paid if they are lost. Money corresponds to an account held with the postal
orders and other valuable items should be sent authority. It is not necessary to affix postage stamps
this way. A fee is paid in addition to the postage as the user is billed directly by the postal services.
payment, and the postal service obtains a The facility is mainly used by businesses and
signature on delivery. makes bulk posting easier. The franking impression
l Recorded delivery: anything sent in this can include a logo or address of the company.
way must be signed for upon delivery. The l Poste Restante: (French for post remaining) the
compensation is not as great as it is for post office holds mail until the recipient calls for
registered post and, therefore, it tends to be used it. This service is suitable for people travelling
for items of lesser value. Typically, this service away from their base who are expecting letters.
is used for delivery of important documents (for Customers can arrange for delivery to a named post
example, a final demand for payment) rather office and collect their post at a convenient time.
than valuables. l Private boxes: installed in many post offices, these
l Express delivery service: express services are are available in exchange for a fee. They provide
available between cities. For a fee, delivery of an guaranteed security for the box holder who can
item will be speeded up because the destination collect mail from their box at their convenience.
post office will make a special delivery of an l Parcels service: the cost of sending a parcel
express paid item as soon as they receive it. A through the post depends mainly on its weight
signature is then obtained to prove that delivery and size, as well as the distance to travel. The
has been made. basic parcel service tends to be slower than letter

80 Photocopying prohibited
 8.3 Postal services

services, especially if items are sent overseas. made. In the case of a small package, registered
Compensation for damage and loss varies from post may be sufficient, but a larger or very valuable
one country to another. item will need more specific provision such as
l Courier services: door-to-door delivery of courier delivery. Whatever the case, it is important
both letters and parcels is available with some that the carrier provides insurance cover.
postal authorities but there are also many private Obviously, a physical item cannot be sent by email!
companies, some of which operate internationally. l Written format: sometimes it is essential that
Each has its own conditions of service and rates communication is in a written or printed format,
but most charge by weight, size and distance. for example, complex instructions. Some legal
documentation may only be acceptable in
Choice of communication method the written format, and perhaps only with an
original signature (where only postal or hand-
Communication can be said to include not only the delivered methods are acceptable).
passing of messages, but also the physical movement of l Confidentiality: it would not be advisable to send
items from one place to another – sometimes these two a confidential communication by fax because it
aspects are interrelated. For example, we know that could be seen by someone other than the intended
a letter can be physically transferred using the postal recipient. A personal letter sent by post could be
services, but it can also be transmitted electronically. appropriate, but it may take too long to arrive. An
The method of communication (genre) used email is another way to ensure confidentiality but
will depend upon several factors. Sometimes a an original signature may be needed.
combination of factors will influence the choice of l Number of recipients: if a lot of people need
communication method. For example, it may be to receive the same message, the written
necessary to communicate urgently, in written format method may be best, but there are many
and confidentially. Several methods of communication other alternatives; the one-to-many methods
could meet these criteria. For example, an express of communication addressed earlier would
postal letter, an email, and a facsimile transmission suit. If the message does not have to be in
will all meet the above requirements. written format, and confidentiality is not
essential, there are many visual and audio
l Urgency: where information must be conveyed media that might be used, as well as the bulk
quickly, the most sensible thing is to speak to posting service provided by the postal service.
someone. It may be best to do this directly, that l Location: the locations of the message’s
is, face to face, either confidentially or in a group transmitter and its recipient will also influence the
situation such as a meeting or, if this is not method of communication. For example, using
practical, via the telephone. But there are many an intercom is not an option when two offices
other alternatives for rapid written transmission are located in different towns, or even different
(for example, email or fax) or face to face over countries. Time zone differences will also
distances (for example, videoconferencing). influence the chosen method of communication
Similarly, the transport costs for physical when different countries are involved.
packages (for example, by post) will also vary l Distance: if the sender and the recipient are not
according to the urgency of need – generally, the located near each other, and may even be in different
speedier the transmission, the higher the cost. countries, a face-to-face meeting may not be
l Numbers, weight and size: the number of possible but teleconferencing or videoconferencing
packages to be physically transported and their may be options, Similarly, the distance over which
weight and size will obviously influence the a physical package has to be transported will
method of transportation used and also the cost influence the method chosen (by land, airmail or
charged for the service. For example, the postal sea), and will also affect the charge made.
service or courier service will base their charges l Cost: a business must weigh up the cost of
on the weight and size involved. communications and whether or not the content
l Value and security: when an item of value is of the message or package justifies the cost of
being transmitted, special arrangements must be transmission or transportation.

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8 COMMUNICATION

8.4 Trends in communication Good for commerce

This is all good news for businesses because
marketers can identify and influence consumers in
Recent technological developments specific relation to their interests.
Technological developments have led to a variety Continued expansion of computer-related
of internet-related communication facilities. The communication, with particular emphasis on mobile
corresponding development of new hybrids of communications, that is, ‘communication on the
mobile telephones closes the gap between computer move’, including selling, buying and paying online,
and telephone applications. has motivated businesses to embrace multichannel
l Tablets are slim and lightweight internet- marketing. Users are exposed to advertising as
enabled computers that work in a similar well as handy communication while on the move,
way to smartphones, with touchscreens and and those engaged in marketing exploit this
downloadable apps. They are much smaller technological opportunity.
than a conventional computer, but larger than a Increased demand for online shopping (e-commerce)
mobile phone. has resulted in increased demand for parcel and
l Mobile phones provide ‘communication on courier services, leading to the creation of many new
the move’ but in recent times they have further and smaller courier service companies. This has also
developed to become a multifunctional tool led to more effective package tracking facilities.
of communication. Smartphones are mobile
phones that perform many of the functions of Easier access to online facilities has led to more
a computer, typically having a touchscreen people working from home, and this trend continues
interface, internet access, and an operating to expand. This is convenient for the worker
system capable of downloading apps. and there is a decrease in the use of commuting
l Touchscreens feature a touch-sensitive panel facilities, helping to lessen pollution. Staff working
covering the screen, allowing the user to use from home can also reduce business operating costs.
their finger as a pointer instead of a mouse. Medical care staff use facilities such as text
They are popular with novices and suitable for messaging to send appointment reminders to patients.
many uses, although they are unsatisfactory for Soon patients with critical illnesses (for example,
fine work. heart disease) will be able to receive reminders when
l Social media such as Twitter, Facebook and they are due to take their next medication. If they do
LinkedIn are online communication channels not react to a reminder, care staff will be alerted.
that group users by interest, location, education
background and so on. Although seen as a All of this has had a significant impact on business
means of communicating with like-minded operations. Businesses have embraced the need to
‘others’, social media is also a significant target use multichannel methods of marketing. Whereas
area for internet marketing. business advertising tended to be restricted to a
l Social media marketing is the process of relatively few (but effective) advertising media,
gaining access to website traffic through companies now have access to a wide variety
social media sites. Content is created that because of the strides made in technological
attracts attention and encourages users of developments, and the internet in particular.
the social media to share it across their
social networks. The drawbacks
l Application store (app store) is an online portal Increased use of electronic communication methods
through which programs are made available for (such as email) has reduced the demand for
the user to download. For example, a user can conventional postal communication. This has put
download an app that enables them to access pressure on postal services and in some cases has
directions to any destination. led to unemployment.

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 Things to do

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
transmitter pie chart body language package tracking
message bar chart voicemail apps
medium histogram voice bank smartphone
receiver line graph hardware social media
public image pictogram software social media marketing
memorandum closed-circuit television spreadsheet

Search and find

Copy the questions below and write out their 14 Explain the difference between hardware and
answers to form your own revision notes. You can software, using examples to illustrate your answer.
find the answers by referring back to the chapter. 15 What is word processing?
1 Why is communication important in commerce? 16 How do spreadsheets aid accounting?
2 What are the four elements of communication? 17 Explain the difference between CAD and CAM.
3 Explain the difference in function between 18 What is the difference between internet
internal and external communication. and intranet?
4 How does global communication aid 19 Describe clearly two contrasting methods of
commerce? communication via the internet.
5 Describe three contrasting forms of oral 20 Why is postal communication still important
communication. despite the obvious advantages of
6 How does a memorandum differ from a letter? internet communication?
7 Why is email not suitable for all forms of 21 Describe two services of postal service where
written communication? a signature is obtained on delivery.
8 Describe three forms of visual communication. 22 How does the Business Reply Service aid
9 Why can body language be said to be a means commercial activities?
of communication? 23 What is the difference between franked
10 Describe ways that the use of the telephone posting and bulk posting?
internally differs from external use. 24 Describe four factors that will influence the
11 What are the similarities and the differences choice of method of communication used,
between an answering machine and a voice whether postal or electronic.
bank? 25 Explain the difference between a conventional
12 Under what circumstances might a mobile phone and a smartphone.
fax machine be a suitable method of 26 What are apps?
communication? 27 Communication is continually changing, but
13 How do teleconferencing and what do you see as the most significant trends
videoconferencing differ? in your country?

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8 COMMUNICATION

Multiple choice
Choose the one most appropriate answer from 6 Which of the following communication
the four alternatives. facilities is the least likely to be used internally
1 Minutes would result from: in a business?
A a memorandum A memorandum
B a telephone conversation B intercom
C a questionnaire C telephone
D a meeting D facsimile
2 In order to access a voice bank an employee 7 Which of the following methods of
would need: communication would contact the most
people in a single transmission?
A a computer
A public address
B a PIN
B pager
C a fax machine
C telephone
D a spreadsheet
D intercom
3 Which of the following includes visual
communication? 8 Which of the following can offer the greatest
degree of confidentiality?
A internet telephony
A intercom
B instant messaging
B CCTV
C videoconferencing
C a letter
D teleconferencing
D a meeting
4 Which of the following does not include verbal
communication? 9 Videoconferencing is a:
A interview A recording of a meeting
B memorandum B conference via the internet
C intercom C special radio service
D meetings D meeting in a large hall
5 Which one of the following postal services 10 A most common method of interdepartmental
provides compensation for damage or loss? written communication is:
A registered post A a letter
B Business Reply Service B minutes
C private boxes C reports
D Poste Restante D a memorandum

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 Things to do

Structured questions
Answer as many parts of the questions as you can. The marks available indicate the amount of detail you
need to supply/the level of difficulty of each question.
1 The questions below are all related to the methods of communication.
a Name one method of oral communication. [1]
b In what ways is a meeting a form of communication? [2]
c Briefly explain the difference between a letter and a memorandum as a method
of communication. [4]
d Clearly describe two contrasting forms of visual communication. [4]
e Draw a simple table similar to the following example and complete it by including one item
in each blank space. [9]

Types of communication:
Advantages and disadvantages
Advantages Disadvantages
Oral
Written
Electronic

2 Refer to Figure 8.4 and answer the following questions related to graphs and charts.
a Use very simple diagrams and brief but clear explanations to describe each of the following ways
of presenting statistics in graphic form:
i pie chart [2]
ii pictogram [2]
iii bar graph [2]
iv line graph [2]
b Explain when it would be more appropriate to use a pie chart than a line graph. [3]
c A company’s sales to overseas countries last year were as follows:
EU 48%
USA 43%
India 9%
Display this information in the form of a pie chart. [3]
d The data given below relates to a company’s sales to Australia over a 12-month period.
Illustrate this data using a bar chart in a vertical or horizontal format. [6]

Month Sales $000s Month Sales $000s Month Sales $000s

January 240 May 180 September 310
February 200 June 280 October 220
March 300 July 190 November 300
April 170 August 220 December 250

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8 COMMUNICATION

3 Read the newspaper article in Figure 8.5 and

then answer the questions that follow.
a What is teleworking? [1]
b Why is teleworking dependent on Prior to the Industrial Revolution Two main factors have led to remote
communication systems? [2] almost everyone worked at or near working. First has been the develop-

c One of the advantages of teleworking their homes. During the Industrial ment of telecommunications and
Revolution, this completely changed computer technologies – the advent
from the point of view of the employer is as workers flocked to the factories to of email and other ways of instantaneous
that it saves on office space. How does look for employment. After that, transmission of information.
it do this? [2] home working became progressively Second, there has been a trend for
low status and poorly paid, but all employers to recruit a wider range of
d State two possible savings for the this has changed. workers than before. Now employers
employer, other than that of space. [2] ‘Telecommuting’ , ‘teleworking’ or want people able to work more
‘remote working’ are names that have flexible hours and with the technical
e State one advantage and one been given to the modern trend of skills to embrace modern technological
disadvantage of teleworking from the working from home using computer ways of working. Teleworking helps to
point of view of the employee. [2] and internet-related technology, embrace these changes.
for at least part of the week.
f What is email and how can this assist
teleworking? [3]
g Briefly describe two specific ways that the
internet can contribute to teleworking, Figure 8.5 Newspaper article
other than by email access. [4]
h There are some kinds of commercial
work where the methods of
communication necessary make
teleworking impracticable. Describe
two examples where this would be
the case. [4] 1 2 3
4 Look at the safety-related signs in Figure 8.6
and answer the questions that follow.
a Why is it important that signs such as
these are understood instantly? [2]
b These signs cleverly communicate their
message without the use of words. How 4 5 6
are they able to do this? [2]
c Choose any three signs in Figure 8.6
and say what you think each one is
communicating to those who see it. [3]
d Produce a simple drawing of three of any
commercial company signs or logos that 7 8
have worldwide recognition and name the
companies that use each of them. [3]
Figure 8.6 Safety signs
e How can a company use modern
technology to make their signs, logos or symbols so easily recognisable that no words are needed
to communicate their business? [4]
f Create simple diagrams to adequately illustrate three of the following circumstances. No colour is
required, but do label your diagrams.
i first-aid facilities point iv not to be used for drinking water
ii no entry v do not touch
iii left or right direction vi no ladders allowed. [6]

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 Things to do

5 The following questions are all related to

the advertisement shown in Figure 8.7. The
advertisement was placed in the vacancies School Leaver Required
section of a local newspaper by a small real
estate agent. for busy real estate agent’s office.
a In what way can this advertisement be Hours: 8.45a.m. to 6.00p.m.
considered a means of communication? [1]
b Give two possible reasons why
+ alternate Saturdays
Homewise placed this advertisement in Experience not necessary as training will
a local newspaper rather than the
national press. [2] be given, but applicants must have:
c Name the two forms of communication
through which applicants are advised to • Good standard of written communication
reply to this advertisement. [2]
d This advertisement is not a particularly • Pleasant telephone manner
good example of communication
because it leaves too many questions
unanswered. For example, how much
does the job pay? Give three other
questions or points that, in your Write or telephone: Abdul Anees,
opinion, the advertisement leaves Homewise Estates, 50-C, Main Gulberg, Lahore
unanswered. [3] Telephone: +92 42 111000111

e Rewrite the advertisement, addressing Figure 8.7 Job advert in a local paper
the criticisms you identified in d, bearing
in mind that it will still appear in a local
newspaper. [4]
f i The job advertisement demands two particular communication skills. Name these two skills
and say why each is important to this particular type of business.
ii Considering the fact that this is a relatively small local business, state with reasons two
technological skills you would suggest could be added to the skills required of applicants [8]

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9 TRANSPORT
organisation to whom delivery is made. The firm
BY THE END OF THIS CHAPTER YOU transporting the freight is often referred to as the
WILL BE FAMILIAR WITH: carrier and the goods being carried are called
l transportation freight or cargo and sometimes the consignment
l containerisation when reference is to a particular batch of goods.
l ports and airports Transport also contributes to the balance of
l transport documents
payments of a country: when goods of another
l developments and trends in transportation.
country are transported by home-country carriers,
foreign currency is earned thus adding to the
income of the country that owns the transport.
9.1 The importance Consignors have a choice of transportation methods
of transportation to ensure goods reach their destination. They will
want to use the most appropriate method for their
Producers create goods that reach the final goods, but also at the best price. In some cases
consumer through a number of channels, including they may be under pressure to ensure goods are
wholesalers, retailers and international trade. This delivered before any deterioration in quality occurs,
journey from producer/manufacturer to consumer is or any depreciation in value while still minimising
called the chain of distribution and transport plays a transportation costs.
vital role in ensuring the goods reach each place in The factors that influence the form of transport
the chain. used include:
Transportation enables: l the nature of the goods
l workers to travel to and from work l how urgently the consignment is needed
l raw materials to reach the producer l the value of an item and insurance costs
l finished products to be distributed. l the cost of transportation
l handling and warehouse costs
An efficient transport system reduces the amount l the distance the goods must be transported
of capital tied up in stocks because new supplies l the size and weight of the load
can be obtained quickly. It also makes international l the convenience of position of terminals, for
trade possible, which is an important aspect of example, docks, airport, railway station
marketing and distribution. l the possibility of combining loads to
Transport plays an important part in the trade reduce costs
of goods – without it, raw materials would not l the reputation of the carrier.
reach the producer, and finished goods would Even when these factors are taken into account,
not be created and distributed to buyers. For problems can still occur. Shipments can be delayed
trade to be effectively executed, a sophisticated for a variety of reasons, for example, industrial
transport system is needed to ensure that goods conflicts such as strikes, or even something as
get to the right place, at the right time, and in simple as poor communication. Freight sometimes
good condition. suffers spoilage and pilferage, and of course
The person or organisation sending freight is called goods may even be misdirected. All of these have
the consignor, and the consignee is the person or implications for the profitability of the business.

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 9.1 The importance of transportation

Methods of transportation Disadvantages of road transport

l Expensive to operate in large congested cities.
Road transport l Subject to mechanical breakdowns.
l Prone to accidents.
l It causes and is affected by congestion.
l Loads are limited in size and weight.
l Some roads are unsuitable for very large vehicles.
l Slower than railways over long distances.
l Wasteful of resources if a truck returns empty.
l Tax on vehicles and fuel costs must be added
to charges.
Road transport is the l It causes considerable pollution.
most flexible method
of transport Shared taxis and buses
Whereas buses follow a set route and timetable, shared
taxis are a mode of transport which falls between
taxicabs and buses. They take a number of forms and
can be as small as cars but are more often minibuses.
Figure 9.1 Road transport can be flexible They tend to operate over relatively fixed routes (in a
similar manner to buses). They may stop anywhere they
Road transport is the most commonly used form are flagged down to pick up and drop off passengers.
of transport in most countries and is the most
flexible (see Figure 9.1). Road transport includes Fleet ownership
carrying passengers, and also transporting freight Relatively small businesses may have little choice
such as raw materials to and from producers about the form of road transport they use. They are
as well as taking finished goods to customers. not big enough to own a fleet of trucks and so they
The majority of road haulage tends to be by are obliged to use the transport facilities of other
relatively large trucks, but smaller delivery vans companies. However, larger concerns can decide
also play an important role. A large proportion whether to operate their own fleets or use those of other
of the spending by governments of all countries providers. There is no simple answer to this dilemma,
is on maintenance and improvement of the and each business will make a decision based on its
road networks. circumstances, taking into account the following:

Advantages of road transport Reasons for fleet ownership

l Door-to-door service provides maximum l Vehicles purchased can be customised to the
flexibility. specialist requirements of the company – for
l Fast over short distances. example, high security, refrigeration and so on.
l Risk of damage reduced by lack of need of l The company is directly able to meet its
trans-shipment. customers’ needs without relying on other carriers.
l Can reach places inaccessible to other forms l Dispatch and delivery times can be completely
of transport. controlled by the consignor and consignee.
l A good road network speeds up movement and l The likelihood of damage or theft is reduced.
reduces congestion. l Vehicles can carry the name and logo of the
l Less tied to a rigid timetable than rail transport. company sending consignments, together
l Suitable for speedy direct delivery of with contact information, thus raising the
perishable goods. company’s profile.
l Other forms of transport rely on road transport l Where a number of deliveries can be scheduled
to connect with terminals such as airports, on the same vehicle, the company can benefit
stations and docks. from the economies made.

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9 TRANSPORT

l The company can use its own fleet to carry private franchises are given for some aspects of the
deliveries for other companies, thus enjoying rail service providing movement facilities for both
further economies. passengers and freight (see Figure 9.2), usually with
l The amount of documentation is reduced when separate services for each.
the company uses its own fleet of vehicles.
Many developed countries with large railway
Reasons against fleet ownership networks have developed high-speed trains suitable
for covering long-distance journeys quickly. These
l Initial purchase cost, ongoing maintenance,
are used for passenger transport and also for speedy
tax and insurance and drivers’ wages are all
movement of high-value freight transport (goods
very high.
trains or freightliners), often linking with special
l Operating costs are increased when vehicles
road, sea and air terminals.
return empty from deliveries.
l Unless vehicles are sent out with full loads they An important feature of all forms of rail freight is
will be operating uneconomically. the use of International Standards Organisation
l When vehicles are standing idle, for example, (ISO) containers, which are loaded direct from
during maintenance or repairs, they are eating trucks onto special train ‘bogies’. They are unloaded
up capital. onto road transport at their rail destination in a
l Ownership of a vehicle fleet means less capital similar manner.
is available for other uses (for example, expansion). Where countries have been able to embrace the
improvements in rail traffic, for example, via the
Rail transport
use of containers for freight handling, rail transport
can be enhanced through:
Modern rail freight uses containers
on special trains called freightliners l improved freight-handling economies
l simplified and more effective timetabling
l reduced losses from damage or theft
l direct links between terminals such as ports.

Advantages of rail transport

l More comfortable and easier for passengers than
some of the alternatives.
l Faster than road over long distances.
l Less labour-intensive than road transport.
l Especially suitable for container traffic.
l More economical in fuel use than road transport.
l Causes less pollution than road transport.
l It is a relatively cheap means of transportation.
l Operates on a schedule and avoids road
blockages.

Disadvantages of rail transport

l Routes determined/restricted by railway lines
Figure 9.2 Rail transport
and stations.
In many countries where rail transport exists, it l Equipment costs are very high.

tends to be in public ownership or in part public l Relies on road transport for trans-shipment.

ownership. This is because the cost of providing l Less economic than road movement for short

the infrastructure required by rail transport is often journeys.

beyond the scope of private business and requires l It is not suitable for perishable goods because of

government assistance. However, in some countries delays in trans-shipment.

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 9.1 The importance of transportation

Waterways transport Sea transport

Many countries use some internal forms of river Sea transport is very important to any country
and canal transport, and the majority of a country’s that has a seaboard. It provides access to ocean-
imports will be brought in by sea. Those that export going vessels, which can transport exports to other
to other countries do so mainly by sea transport. countries and bring in the many imports now
demanded by modern society. The main forms of
River transport sea transport are outlined below and in Figure 9.3.
Suitable rivers (and canals in some places) allow l Passenger liners (cruise liners) are built mainly
the movement of freight and people from one place for passenger travel, particularly cruising. They
to another. Sometimes river transport is used to sometimes carry some cargo and tend to follow
move goods from inland places to sea harbours fixed routes and keep to a regular timetable.
for transfer to seagoing vessels. Although river Therefore, delivery dates can be guaranteed.
transport is not used extensively it can be a useful However, freight costs limit their use to high-
facility in more remote areas. value cargoes.

Oil tanker

Tramp ship Fishing boat

Cargo ship Ferry

Hovercraft Container ship

Passenger liner

Figure 9.3 Commercial shipping

Photocopying prohibited 91
9 TRANSPORT

l Cargo ships sometimes carry passengers but l Ship maintenance costs are very high.
their main purpose is to deliver cargo. They l Sea transport is particularly affected by climatic
tend to operate on fixed routes and to a regular conditions.
timetable. Such a vessel will sail from a port on
time, even if some of the scheduled cargo has Air transport
not arrived in time for loading. This is the newest and most highly technical form
l Tramp ships are vessels that have no timetable or of transport. It carries both passengers and freight
set route. They will carry any type of cargo they between countries and within them, and the volume
can manage to any part of the world. The vessels of both is constantly expanding. Freight-carrying
are chartered through a charter party agreement. facilities have been improved and speeded up by the
l Special freighters are purpose-built ships including: development of containers suitable for transport by
container ships: cellular design vessels for freight planes.
fast load/unload
There are a wide variety of aircraft available for
bulk carriers: for grain and ore
both commercial and recreational use. Larger
tankers: for oil and other bulk liquids
‘fixed wing’ aircraft figure prominently in
ferries: roll-on/roll-off ferries that can carry
commercial transport, including those that do not
vehicles; hovercraft have proved particularly
carry passengers but concentrate just on freight
successful in this role in some parts of the world
operations. There are also many other forms of
oil, bulk, ore (OBO) ships which have different
smaller aircraft that have a niche in commercial
holds so that they can carry a mixture of
activities such as helicopters and seaplanes.
different types of bulk cargo in the one vessel.
l Fishing boats are purpose-built vessels used Air transport makes a major contribution to the
for inshore fishing, which go out daily. Larger tourist industry. It has also become increasingly
deep-sea ships will go out for many days into important for carrying cargo where it is economically
international waters seeking a harvest from viable, for example, small-size, high-value freight.
nature in a wider area.
Overall, economic use of air transport is limited to
Fishing has been hit in recent years by
certain cargoes, particularly lightweight, high-value,
international demands to protect fishing stocks.
urgently needed commodities such as drugs, mail or
It has also been affected by the development of
high-value perishable goods.
inshore ‘fish farms’. This hits local economies
that rely heavily on fishing. Advantages of air transport
l It is the fastest form of transport.
Advantages of sea transport
l Operates to timetables, mostly on direct routes.
l The ‘way’ is free and gives access to most parts
l Containers for cargo facilitate fast loading and
of the world.
unloading.
l A large ship can be propelled with a relatively
l The risk of damage or pilferage is reduced.
small amount of power. l Packaging costs are reduced.
l The natural buoyancy of the water enables
l Particularly fast over long distances.
ships to carry very heavy loads, which gives l A fast and convenient form of transport if the
economies of scale.
value of the cargo justifies the transport cost.
l It aids international trade.
l Relatively safe as accidents are rare.
Disadvantages of air transport
l Causes relatively small amounts of pollution.
l High operational costs result in high freight rates.
l Weight and size of cargo are limited.
Disadvantages of sea transport
l Sometimes affected by adverse weather conditions.
l Can carry cargo only as far as the ports.
l Relies on other forms of transport to and
l Reliant on other forms of transport to deliver its
from airports.
cargo to and from ports. l Not suitable for short distances.
l A relatively slow method of moving freight.
l Causes noise and pollution.

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 9.2 Containerisation

Pipelines The containers are moved around the terminal by

Transporting commodities via pipelines removes straddle carriers. The container is loaded precisely
the need to use vehicles. Goods transported by this into position in the ship’s hold by special gantry
method include oil, gas and water, usually over long cranes (see Figure 9.4).
distances. Pipelines run under the oceans as well Advantages of containerisation
as overland.
l Standard sizes (ISO sizes) means that

Advantages of pipelines standardised handling facilities can be used

l Products are conveyed to their destination with
throughout the world.
l Reduced staffing requirements reduce
limited labour input, thus achieving economies.
l Environmentally friendly – vehicles are not used
transport costs.
l Movement of large loads in a single lift reduces
so there is no need to organise a return cargo load.
l The maintenance cost of pipelines is low
handling costs.
l Damage and pilferage is reduced because a
compared with other means of transportation.
container is a very strong and secure package.
Disadvantages of pipelines l Warehousing costs are reduced because a

l Products that can be moved are limited to liquid

container is in effect a large storage space.
l Packing and insurance costs are reduced.
products.
l Containers can be adapted to carry a wide range
l Leakages can occur and go undetected for
some time, causing wastage and potentially of specialised products – dry cargo, liquid cargo
environmental damage. and even refrigerated cargo.
l Ship and aircraft turnaround is speeded up
l In recent years pipelines have suffered from
vandalism, attacks by militant groups, and theft considerably.
l Increased protection of goods from fire and
of the pipes and the transported products.
bad weather.

9.2 Containerisation Disadvantages of containerisation

l Site constraints apply because containers are
A container is a large steel box available in two extremely large packages that require vast
ISO standards, capable of carrying 20 or 30 tonnes storage space, even when they are not in use.
of freight. The container is packed at the factory or l Capital costs of containers are relatively high,
inland pooling depot and delivered to the shipping not just because of their size but also because
container terminal by rail (freightliner) or by road, and of the need for heavy lifting and movement
deposited in the container parking area in the dock. equipment.

Figure 9.4 Containerisation

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9 TRANSPORT

l While their strength facilitates stacking, it is can link up with other forms of transport. For this
inconvenient if a container low down in a stack reason, an airport must be sited as close to a major
needs to be accessed. city as possible, while avoiding high-rise buildings
l If a container is lost overboard from a ship the and causing as little noise and air pollution
cost effects are very high in terms of the value of as possible.
the container itself and the cargo in it.
l The regular movement of such heavy loads can Road and rail links
lead to damage. Road and rail links play an important part in
l Small amounts of cargo are unsuitable for providing easy access for both travellers and freight.
container transit and so loads have to be ‘pooled’. If the road and rail links are speedy and efficient, an
l Containerisation has reduced employment airport can be sited further away from a city centre.
within cargo handling. A modern air terminal also requires facilities for
long- and short-term parking and hotels, as well
Despite the disadvantages, containerisation as freight storage such as bonded warehouses (see
continues to develop and expand successfully Chapter 10).
because the advantages outweigh the disadvantages
and are clearly cost effective. Operational facilities
A wide range of equipment and repair services
9.3 Ports and airports is necessary to keep aircraft flying. For example,
sophisticated radio, radar, computer and other
technical equipment (and the people to operate them)
Requirements of a seaport are essential at busy international airports. In addition,
Efficient sea transport requires good terminal aircraft use vast quantities of highly inflammable
facilities that enable vessels to ‘turn round’ quickly. fuel. This must be stored safely and a fleet of tankers
and other vehicles are need to load fuel, luggage and
The main requirements of a modern port include:
freight onto and off aircraft. In addition, safety and
l clear access channels with deep water medical services such as ambulances and fire engines
l some protection from rough seas must be on standby at all times.
l wharves with appropriate lifting gear
and equipment such as those needed for Customs and immigration officials
handling containers Customs and immigration officials regulate the
l warehouses, including special storage, such as import of goods on which duty must be paid, as
refrigeration, bonded stores and facilities for well as checking for prohibited items such as drugs
hazardous cargo and firearms. Immigration officials also ensure that
l supplies of oil, water and other shipping those who enter the country have the right to do so.
requirements
l repair facilities such as dry docks Terminal buildings and personnel
l customs and immigration facilities Terminal buildings need baggage and freight-
l good links with road or rail networks handling equipment to ensure speedy movement
l buildings for offices and commercial services. of passengers and freight. Often there are facilities
such as shops, bars and restaurants and a duty free
Requirements of an airport shop. Airports require a wide variety of personnel
to operate the terminal buildings. Security
Site arrangements and security personnel are an
essential aspect of airport operations.
While it would be convenient to site an airport in
the countryside where land is comparatively cheaper All of the above provide a good source of
than in an urban environment, most air travellers employment for local people, as well as nearby
are heading to the world’s major cities where they businesses (see Figure 9.5).

94 Photocopying prohibited
 9.4 Transport documents

Figure 9.5 Airports have sophisticated requirements

9.4 Transport documents l Bill of lading: used to ship goods traded

internationally by sea; this document conveys
A number of transportation documents are necessary the right to take possession of the goods. The bill
for road, rail, sea and air transport. The principal of lading gives details of:
documents are summarised below in alphabetical order. a description of the cargo and its
destination
l Air waybill: used in air transport and given the title to ownership of the goods
to the consignor as a receipt for cargo to be a receipt for the goods on board the ship.
transported as air freight (see Figure 9.6). (See Figure 9.7.)

Photocopying prohibited 95
9 TRANSPORT

TFC20246899
Shipper’s Name and Address Not Negotiable
ABC EXPORTER SND BND
KWANG 264, PADUNGAN ROAD,
HOUSE AIR WAYBILL
issued By
KUCHING
MY FREIGHT FORWARDING COMPANY LTD
MALAYSIA
30, DEMO FREIGHT BUILDING KUALA LUMPUR Malaysia my
my freight
freight
T:46465 F:12346
THE DIRECTOR T:+000000 F:+000000
Copies 1, 2 and 3 of this Air waybill are originals and have the same validity
Consignee’s Name and Address
It is agreed that the goods described herein are accepted in apparent good order and condition (except as
AYZ IMPORTER GMBH noted) for carriage SUBJECT TO THE CONDITIONS OF CONTRACT ON THE REVERSE HEREOF ALL GOODS
RIEMER STRASSE 350, D – 81829 MAY BE CARRIED BY ANY OTHER MEANS INCLUDING ROAD OR ANY OTHER CARRIER UNLESS SPECIFIC
MUNICH CONTRARY INSTRUCTIONS ARE GIVEN HEREON BY THE SHIPPER, AND SHIPPER AGREES THAT THE
GERMANY SHIPMENT MAY BE CARRIED VIA IMMEDIATE STOPPING PLACES WHICH THE CARRIER DEEMS APPROPRIATE.
T:123987 F:654123 THE SHIPPER’S ATTENTION IS DRAW TO THE NOTICE CONCERNING CARRIER LIMITATION OF LIABILITY.
PURCHASING OFFICER Shipper may increase such limitation of liability by declaring a higher value of carriage and playing a
supplemental charge if requried.

Issuing Carrier’s Agent Name and City Account Information

MY FREIGHT FORWARDING COMPANY LID
MALAYSIA

Agent IATA Code Account No

Airport of Departure (Addr of First Carrier) and Requested Routing

KUALA LUMPUR INTERNATIONAL

To By First Carrier Routing and Destination to by to by CUR CHGS WT/VAL Other Declared Value for Carriage Declared Value for Customs
Code
PPD COLL PPD COLL

FRA N V D N C V
Airport of Destination Request Flight / Terms
Amount of Insurence INSURANCE - If carrier offers insurance and such insurance is requested
in accordance with the conditions hereof, indicate amount to be
FRANKFURT INTERNATIONAL NIL insure in box marked ‘Amount of Insurance’

Handling information

No. of Rate Class Rate

Gross kg Chargable Nature and Quantity of Goods
Pieces Commodity Total
Weight lb weight (Incl Dimension or Volume)
RCP Item No. Charge

13 147 K Q AS AGREED AS AGREED Shipper’s load, stow, and count

FOOD STUFF
3.78

13 147 AS AGREED
Prepaid Weight Charge Collect
Other Charges

AS AGREED
Total other Charges Due Agent

Total other Charges Due Carrier

Valuation Charges
Shipper certifies that the particulars on the face hereof are correct and that insofar as any part of the consignment contains dangerous
goods, such part is properly described by name and is in proper condition for carriage by air according to applicable Dangerous Goods
Tax Regulations.

MY FREIGHT FORWARDING COMPANY LTD

Signature of Shipper or his agent
Total Prepaid Total Collect

Currency conversion Rates Collect Charges in Destination Currency 2 January 2016 KUALA LUMPUR INTERNATIONAL
Executed on (Date) at (Place) Signature of Issuing Carrier or his agent

ORIGINAL 1
For Carrier’s Use only at Destination Collect charges at Destination Total Collect Charges

(FOR CARRIER)
Figure 9.6 An example air waybill

96 Photocopying prohibited
 9.4 Transport documents

Date BILL OF LADING - SHORT FORM - NOT NEGOTIABLE Page 1 of 1

SHIP FROM Bill of Lading Number:

[Name]
[Street Address]
[City, ST ZIP Code]
SID No.:
SHIP TO Carrier Name:
[Name] Trailer number:
[Street Address]
[City, ST ZIP Code]
Serial number(s):
CID No.:

THIRD PARTY FREIGHT CHARGES BILL TO SPAC:

[Name] Pro number:
[Street Address]
[City, ST ZIP Code]

Special Instructions: Freight Charge Terms (Freight charges are prepaid unless marked
otherwise):
Prepaid Collect 3rd Party
Master bill of lading with attached underlying bills of lading.
CUSTOMER ORDER INFORMATION
# of Weight Pallet/Slip
Customer Order No. packages (circle one)
Additional Shipper Information
Y N
Y N

Y N
Y N
Grand Total
CARRIER INFORMATION
Handling Package LTL Only
unit
Qty Type Qty Type Weight HM Commodity Description NMFC Class
Commodities requiring special or additional care or attention in handling or
(x) stowing must be so marked and packaged as to ensure safe transportation with No.
ordinary care. See Section 2(e) or NMFC item 360

Where the rate is dependent on value, shippers are required to state specifically in writing the COD Amount: $
agreed or declared value of the property as follows: The agreed or declared value of the
property is specifically stated by the shipper to be not exceeding ____________ per Fee terms: Collect Prepaid Customer check
________________. acceptable
Note: Liability limitation for loss or damage in this shipment may be applicable. See 49 USC § 14706(c)(1)(A) and (B).
Received, subject to individually determined rates or contracts that have
been agreed upon in writing between the carrier and shipper, if applicable, The carrier shall not make delivery of this shipment without payment of charges and all
otherwise to the rates, classifications, and rules that have been established other lawful fees.
by the carrier and are available to the shipper, on request, and to all Shipper Signature
applicable state and federal regulations.

Shipper Signature/Date Trailer Freight Counted: Carrier Signature/Pickup Date

Loaded: By shipper
This is to certity that the above named materials are Carrier acknowledges receipt of packages and required
properly classified, packaged, marked, and labelled, By shipper By driver/pallets said to placards. Carrier certifies emergency response information
and are in proper condition for transportation By driver contain was made available and/or carrier has the DOT emergency
according to the applicable regulations of the DOT. By driver/pieces response guidebook or equivalent documentation in the
vehicle. Property described above is received in good order,
except as noted.

Figure 9.7 An example bill of lading

Photocopying prohibited 97
9 TRANSPORT

l Certificate of marine insurance: verifies the a consignment for delivery at a destination (not to
insurance cover taken out by the consignor be confused with a delivery note, see Figure 9.8).
for goods being transported by sea. A similar l Consular invoice: a special kind of invoice
form of insurance will be taken out for goods in issued to the importer by the exporter, but within
transit by air and road transport. which the exporter must verify the value of the
l Certificate of origin: used to authenticate the goods. This information is needed when goods
country of origin of internationally transported are subject to taxation on an ad valorem (as per
goods. This is often needed because imports value) basis. It ensures that the taxation is based
from countries with special trading agreements on the true value of the goods.
with the importing country receive special l Delivery note: accompanies the goods, listing
concessions on import duties, hence the need to the description and quantity of goods delivered. A
verify the place of origin. copy of the delivery note, signed by the consignee,
l Charter party agreement: a contract made is returned to the consignor as proof of delivery.
between a ship owner and a consignor for the (See Figure 9.9.)
transport of freight. It details the terms by which l Freight note: the bill presented to the
the goods are carried, including the costs and consignor detailing the charges for shipping a
who will pay them. particular cargo.
l Consignment note: prepared by the consignor and l Manifest: a summary of all the bills of lading
countersigned by the carrier as proof of receipt of and all the cargo a ship is carrying.

PLEASE COMPLETE IN BLOCK CAPITALS AND PRESS HARD

CONSIGNMENT NOTE NUMBER
TNT EXPRESS HOUSE, HOLLY LANE, Express DIV BOOK COLLECTIONS
ATHERSTONE, WARWIOKSHIRE CV9 2RY
TELEPHONE : 01827 303030 Pricing Copy 0I0 ONLINE

OR CALL CUSTOMER
SENDER’S ACCOUNT NUMBER SERVICES ON

763602332 0800 123 456

FROM (Sender) PLEASE USE BLOCK CAPITALS
UK DELIVERY OPTIONS
COMPANY NAME:
Please tick ONE box only and note that if a service options box is not ticked our
STREET: standard Next Working Day Delivery will be given.
Please refer to our CTC Services available map for those geographic areas where
the following services may not be available.

TOWN: POSTCODE: NEXT WORKING DAY Before 9.00 AM

COUNTY: COUNTRY: NEXT WORKING DAY Before 10.30 AM
CONTACT NAME: NEXT WORKING DAY Before Noon
TEL NO: NEXT WORKING DAY Delivery
SATURDAY Before 9.00 AM
CUSTOMER REFERENCE (INFORMATION YOU WOULD USE TO APPEAR ON THE INVOICE) SATURDAY Before 10.30 AM
SATURDAY Before Noon
SATURDAY DELIVERY
TO (Receiver) PLEASE USE BLOCK CAPITALS
COMPANY NAME: EUROPEAN ROAD SERVICE
(Dangerous Goods cannot be sent on this service)
STREET:
WE CANNOT DELIVER IMPORTANT: Tick box if Enhanced Liablitiy cover IS required
TO P.O. BOX NUMBERS
DOES THE CONSIGNMENT CONTAIN DANGEROUS GOODS!
TOWN: POSTCODE:
COUNTY: COUNTRY: (Tick correct box) NO YES UN NUMBER
CONTACT NAME:
DANGEROUS GOODS DELIVERIES ARE NOT GUARANTEED
TEL NO:
Goods description Number Weight Dimensions (cms)
of items
SENDER’S SIGNATURE RECEIVER BY CTC (Please specify if goods are packed) Kilos Length Width Height

(PLEASE PRINT) (PLEASE PRINT)

DATE (Day/Month / Year) DATE (Day/Month/ Year)
Consignment subject to volumetric
ALL CONSIGNMENTS ARE CARRIED SUBJECT TO TNT EXPRESS SERVICES CONDITIONS OF CARRIAGE , THE PRINCIPAL CONDITIONS ARE SHOWN OVERLEAF Total number of items and weight
measurement

Figure 9.8 An example consignment note

98 Photocopying prohibited
 9.5 Developments and trends in transportation

COMPANY NAME DELIVERY NOTE

Address
Tel: 0 Fax: 0
00001
E-mail: 0 Web: 0
VAT Reg No. GB Date / / Order No.

Deliver To: ...................................................................................................................... Invoice To: .........................................................................................................

...................................................................................................................................... ..........................................................................................................................

...................................................................................................................................... ..........................................................................................................................

TOTAL PACKAGES DESPATCHED DATE DESPTCHED DELIVERED VIA WEIGHT SALESPERSON

QUANTITY DESCRIPTION

DATE RECEIVED PRINT NAME SIGNATURE TOTAL PACKAGES RECEIVED

Figure 9.9 An example delivery note

l Railway consignment note: evidence of and more bridges and tunnels to expedite traffic
shipment by rail transport, mainly used in movement. Transport has embraced the need for
transcontinental shipments. communication on the move, and freight tracking
l Road consignment note: contains details of the and communication with drivers has been enhanced.
goods being transported from a seller to a buyer It is now commonplace to find WiFi incorporated
by road; it travels with the goods. The road into buses and trains, enabling people to make social
consignment note acknowledges that the haulage contact and to work whilst commuting.
company has received the goods.
Probably the biggest criticism of road transport
has been the amount of pollution it creates. This
9.5 Developments and complaint has escalated as our awareness of the
problems of global warming has grown and the
trends in transportation depletion of fossil fuels has been acknowledged
more widely. Accordingly, efforts have been made
Transportation is changing in many ways to meet
to reduce exhaust emissions and to develop vehicles
the challenges of the expanding global market,
that do not use fossil fuels (for example, electric cars).
and the technological developments that are
These are largely limited to private motoring but are
fuelling this expansion. The commercial activity of
leading to improvements in commercial transport.
transportation from suppliers to customers is often
referred to as logistics. The changes in demand wrought by e-commerce
and mobile commerce have had an effect on
Road transport trends retailers’ selling and distribution – this in turn
has changed their transport needs. For example,
The growth in the amount of traffic on roads has many distributors who relied almost entirely on
encouraged governments to take steps to keep road transport have had to rethink their strategies
vehicles moving. It has led to the creation and and adopt a multichannel approach to their
expansion of express road routes, ring roads, transport needs.

Photocopying prohibited 99
9 TRANSPORT

This could be good news for road transport providers. Sea transport trends
For example, some larger companies, such as retail
chains who operate their own fleets of vehicles, may The smaller aspects of sea transport, such as
consider it a better proposition to hire a third party to fishing, have suffered from recent developments.
move their freight. There may also be an increased For example, environmental considerations have
need to transport in part loads rather than full loads. resulted in restrictions (the imposition of quotas)
Again, this could benefit independent road transport being placed on some fishing areas. The aim is to
providers because they have a number of users and improve fishing stocks in the seas, but the effects on
can combine loads more easily than fleet owners. local economies that are dependent on fishing can
be severe. Similarly, the development of fish farms
in local waters can boost the local economy, but can
Rail transport trends also adversely affect local traditional fishing.
Some users of road transport are now reconsidering
More widely, sea transport has not been affected as
how they can increase their use of rail transport as
significantly by e-commerce and m-commerce as
part of their multichannel approach. As we have
road transport. However, it is affected by any general
already identified, rail transport still relies on road
global economic downturn. In such circumstances,
transport to move consignments from stations to
sea transport has to fight hard to gain both passenger
the consignee. Where the consignee is not close to
and freight custom. When the global economy
a rail station, some road transport businesses have
improves, sea transport will rebound. In the
established a yard in close proximity to rail links,
meantime, vessel-sharing agreements (VSAs) are
thus making consignment delivery from railway
an interim solution. In addition, containerisation has
stations easier with interim storage space.
placed sea transport in a sound competitive position;
A prominent development in rail freight has been the the proof of this is found in the establishment of
push for nationally aligned railway systems into a seaports dedicated to container traffic.
single, integrated intercontinental system. This has
There has also been an increase in the use of
created a system that offers a more competitive rail
freight forwarders in sea transport – businesses
freight and passenger service between countries as
that specialise in arranging storage and shipping
compared with road transport. This is easier to achieve
on behalf of others such as exporters. Freight
where the countries are part of a single trading bloc
forwarders typically provide a wide range of
(for example, the European Union), but more difficult
shipping-related services including:
where such international alliances do not exist.
l preparation of shipping and export documents
Similarly, the development of improved and faster l warehousing
rail passenger and freight movement has led to many l booking cargo space
countries embracing high-speed rail developments. l tracking consignment movements
Examples are the mass rapid transit (Singapore) l negotiating freight charges
and the London Underground, which while already l filing insurance claims.
well established are evolving and improving.
Pakistan has future plans for a high-speed train that
will run between Peshawar and Karachi via major
Air transport trends
cities. Experiments in driverless trains have proved As the most technically developed method of
workable and will be introduced soon (for example, transport, it is not surprising that air transport has
London Underground), and card-operated automatic fully embraced the latest technological trends.
entry to rail station platforms is already a reality.
Many airlines are now engaging with customers via
High-speed rail involves huge costs and requires social media. For example, Virgin Atlantic (VA) ran a
financing at government level; only countries with ‘Looking for Linda’ event underpinned by the unique
sufficient resources and the need for long, fast concept of passengers choosing seats alongside
journeys are able to develop it. fellow passengers with similar interests, indicated in

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 9.5 Developments and trends in transportation

their social media profiles. British Airways (BA) ran short-haul flights in preference for longer flights –
an application called ‘Perfect Days’ that encourages leaving a gap that has been filled by smaller,
people to share a wish list and itinerary via Facebook. low-cost airlines. The latter have also had to make
economies in order to survive including introducing
Considerable progress has also been made in the
separate costs for in-flight refreshments, reducing
automation of passenger processes. For example,
luggage allowances and so on. Cutting out ‘frills’
many passengers choose their seats and check-
has enabled low-cost airlines to find a niche in
in online, thus simplifying and speeding up the
the market.
process at the airport terminal. Some airlines have
experimented with bag drops away from the terminal In spite of the various pressures on air transport it
at selected hotels. It is also predicted that bag drops continues to grow. For example, one growth area is
may be executed in the future at fast-food restaurants. specialist facilities for freight carriage by dedicated
aircraft. But it still remains under constant pressure
As the cost of fuel has increased over the past
from environmentalists who lobby for a reduction in
decade, airlines have been forced to consider ways
pollution caused by aircraft.
of improving fuel efficiency. Many major airlines
have achieved this by reducing the number of

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9 TRANSPORT

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
consignor spoilage fleet ownership air waybill
consignment pilferage pipelines manifest
freight industrial conflicts containerisation certificate of origin
carrier private franchises freightliner

Search and find

Copy the questions below and write out their 13 Explain three advantages and three
answers to form your own revision notes. You can disadvantages of sea transport.
find the answers by referring back to the chapter. 14 How can pipelines be said to be a form
1 How does transport aid the chain of distribution? of transport?
2 Describe four factors a company will take 15 Describe one advantage and one
into account when deciding which form of disadvantage of pipelines.
transport to use. 16 What is a container?
3 Why is road transport more flexible than rail or 17 How does containerisation improve the
air transport? movement of freight?
4 Other than flexibility, what are the advantages 18 Despite their many advantages, containers
of road transport? have disadvantages. Describe four of them.
5 List four disadvantages of road transport. 19 What are the requirements of a seaport?
6 Why would some businesses choose to 20 What are the requirements of an airport?
operate their own fleet of vehicles?
21 How does the function of a delivery note differ
7 List at least four advantages and four from that of a consignment note?
disadvantages of rail transport.
22 What is the purpose of a certificate of origin?
8 How has rail transport embraced containerisation?
23 What do you see as the most significant trend
9 Explain the difference between river transport in road transport?
and sea transport.
24 How is rail transport changing?
10 Describe three different forms of sea transport.
25 Why has sea transport been less affected by
11 List three advantages and three disadvantages developments than the other forms of transport?
of sea transport.
26 In what ways has air transport adapted to meet
12 ‘Air transport is the newest and most technical new challenges to their operations?
form of transport.’ Discuss this statement.

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 Things to do

Multiple choice
Choose the one most appropriate answer from 6 Which of the following documents conveys the
the four alternatives. right to take possession of goods?
1 Valuable items such as jewellery being sent to A freight note
overseas countries would be sent by: B manifest
A container ship C bill of lading
B road transport D air waybill
C air transport 7 Transport contributes to a country’s balance of
D rail transport payments by:
2 The best way to transport fresh flowers to A carrying the cargo of other countries
another country would be by: B buying useful products from other
A air countries
B hovercraft C sending cargo by foreign ships
C sea D creating demand for express roads
D tanker 8 The main advantage of road transport is:
3 Air transport is unsuitable for the transport of: A the large loads it can carry
A perishable goods B the flexibility it offers
B high-value cargo C it is not labour-intensive
C low-value freight D it does not cause pollution
D mail 9 The main characteristic of tramp ships is that
4 Which of the following refers to the person to they:
whom goods are being sent? A carry cargo to and from any port
A carrier B only operate on a fixed route
B consignor C tend to be old ships
C shipper D stick to a set timetable
D consignee 10 Which of the following is not a true advantage
5 Freightliners are part of: of sea transport?
A air transport A its route is clear
B sea transport B carries large loads economically
C rail transport C has access to many countries of the world
D river transport D it does not rely on other forms of transport

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9 TRANSPORT

Structured questions
Answer as many parts of the questions as you a Why is the line for water transport
can. The marks available indicate the amount of relatively level? [2]
detail you need to supply/the level of difficulty of b List the cheapest methods of transport
each question. at each of the distances shown as
1 a State two major factors that have to be A, B, C and D. [4]
taken into account when choosing a site c Which of the points X, Y and Z would
for an airport. [2] you consider to be related to air
b Why do airports rely on other forms transport? Give reasons for your answer. [6]
of transport? [2] d List the factors a business would take
c What is the function of an airway bill? [2] into account in deciding which method
d What part does a freight forwarding of transport to use. [8]
agent play in the transportation of goods? [3] 4 The table in Figure 9.11 shows the volume
e Describe examples of goods for which of inland passenger transport for the
air transport would be appropriate and imaginary country of Noland. Answer the
others for which air transport would be questions related to the data.
impracticable. [5] 2004 2014
f What are the requirements for an % %
efficient and safe airport? [6]
Road 1537 84.54 1444 86.21
2 a State two contrasting uses of
road transport. [2] Rail 176 9.68 79 4.72
b Why is road transport the most Water: 44 2.42 57 3.40
commonly used form of transport in sea-going
most countries? [2] Water: 11 0.61 7 0.42
c Why is the greatest volume of road internal
transport carried out by large vehicles? [2] Pipelines 50 2.75 88 5.25
d Explain three ways that road transport Total 1818 100 1675 100
serves other forms of transport. [3]
Figure 9.11 Domestic goods transport of Noland
e State three advantages road transport
has over other methods of transport. [3] a Which type of inland transport, air, rail
f State four disadvantages of or road, carries the greatest volume of
road transport. [4]
passenger transport? [1]

g Explain clearly what is meant by ‘fleet b The data shown here relate to domestic
ownership’. Give two reasons why some passenger traffic. What is meant by
businesses choose this option. [4]
‘domestic’ in this respect? [2]

3 The graph in Figure 9.10 shows the costs of c State the total percentage of
various means of transport. Study the graph passenger traffic carried by road in
and answer these questions. 2004 and 2014. [2]
d Draw an appropriate graph to show a
X Road comparison between air, rail and road as
Rail a percentage of the volume of domestic
transport costs
Increase in

passenger traffic carried in both 2004

Y Water
and 2014. [3]
Z
e Briefly state the general trend that can
be seen between 2004 and 2014 in
relation to each of the three categories
A B C D
Increase in distance
of transport shown. [3]

Figure 9.10 Costs of means of transport

104 Photocopying prohibited

 Things to do

f What trend can be observed if Miles Road Rail

public transport is compared with
125
private transport? [3]
200
g Explain some of the possible reasons
for the trends that can be observed in 300
this data. [6]
Figure 9.13
5 The graph in Figure 9.12 shows the cost
per kilometre of transporting bulky and a i Which is the cheapest method
heavy loads for various journeys up to 350 of transport for a journey of
kilometres. The following questions are 100 kilometres? [1]
related to this graph. ii Which is the cheapest method for
journeys exceeding 300 kilometres? [1]
8.00
iii At what distance does it cost the
7.50
same to transport by road as by rail? [1]
7.00 Rail
6.50 b Copy and complete the table
6.00 (Figure 9.13), which aims to show the
Cost per kilometre ($)

5.50 differences in total costs between road

5.00 and rail journeys for various distances. [3]
4.50 c Why does road transport have an
4.00 advantage over rail transport for shorter
3.50 journeys, but is at a disadvantage for
3.00 Road longer journeys? [4]
2.50 d Why does rail transport rely heavily on
2.00 road transport? [4]
1.50
e Other than distance, what other factors
0 will influence a business’s choice
0 50 100 150 200 250 300 350
Number of kilometres
between road and rail transport for
delivering goods? [6]
Figure 9.12 Transporting bulky and heavy loads

Photocopying prohibited 105

10 WAREHOUSING
when goods are available and when they are
BY THE END OF THIS CHAPTER YOU actually required (for example, seasonal goods).
WILL BE FAMILIAR WITH: Goods might include raw materials, component
l the role of warehousing parts, semi-finished goods and finished goods
l types of warehouse. associated with production and distribution.
Warehousing provides temporary storage and
enables production, marketing and sales to get on
with their important roles. For example, holding
10.1 The role of warehousing production materials in store means they are readily
available when required, enabling production to
continue without hold-ups. Similarly, perishable
goods can be held in appropriate storerooms (for
example, freezer rooms) in anticipation of sales,
thus extending their life cycle and protecting
price stability. In turn, this enables stocks to
be drawn on at the time when they are needed,
thus protecting supply by ensuring stocks are
continuously available. Warehousing also helps
to maintain price stability and preventing the
violent fluctuations that can occur if such a store
is not accumulated. Fluctuations in prices can
be caused when demand for goods exceeds the
Figure 10.1 A warehouse is a very large storage area supply available.
A warehouse is a commercial building where Business warehouses
goods are temporarily stored or re-routed to other
Individual businesses will have their own
businesses. For this reason, warehousing plays an
storerooms for internal use (for example, for
important part in the chain of distribution.
stationery stocks and operational materials) and
Warehouses tend to be large, plain buildings in these are rightly referred to as storerooms. But
industrial areas of cities and towns (see Figure 10.1). businesses with larger storage requirements (for
They usually have loading bays or docks to load example, manufacturing companies) will need
and unload goods from trucks. Some warehouses warehouses with more extensive storage facilities.
are located so that goods can be unloaded directly Very large companies may even use automated
from railways, airports or seaports. They often have warehouses and robotics, where stocks are
cranes and other heavy lifting gear and forklifts withdrawn by computer-aided equipment. The
for moving goods that are stored on standard-sized latter are known as automated storage and
pallets, which can be conveniently loaded into retrieval systems (ASRS) and employ carousels,
pallet racks or containers. vertical lift modules, horizontal carousels, robotics
and mini loads.
The importance of warehousing Warehouses need to be secure places because the
Warehouses are used by producers, manufacturers, items they store are valuable. In addition, their
importers, exporters, wholesalers, retailers, storage facilities must be suitable for particular
transport businesses, customs departments and products; for example, hazardous items need
many others. They bridge the time-gap between special facilities, as do perishable goods.

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 10.2 Types of warehouse

Traditional warehousing has declined in some can be repacked into smaller quantities, or graded in
countries with the increased use of just in time some way. But they can be taken out of the warehouse
(JIT) manufacturing techniques. The JIT system only when the appropriate duty has been paid.
promotes delivery straight from the manufacturer
A bonded warehouse may be owned by a business
to the consumer without the use of warehouses as
but will be under the control of the Customs
intermediaries.
and Excise authority. The owner of the bonded
The location of a warehouse is important. It should: warehouse is required to abide by Customs and
Excise directions to ensure that the regulations
l be within convenient proximity of its customers
are not broken, that is, goods will not be removed
l have access to good transport facilities such as
before the required duty has been paid, unless they
road and rail networks.
are being re-exported.

10.2 Types of warehouse Cold storage warehouse

These are refrigerated or deep-freeze storage facilities
for the cold storage of perishable food products
and other perishables such as fruit, vegetables and
meats, sometimes including frozen goods. Cold
storage enables seasonal agricultural products to
be distributed (e.g. to retailers) over a much longer
season and even all year round. Figure 10.2 shows a
warehouse with chilling capabilities.
Although cold storage is particularly evident in
home trade it also has a link with foreign trade. For
example, imported and exported flowers and some
foodstuffs require temporary cold storage.

Wholesale warehouse
A wholesaler is an intermediary that provides
the link between retailers and producers. The
wholesaler is active in a wide range of trades from
agricultural products to manufactured goods,
and in some cases fresh food. The main function
Figure 10.2 Some warehouses provide specialist
of a wholesaler is to buy in large quantities from
facilities, such as chilling or freezing
producers and to sell in smaller quantities to
Warehouses are used by manufacturers, retailers, other wholesalers and large buyers such
wholesalers, retailers, importers and exporters. as schools. In doing so, wholesalers use warehouses
There are many types of warehouse, but for the extensively. They site these cash and carry
purpose of our studies we will focus on bonded warehouses in convenient reach of their customers,
warehouses, cold storage warehouses, cash and with large parking areas, so that customers can visit
carry warehouses, manufacturers’ and retailers’ the warehouse to make purchases.
warehouses, and regional distribution centres.
An important key to the success of wholesaling
Bonded warehouse is expert knowledge in buying, and rigorous
organisation of the wholesale warehouse. Efficient
Particularly evident in foreign trade, bonded
receipt, storage, handling and despatch of goods,
warehouses are also used in home trade occasionally.
and close stock control are essential.
Goods on which customs and excise duty have to be
paid can be stored in a bonded warehouse. While in the The wholesale warehouse is often a large
warehouse the goods are said to be in ‘bond’ but they open space where goods are stored on pallets
can be adapted in some way. For example, large lots and shelves, rather like a larger version of a

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10 WAREHOUSING

supermarket. The warehouse will receive goods Retail warehouses

and despatch orders via docking bays designed to Retailing trends have led to the development of
accommodate trucks and loading apparatus such warehouse-style retail stores. These high-ceilinged
as forklift trucks. buildings display retail goods on tall, heavy-duty
racks rather than conventional shelving. Typically,
Manufacturers’ warehouses
items ready for sale are on the bottom racks and
These are part of production operations, used to crated or palletised items are on the upper racks.
store raw materials and other resources needed by Essentially, the same building serves as both a
manufacturers for production purposes, supplying warehouse and a form of retail store.
items as they are required. This will include
semifinished products needed for final assembly as
well as raw materials. Choosing the site of a warehouse
Warehouses are sited in many different places
Cash and carry warehouse and the choice of site is influenced by several
Cash and carry is a form of home trade in which factors including:
goods are sold by the wholesaler to retailers from
a wholesale warehouse. These usually operate
l where the production takes place (where the
on a self-service basis with the retailer taking factory is located)
the goods in a similar manner to consumers in a
l where the market for the products is
supermarket. The retailers are required to pay for
l where the nearest regional distribution centre
their purchases at the time of purchase (cash), and is sited
delivery is not provided by the warehouse (carry).
l operating costs, for example, where land charges
This type of wholesale warehouse is sited within are not too high
convenient reach of their retailer customers, with
l costs involved in building the warehouse
large parking areas so that their customers can visit,
l location of necessary transportation links
make purchases and take the goods away in their
l level of consumer demand in a location.
own vehicles.
Advantages and disadvantages
Retailers’ warehouse of warehousing
Similar to manufacturers, retailers engaged in home
trade need warehouses to ensure that they have a Warehousing plays a very important role in
ready supply of goods on hand to refill shelves to business activities and the chain of distribution in
ensure that there is a continual supply of products particular.
to meet shoppers’ demand. This entails not only Advantages of warehousing
secure and carefully monitored stock turnover and
l Warehouses serve to safeguard the stocks of
regeneration but also the provision of special storage
needs such as freezer and cold storage areas. merchants who have either no warehouses of
their own or very limited storage space. Hence,
Regional distribution centres merchants are not restricted in their business
Large retail chain stores will often store their operations owing to lack of storage room.
l Provision is made for the unloading and loading
products in regional warehouses (also referred to
as regional distribution centres). This reduces the of freight carriers such as ships, aircraft and
need for long journeys and means their many stores railway wagons.
l Having warehouse facilities within useful distance
can replenish stocks. Each regional warehouse will
be conveniently located to service as many satellite of where goods are needed will assist merchants
stores as possible. (for example, places for selling or production).

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 10.2 Types of warehouse

l In the case of bonded storage, the need to pay l Power breakdowns can be costly, especially
customs duties can be delayed, or avoided when perishable goods are involved.
completely if goods are re-exported. Consequently, insurance costs tend to be high.
l Storage is required as close as possible to the
Disadvantages of warehousing businesses being supplied and sometimes this
l Even though some imaginative designs means warehouses are sited near residential
exist, warehouses are generally unattractive areas, which attracts opposition.
buildings that do not always appeal to l Providing security for massive buildings housing
planning authorities or local residents, large quantities of valuable items is expensive,
especially when sited away from which is why the JIT manufacturing process has
industrial areas. become increasingly important.

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10 WAREHOUSING

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
storeroom hazardous items price stability JIT manufacturing
time-gap life cycle supply retailer’s warehouse
perishable goods automated warehouse demand regional distribution centre
pallets robotics seasonal production

Search and find

Copy the questions below and write out their 7 What kind of products would you consider
answers to form your own revision notes. You can unsuitable for the use of robotics?
find the answers by referring back to the chapter. 8 What role do distribution centres play in
1 In what way does a warehouse bridge the warehousing?
time-gap between a producer and a retailer? 9 How does warehousing help a wholesaler
2 In what ways can warehousing be said to help carry out its main function?
prevent price fluctuations? 10 What is the basic purpose of a bonded
3 What part does warehousing play in the warehouse?
chain of distribution, other than bridging a 11 How does a cash and carry warehouse differ
time-gap? from a retailer’s warehouse?
4 How does warehousing enable producers to 12 Describe four factors that would be taken
concentrate on producing? into account when deciding where to site
5 Why do warehouses need to be secure places? a warehouse.
6 Give a simple description of what we could 13 Give one advantage and one disadvantage
expect to see within a typical warehouse. of warehouses.

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 Things to do

Multiple choice
Choose the one most appropriate answer from 6 Which of the following is the most appropriate
the four alternatives. description of a warehouse?
1 A pallet is: A a wholesaler’s main store
A the charge for warehousing goods B a place where goods are temporarily stored
B a metal shelf C a freezer storage room
C used to move cargo D a retailer’s stockroom
D a form of freight insurance 7 JIT manufacturing:
2 A product’s life cycle can be described as: A increases the need for warehousing
A the span of a product’s existence B requires a special form of warehouse
B the movement of goods C just includes transport
C the time it takes to deliver goods D reduces the need for warehouses
D the way goods are produced 8 The customers of a cash and carry
3 The type of warehouse that is supervised by warehouse are:
Customs and Excise is called a: A manufacturers
A wholesale warehouse B wholesalers
B central warehouse C retailers
C regional warehouse D exporters
D bonded warehouse 9 A large chain of retailers will be likely to have a:
4 Warehousing helps to reduce: A business warehouse
A transport costs B regional distribution centre
B price fluctuations C wholesale warehouse
C storage costs D central warehouse
D delays 10 The type of warehouse that will supply a
5 Which of the following is the best example of production unit would be a:
a seasonal product? A regional distribution centre
A garden supplies B retailer warehouse
B furniture C retailer warehouse
C birthday cards D manufacturer’s warehouse
D clothing

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10 WAREHOUSING

Structured questions
Answer as many parts of the questions as you 2 a What is a warehouse? [1]
can. The marks available indicate the amount of b State three different places where
detail you need to supply/the level of difficulty of warehouses can be found in the chain
each question. of distribution. [3]
1 Read the following statement and answer c Although warehouses play an important
the questions that follow it. part in commercial activities, they do
have disadvantages. Summarise four of
‘Storage of commodities is vital, so the disadvantages. [4]
large warehouses may be found at most
d A wholesaler would use his warehouse
seaports, airports and in many cities, to
to store seasonal products, extend life
store goods until they are required on
cycle and protect price stability. Explain
the home market or the foreign market.
the words in italics. [6]
Raw materials and finished or semi-
finished products are stored so that e Warehousing plays an important part
demand can be met at any time. This in varied types of commercial activity.
enables production to take place ahead Explain how warehousing requirements
of demand, which is convenient for would be used differently for each of
the producer and also helps to avoid the following types of commercial
changes in prices that are caused by activity: an insurance office; a chain of
shortages and gluts.’ retail shops; a farmer. [6]
3 a State one way a storeroom differs from
a Give two examples of commodities a warehouse. [1]
and say what is ‘vital’ about them. [2] b Why is warehousing important at every
b State two places where warehouses stage in the chain of distribution? [2]
are found in addition to ports c How does the function of a bonded
and cities. [2] warehouse differ from other types
c ‘In all warehouses, goods are only stored of warehouse? [3]
temporarily.’ Explain this statement. [2] d Distinguish between two different
d Explain the terms ‘raw materials’, ‘semi- types of warehouse, other than a
finished products’ and ‘finished goods’. [3] bonded warehouse. [4]
e How does the existence of warehouses e What is a regional distribution centre
enable manufacturers to produce ahead and why are they set up? [4]
of demand? [3] f ‘Warehousing is present when a producer
f List and describe four different types sells to a wholesaler and the wholesaler
of warehouse. [4] sells to retailers who eventually sell to
g Which kind of warehouse would be consumers. But it is also necessary when
likely to be found in a port and which in a producer sells direct to the consumer.’
a large city? Give a reason for each of Explain this statement. [6]
your choices. [4]

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11 INSURANCE
to those who suffer a financial loss. Insurance
BY THE END OF THIS CHAPTER YOU cannot always recompense all losses (for
WILL BE FAMILIAR WITH: example, loss of health) but it can provide
l the purposes of insurance financial protection.
l business and personal risks Simply put, insurance is an agreement between
l insurance principles an insurance company (the insurer) and someone
l effecting insurance cover
who wants financial protection (the insured – also
l the statistical basis of insurance
l effecting a claim.
referred to as the proposer) that compensation
(indemnity) will be paid if a particular loss occurs.
Insurance companies are businesses, and therefore
they charge for their services. The charge they
11.1 The purposes of insurance make is called a premium and the contract drawn
up between the insurer and the insured is known as
the policy.
Why is insurance necessary?
Insurance companies are able to compensate people
All individuals and organisations face a wide and organisations in this way for a relatively small
variety of risks, but only some of them actually charge. This is because insurance ‘pools risks’. This
suffer a loss during the course of a year. Insurance promotes business confidence; entrepreneurs are
provides a system of awarding compensation reassured that they can claim compensation should
Foreign government

preference shares
Debentures and

Ordinary shares
Government
Mortgages

Property
bonds

bonds

Other

Investments
Investments

Profits

Profit
on
investments
Expenses and
running costs Policyholders’
Premiums Premiums premiums

Compensation: fire/life/
accident/marine

Figure 11.1 How an insurance company works and invests

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11 INSURANCE

some unforeseen costly event occur. This saves Pooling of risks

them from the need to set aside funds against such
an occurrence and encourages them to undertake Insurance is sometimes described as ‘pooling risks’.
the risks involved in business activity. To offset possible risk, individuals or businesses
can contribute a small sum of money (called a
Insurance is vital not only to individuals, but to premium) to a fund (‘pool’) operated by an insurance
all forms of business and the economy as a whole. company. The many small sums of money people
If as individuals we had to face all of life’s risks and businesses pay in premiums form a large pool
without any protection there are many things of money. When contributors suffer a loss there is
that we would not do – at times we might even enough money in the pool to compensate (indemnify)
hesitate about leaving the safety of our homes. them. Cooperating with others in this way means
Similarly, many businesses would not be created if that risks are ‘spread’ or ‘shared’ between many
individual entrepreneurs and their backers had to people and organisations that have contributed to the
face all the risks of enterprise themselves. Insurance insurance pool. (See Figure 11.2.)
reduces the risks faced by individuals and business
people. In this way insurance helps to promote Here is an example of risk pooling in practice: if
commercial activities. a trader owns a shop worth $100 000 and it burns
down, it will cause considerable hardship to replace
Insurance is also a source of investment for it and it might even be impossible to do so if the
individuals and corporate investors in the money owner cannot raise the money. However, if many
market. It is particularly attractive to investors shop owners agree to pay a regular, relatively small
because it is generally a safe investment, especially amount into a pool, there will be enough money to
in the long term. This is because insurance compensate for the loss if one of the shops burns
companies are very good at planning for the down. In this example the risk is spread between the
long term. many shop owners.
Endowment insurance is a form of investment We could compare the pooling of risks with a
for individuals. An endowment policy is a life lottery. In the case of a lottery, many people put
insurance contract designed to pay a specific money into a pool and the lucky person takes from
sum after a specific term (on its ‘maturity’) or the pot. In the case of insurance, many people put
in the event of the insured person dying. Typical money into a pool and the unlucky person takes
maturities are 10, 15 or 20 years. Some policies also money from it.
pay out in the case of critical illness.

Insurance
pool

Many businesses at risk When one of the ... the insurance company
contribute money to a businesses suffers will help with finance
pool. a loss ... for repairs.
Figure 11.2 Pooling of risks

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 11.2 Business and personal risks

11.2 Business and l Public liability insurance: provides

compensation if a member of the public is
personal risks injured within the business’s site area and due to
negligence by the business.
l Key personnel insurance: provides
Business risks compensation to a business if a key member of
staff dies or is severely incapacitated.
Scenario l Fidelity insurance: is used particularly by
Wobbly Wheels is a company that provides businesses to protect against loss by fraud and
replacement wheels and tyres. The company is stealing, including theft by employees.
owned by two partners and employs eight people. l Cash in transit insurance: covers money being
The business has a large storage warehouse carried by an employee to the bank (including
that also includes service bays. It also has a injury to the carrier).
separate office with rest areas for customers l Premises insurance: covers against the risk
and a large parking yard. Customers respond to of damage to the property of the business, the
advertisements and they visit the premises. stock it holds and equipment used. There are two
types of business premises insurance:
The business faces several risks including: building insurance covers the cost of repair
l If one or both of the owners become ill for or rebuilding the premises as a result of
an extended length of time the business damage (but not expected wear and tear)
could collapse. contents insurance covers the cost of
l Employees and customers could be injured on replacing stock or equipment damaged
the business site. or stolen.
l A large amount of money is handled and is at l Consequential loss insurance: covers the
risk of theft. indirect loss (consequential loss) caused by
l If a faulty product (that is, a wheel or tyre) is being unable to use business property (business
supplied, it could be dangerous and lead to a interruption) as a result of fire, floods and
claim against the company. storms or vandalism and so on. Some types of
this insurance can cover loss of business income
This scenario demonstrates just a few of the as well as replacement of material items.
risks that a business faces. You will see from l Goods in transit: covers property against loss
the following summaries that all of the risks or damage while it is in transit from one place to
highlighted above, and many others, can be another, or being stored during the journey.
covered by insurance. l Motor insurance: must be held by businesses
for vehicles they own. Although the
l Liability insurance: any type of insurance minimum legal cover permitted is third party
that protects individuals or businesses from insurance, most businesses will in effect have
the risk that they may be sued and held legally comprehensive cover for all their vehicles.
liable for something such as malpractice, injury l Event insurance: any event that could cause
or negligence. the organiser or participant to have to pay a
l Employer’s liability insurance: (compulsory claim must be insured. For example, any events
for all employers) protects employers from where large numbers of people congregate
claims and liabilities arising from accident or (for example, outdoor shows, exhibitions,
injury to an employee during the course of his or demonstrations or celebrations) carry risk that
her employment. must be covered by insurance.
l Product liability insurance: protects the l International traders: businesses involved
business against claims by customers as a in international trade (for example, exporters)
result of faulty products being supplied by need special forms of insurance in addition
the business. to those identified above. For example, trade

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11 INSURANCE

credit insurance (also referred to as export l Motor insurance: any vehicle taken on public
credit insurance) protects businesses against roads is required to have a certain minimum
default by a customer on the amount due for the level (third party) of insurance to ensure that
consignment exported. drivers can meet their liability for injury to
l Marine insurance: a special form of insurance others. The two most common types of motor
used by those involved in shipping. It covers the insurance are:
loss of, or damage to, ships and their cargoes. third party, fire and theft – the motorist
Aircraft insurance is very similar. There are four insures the liability for damage to other
broad categories of marine insurance: people and their property, plus the loss or
Hull insurance covers damage to the vessel damage to his or her car through fire or theft
itself and all its machinery and fixtures. (but not as a result of an accident)
Cargo insurance covers the cargo the ship is comprehensive policies – these not only give
carrying. the above third party, fire and theft cover,
Freight insurance is customary insurance but also provide compensation for accidental
taken out to cover the possibility that for damage to the vehicle of the insured.
some reason the shipper does not pay the l Travel insurance: covers medical expenses, trip
transport (freight) charges to the shipowner. cancellation, lost luggage, accidents and other
Shipowner’s liability refers to a vessel losses incurred while travelling at home or abroad.
owner’s responsibility to insure against a l Life insurance: sometimes referred to as
wide variety of events, such as collision with ‘assurance’ rather than ‘insurance’. At one,
other vessels or dock, injury to crew members time ‘insurance’ and ‘assurance’ had different
or passengers and pollution of beaches. meanings. Insurance was protection against a risk
that might or might not happen, while assurance
concerned an event that was inevitable (death or
Personal risks reaching a particular age). Today, this difference
Individuals also face personal risks. Some of is less important, but the word ‘assurance’ is
these will be the same as those of a business (for still sometimes used in reference to life policies.
example, risk of damage to vehicles, home buildings There are two main types of life assurance:
and contents), but some are specific to private whole life policies provide for a payment to be
individuals. The following summarises the main made after the death of the insured. Premiums
risks that private individuals will insure against, but are usually paid quarterly or annually by the
you should bear in mind that composite insurance person whose life is insured or by his or her
policies exist that cover, for example, not only spouse. The idea is that when the insured
a building owned by an individual but also the dies, someone will benefit from the policy (for
contents. example, a spouse or dependent).
endowment policies provide a payment of
l Household insurance: provides cover for
a basic sum at a certain age or on the death
buildings in a similar way to business buildings
of the insured, whichever occurs first. This
examined earlier. The contents of the building
provides not only for any dependents, but
may be covered in a separate policy, but the two
also pays out a useful sum of money for
are often combined in a composite covering both
the insured if he or she survives the period
the building and its contents.
covered by the policy. A variation of this
l Mortgage protection insurance: a policy that
type of policy is one ‘with profits’ which, for
protects the mortgage lender in the event that
a higher premium, entitles the insured to a
the borrower defaults on payments because he
share in the profits of the insurance company.
or she dies or is otherwise unable to meet the
contractual obligation to repay the amount owed. Insurers use their statistical knowledge of life
In effect it is the person who owes the debt that expectancy, occupation, leisure pursuits and so on
pays for the cover, thus ensuring the lender will to assess the risk involved and calculate premiums
be repaid. accordingly.

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 11.3 Insurance principles

Uninsurable risks 11.3 Insurance principles

The success of insurance depends on the ability
of insurance companies to meet a loss if it occurs, Insurance is successful and trusted because the
that is, to pay out. The insurance companies parties to insurance honour three basic principles:
ensure that they can meet any claims that arise by l insurable interest
using statistical analysis. The people who carry l utmost good faith
out this analysis are called actuaries. (See also l indemnity.
Section 11.5.)
The people or companies who accept the risks Insurable interest
of insurance are called underwriters. Insurance
With the exception of life insurance (where a
underwriters are used by insurance companies to
husband and wife, for example, can insure the life of
evaluate the risks of insuring a particular person
each other) it is not possible to insure a risk unless
or asset, and use that information to assess the
you have an ‘insurable interest’. In other words,
premium for insurance policies. They base their
the insured must be the person who would suffer
assessment largely on the records of past claims
financially if an event occurred. You can insure your
to calculate the probability of the risk occurring.
house or car, but you cannot insure your neighbour’s
Underwriters actually back (underwrite) insurance
car or house. If your neighbour’s house burns down
risks on behalf of members.
you have lost nothing.
If it is considered that the probability of an event
taking place is insurable, an insurance company Utmost good faith
will be willing to take on the risk involved, and it
will be able to calculate how much to charge (the Utmost good faith means that the parties to
premium) the customer (the proposer). But not all an insurance contract must be truthful. The
events are insurable (see Figure 11.3). The following declarations the insured makes to the insurer
are examples of uninsurable risks: when taking out the policy must be true, and the
insurer must be truthful about the effectiveness
l when the loss is inevitable of the insurance cover offered. This ruling affects
l where there is insufficient past experience to the proposer of insurance more than the insurer,
assess the risk because it is the proposer (the insured person)
l if the proposer does not have insurable interest who provides most of the information upon which
(see Section 11.3) the insurer decides the premium and issues a
l fair wear and tear such as rust and corrosion policy (contract).
l that a business will be successful.

You cannot insure against

wear and tear on You cannot insure that
equipment and property. you will do well in exams.
Figure 11.3 Uninsurable risks

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11 INSURANCE

Indemnity money I receive takes the place of the car and

the damaged vehicle now becomes the property
This is the insurance principle by which a of the insurance company, which will sell it and
policyholder is compensated for any loss that retain the scrap value.
occurs. There are several important aspects to l Proximate cause: When an insurance policy
this principle: covers a particular risk, it is quite possible that
l No profiteering: Although we take out damage may be incurred, which is not directly
insurance to receive money in compensation if related to the terms of the policy but which may
we experience a loss, we are not supposed to still be indemnified by the insurance company.
make a profit from our claim for compensation. For example, your house may be covered by fire
The principle is that the insurance policy should insurance and, of course, the insurance company
indemnify the insured, in other words, return is expected to pay compensation as a result of
the insured to the financial position that existed a fire. However, it will also pay for damage to
before the event took place. doors or windows caused by the firefighters
l Overinsurance: If the insured overinsures an having to break into the house to fight the fire.
item (more than its true value), he or she will However, such a claim will be allowed only if
only be compensated for its true value in the the loss incurred is closely related to the original
event of a loss. event. For example, if your car is damaged in an
l Underinsurance: If a loss occurs where the item accident and you leave it unattended for a long
is underinsured, the policyholder will receive time, the insurance company would pay for the
only a proportion of the loss: repairs to the car, but would not necessarily be
Example expected to pay for a camera left unattended and
stolen from the car.
Shop value $100 000
Insured for $80 000 11.4 Effecting insurance cover
Damage by fire $20 000 (i.e. one-fifth)
Compensation $16 000 (one-fifth) The insurance contract
l Contribution: Situations arise in which a Insurance is not only implemented through
claim could be made and where two insurance insurance companies: banks, lawyers, friendly
companies are liable to indemnify the insured societies and many others also arrange insurance
for the same occurrence; for example, where two cover. Whichever approach to obtaining insurance
policies overlap. In such a case, both insurance is used, the following basic procedure is followed.
companies will contribute towards payment of
the claim. The prospectus
The proportion that each insurance company pays Insurance companies issue a form of leaflet, called a
will depend upon the amount of insurance placed prospectus, to describe and summarise the various
with each company in relation to the cover. For policies they offer.
example, if a building valued at $160 000 (insured
with A for $100 000 and with B for $60 000) is burnt The insurance proposal
down, A will pay 10/16ths and B 6/16ths of the loss. To formulate an agreement between the insured
(the person buying insurance) and the insurer it
l Subrogation: To subrogate means ‘to take the must be clear what is being insured, in other words,
place of’. When an insurance company pays what risk is being covered, in order to establish how
out compensation on a claim, the money takes much the cover will cost. The precise details of what
the place of the article damaged. For example, is required are provided by filling out a proposal
if my car is ‘written off’ (too badly damaged form, either as a hard copy or online. Figure 11.4
to be repaired), the insurance company will shows an example of a proposal form.
indemnify me for the value of the car. The

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 11.4 Effecting insurance cover

10 per cent would be $4000 and the premium on a

1. What is your age? $200 000 risk at 5 per cent would be $10 000.
2. Address where your car is kept.
3. What make and model of car? The insurance specialist who calculates the
4. What is the size of the engine? premium based on the degree of risk is called an
5. Has the engine been altered to increase its actuary. We return to this in Section 11.5.
performance?
6. What is the year of registration?
7. Is the car normally kept in a garage? The policy
8. How long have you been a qualified driver? This document, sent by the insurer to the insured,
9. Is your car used for business purposes?
10. Will the vehicle be driven by any driver who is
states what has been agreed between the two
under 25? parties. It is like a contract agreement. Many people
11. Has any proposed driver of the car had any driving find policies confusing because of the ‘small print’,
convictions in the last ten years? which refers to the ‘rules’, clauses and ‘exceptions’
12. What sort of cover do you want for your car?
to the agreement. However, it is important that the
insured reads this part of the policy and questions
Figure 11.4 The insurance proposal asks important the insurance company if there are any points he or
questions she does not understand. Failure to read policies,
or ask for explanations, is the source of most
As its name suggests, the proposal form tells the misunderstandings related to insurance.
insurance company what risk the person buying The following documents may also be issued in
insurance proposes to insure against. In other association with the insurance policy.
words, it is a suggestion (proposal) by the potential
buyer that he or she would like the insurance l Certificate of insurance: for employer’s
company to agree with. liability and motor insurance, the law requires
evidence that the insurance has been put into
It is essential that the proposer (the person who effect. A certificate issued by the insurer acts
wants to buy insurance) gives every detail, as evidence.
which applies to the risk, and conceals nothing. l Cover note: a temporary document provided by
If a ‘material fact’ is concealed, the policy will the insurer while the certificate of insurance is
be ineffective. being prepared.
l Endorsement: a notice of an amendment to the
The premium
policy, usually by the insurer; for example, to
When the insurance company has received the exclude coverage for losses caused by acts of
proposal from the person wishing to take out terrorism. The endorsement is attached to the
insurance, the underwriters of the insurance policy and becomes a part of the policy.
company will work out how much they will charge l Renewal notice: issued by the insurer prior to
to cover the risk being insured. This charge is the expiry date of the insurance cover. It invites
called the premium, and to put insurance cover the insured to renew the cover and advises of
into effect, the person buying insurance cover pays the renewal premium (the cost) and the date on
the premium. which it is due.
In calculating the premium for the cover, many
points are taken into consideration, and one is Insurance brokers
obviously the value of the item being insured.
Another is the extent of the risk: an insurance An insurance broker acts as an intermediary between
company might charge 10 per cent for one risk (say, clients and insurance companies. Insurance brokers
the stock of a factory) and 5 per cent for another represent the buyers of insurance (individuals,
risk (say, the buildings of a factory) to the same businesses or other forms of organisation) and aim to
customer, because one risk is greater than the other. find them the best policy by comparison shopping.
In such a case, the premium on a $40 000 risk at They will compare the policies and premiums of
many insurance companies and find the ‘best deal’

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11 INSURANCE

to offer their clients. They are paid a fee by the local insurance company or agent to obtain a few
insurance company for the service they give to the proposal forms for different risks. Look at some of
buyer of insurance. the questions asked on the form; for example, age
or date of birth, health, experience. Consider why
the insurance company asks these questions, and to
11.5 Statistical basis which statistics they might relate the answers.
of insurance You might assume that all insurance companies will
charge the same premium for the same risk (given
We have already looked at some of the ways insurers
the fact that the premium will be based on statistical
use statistics to formulate knowledge when they are
analysis). However, this is not the case. Insurance
calculating premiums. For example, knowledge of
companies will differ in the charge they make
life expectancy, occupation and leisure pursuits is
for cover, because they will each manage their
used to calculate the premium for life insurance.
company in different ways, and invest their ‘pool’
Similarly, insurers will use statistics to help them
in varying ways. This is why insurance brokers
calculate premiums for other risks. The people
serve such a valuable role. They help those seeking
who calculate these important statistics are called
insurance cover to compare and evaluate the
actuaries, and underwriters use the information
quotations and premiums of many insurers to find
they supply to establish the premium for risks.
the best deal.
By studying the records of past claims, insurance
Insurers do not only use statistics to calculate
companies can establish that people who live in a
the premiums they charge. They also have to
certain area are more likely to have a motor vehicle
manage their ‘pool’ of money to ensure that funds
accident than those who live in another area.
are always there to meet claims when they arise.
For example, people who live in a large city are
The money that insurance companies collect in
more likely to have a car accident than those who
premiums is not left idle but is invested safely.
live in a rural area because they will experience
Much of this investment goes into industry, thus
heavier traffic.
providing capital for the production of goods,
Insurers use risk data to calculate the likelihood of which helps to improve our way of life and provide
an event taking place. The more likely it is that an employment for many people.
event will occur, the higher the risk to the insurer
and, as a result, the higher the cost of the premium
for that particular risk.
11.6 Effecting a claim
An insurer will take two important factors into A person or business that suffers a loss (the ‘insured’)
account when working out the premium it will charge. completes a claim form (see Figure 11.5). This is sent
by the insured to the insurer and is in effect a request
1 How likely is it in general terms that someone
for compensation. The claim form provides the
will need to make a claim?
insurer with the details of the loss such as when and
2 Is the person/business who wants to take out a
how it occurred and the amount of compensation that
policy a bigger or smaller risk than the ‘average’
is being claimed.
policyholder?
Documentary evidence of the incident that has
People in certain occupations will be more likely
taken place will be needed when making a claim.
to suffer illness or death than those in other
For example, a death certificate will be required
occupations: take as a comparison a miner and a
when life insurance is being claimed. In the case
farm worker. Similarly, people who live in some
of property damage or loss, one or more quotations
areas (industrial centres) are a higher risk than those
for repair would be needed. It is not unusual for the
who live elsewhere (for example, the countryside).
insurer to request police or firefighter reference
Try to think of other factors that increase or numbers of an incidence that has resulted in a claim
decrease the risk involved. A good idea is to visit a against a policy.

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 11.6 Effecting a claim

Property Damage Claim Form

Policyholder’s Details

Title First Name Surname

Insurer Policy no.

Address
Postcode

Telephone No. Email

Is the Insured registered as a taxable person for VAT? YES/NO

Details of Loss or Damage

Date Time Place

Cause of loss

Describe what happened

If applicable/known, what is the name and address of the person(s) responsible for the damage

Has the incident been reported to the police? YES/NO

If Yes Please give details of which police station

Crime reference No.

DETAILS OF THE ITEMS/PROPERTY LOST OR DAMAGED

Description Date acquired Owned leased or Cost to replace or

other repair

Receipts/estimates – please attach/forward Total value of loss £

Are there any other insurance policies covering this loss? YES/NO
If Yes Details of insurance company and policy number

DECLARATION
I/We declare that the particulars given in this form are true to the best of my/our knowledge and belief.

Signature and status of signatory Date:

………………………………………………………………………………………………. ……./……/……

Figure 11.5 A claim form is a request for compensation for a loss

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11 INSURANCE

In the case of large or doubtful claims the insurance replacement of a television purchased five years ago
company will usually send a loss adjuster to ensure and which has been damaged by fire, the insured will
that claims are settled fairly from the point of receive the current replacement value, less an amount
view of both the insured and the insurer. A loss calculated to represent the five years of use, so:
adjuster is an independent claims specialist who Current replacement
investigates contentious claims on behalf of insurance price of TV ($600) – five years of use ($250)
companies. All fees charged by the loss adjuster are
paid by the insurance company in addition to the Compensation paid = $350
compensation given. In some circumstances it is possible to obtain a
The aim of the insurance company in the case of a ‘new for old’ policy that gives claimants the value
claim is to indemnify the insured person or business of goods as new. However, these policies are more
that is, to put them back in the same financial expensive/carry a higher premium.
position after the accident/event as before. The Once the insurance company has compensated
insurance company will compensate the insured (indemnified) the insured the insurance company
only if the loss has been genuinely accidental. For takes over the right of ownership of anything of
example, an insurance company cannot be expected remaining value. They own the scrap value of
to pay a claim for damage to a car if the accident a car that has been ‘written off’. This is called
occurred because the vehicle was not kept in good subrogation.
working order.
If the insured item is covered for a particular risk
The aim of the insurance company, in the case of by two companies, then full compensation cannot
a valid claim, is to indemnify the insured person. be claimed from both as the insured would make
But the insurance company will compensate for the a profit out of the loss. Instead each company will
current value of the item that has been damaged pay a proportion of the loss, for example 50 per cent
or lost. For example, if a claimant claims for the each. This is called contribution.

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 Things to do

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
insurance financial protection claim proposal
compensation indemnity actuaries material fact
insurer premium underwriter certificate of insurance
insured policy risk data cover note
financial loss pooling risks prospectus endorsement

Search and find

Copy the questions below and write out 8 Why are some risks uninsurable? Give four
their answers to form your own revision notes. examples of uninsurable risks.
You can find the answers by referring back to 9 Why must the insured have insurable interest?
the chapter.
10 What is meant by ‘utmost good faith’?
1 Why is insurance necessary for everyone?
11 Insurance is said to be a contract of indemnity.
2 Give a simple explanation of how an insurance What does this mean?
company works.
12 What do the terms ‘contribution’ and
3 How does insurance ‘pool risks’? ‘subrogation’ mean in relation to insurance?
4 Explain the differences between business 13 Explain proximate cause and give an example.
risks and personal risks. Give two examples
14 Describe the process of putting insurance
of each.
into effect, including a brief description of the
5 Why is motor insurance compulsory for all documentation involved.
vehicle drivers?
15 What is the process of making a claim and
6 Why is life insurance sometimes referred to what part do loss adjusters play?
as ‘assurance’?
16 In what way can insurance be said to be based
7 Explain the difference between whole life and on statistical analysis?
endowment policies.

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11 INSURANCE

Multiple choice
Choose the one most appropriate answer from 6 Which of the following statements is untrue?
the four alternatives. A a business can insure against making a loss
1 The sum of money paid to an insurance B a broker sells the policies of many companies
company for cover is called:
C a business can insure against flood
A a premium
D an actuary calculates risks
B a claim
7 A man insured his shop for $60 000 but the true
C a proposal value was $80 000. A fire has caused $8000 of
D a policy damage. The insurance company will pay:
2 Insurance protection against loss caused by A $6000
fraud is called: B $3750
A burglary insurance C $5000
B accident insurance D $4200
C liability insurance 8 Which of the following risks is uninsurable?
D fidelity insurance A injury to employee at work
3 The principle of insurance that requires all B injury to a customer visiting a shop
information to be truthfully given is known as:
C the failure of a business
A subrogation
D damage to stock caused by flooding
B proximate cause
9 If a business is paid $12 000 by an insurance
C utmost good faith company for fire damage, this sum represents:
D insurable interest A insurable interest
4 The temporary document issued while the B indemnity
policy is prepared is called a
C subrogation
A proposal
D premium
B cover note
10 Which of the following forms of insurance
C prospectus is compulsory?
D premium A fidelity insurance
5 Which of the following professionals is the B business interruption insurance
person engaged by insurance companies to
C buildings insurance
ensure claims are settled fairly?
D motor vehicle insurance
A broker
B underwriter
C agent
D loss adjuster

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 Things to do

Structured questions
Answer as many parts of the questions as you can. The marks available indicate the amount of detail you
need to supply/the level of difficulty of each question.
1 Refer back to Figure 11.4, which gives examples of the kind of questions that are asked when someone
is completing an application for motor insurance.
a Give two reasons why an insurance company would want to know the age of the proposer for
motor insurance. [2]
b Explain the relevance of questions 4 and 5 to the premium that will be charged. [4]
c Clearly explain the differences between third party, fire and theft motor insurance and a
comprehensive policy. Include an explanation of the implications for the motorist and any
other injured party. [6]
d Take any four questions from the list not considered so far and explain the purpose of including
them on a motor insurance proposal form. Try to choose questions that deal with different
factors that influence the amount of premium to be charged. [8]
2 Look at the newspaper article in Figure 11.6 and answer the questions.
a Give an example of how ‘proximate cause’
might apply in relation to the event shown
in the newspaper article. [2]
b Explain the effect on the insured’s claim:
i if the building was overinsured FACTORY BLAZE
ii if the building was underinsured. [4]
Fire has wiped out the factory of Tower Toys Ltd.
c The manufacturer referred to in the on the Barn Mills Industrial Estate just weeks before
newspaper article was covered by both
the Christmas rush. The Chief Fire Officer said that the
fire insurance and business interruption
fire was caused by an electrical fault in a storeroom
insurance. Describe the kind of things
the manufacturer might claim for and quickly spread throughout the factory.
against these forms of insurance cover. [6]
A spokesman for Tower Toys said that extensive
d The owner of this business would be
required by law to have employers’ damage to buildings, machinery and stock means
liability insurance and may also have that production will be suspended for at least two
public liability insurance. Give a summary months. No one was hurt in the fire.
description of each of these forms of
insurance and say why they may have
been important in the circumstances
that the business has experienced. [8] Figure 11.6

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11 INSURANCE

3 Look at the article in Figure 11.7 and answer these related questions.

THE DANGER OF BEING UNDERINSURED

In a recent case, two workmen employed by a firm were removing a large
boiler from a cheese-processing plant. The workmen secured a rope around
one of the pillars supporting the factory. As a result the building collapsed,
causing $500,000 of damage and the manufacturer had to close down the
plant for several weeks.
The company presented a claim to its insurers for the repairs to the plant,
and for the cost of loss of business. But the insurers would only meet 80% of
the value of the claim because the firm was underinsured. Although the firm
took a variety of measures to find the shortfall, they could not make the
balance from their resources. And financial institutions were unwilling to lend
money to a business that was in fact standing idle.
Within three months the firm was forced into bankruptcy and what had
been a thriving business employing 15 workers ceased to exist.

Figure 11.7

a What is the purpose of insurance? [2]

b What is meant by underinsurance? [2]
c Why is insurance unable to fulfil its main purpose in the example shown in this article? [3]
d Name at least three different categories of insurance that a business will generally need
but which a private individual will not require. [3]
e Briefly describe how the insurance company decided that it could only meet 80 per cent
of the cost of the claim of the dairy producer. Why not 85 per cent? [4]
f What led to the failure of the firm? How could this have been avoided? [6]
4 Figure 11.8 is a simplified version of the type of table
Years of age Further expectation of life
an insurance company would issue to its agents
or brokers to help them quote a premium for life NOW MALE FEMALE
assurance cover. The table shows that at 30 years of 20 54.6 58.3
age a man is expected to live another 44.9 years, that
25 49.9 53.6
is, to 74.9 years of age.
30 44.9 48.8
a What is the term used for the person who
calculates the statistics in a table such as this? [1] 35 40.1 44.0
b Which type of insurance would this data be 40 35.3 39.1
related to? Give one reason for your choice. [2] 45 30.6 34.3
c If a man has reached 40 years of age, what is 50 26.1 29.7
his expectation of further life and to what age
55 21.9 25.3
can he expect to live? [2]
d To take out life assurance you are charged a Figure 11.8
premium. What is a premium and which two
factors other than age are likely to be used in the calculation of the premium? [3]
e Using data shown, explain the differences in the table between male and female life
expectancy, and say why you think this difference exists. [6]
f Give a clear explanation of the difference between insurance and assurance using examples to
illustrate your explanation. [6]

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 Things to do

5 a Explain what is meant by saying that insurance is based on ‘pooling’ of risks. [2]
b Name two types of insurance that are compulsory by law. Name two types of insurance that
are voluntary. Give reasons. [4]
c Certain principles apply to all insurance contracts. Name three of these principles and explain
fully what they mean for a person seeking insurance. Give an example in each case to show
how these principles work. [6]
d Explain fully four of the following terms associated with obtaining insurance: proposal,
premium, policy, cover note, brokers, underwriters. [8]

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12 BANKING
forms of money transfer facilities, automatic
BY THE END OF THIS CHAPTER YOU teller machines (ATMs), credit cards, debit cards,
WILL BE FAMILIAR WITH: telephone banking, provision of foreign currency
l banking services and international payments, and much more.
l means of payment for home and Let us look more closely at some of the important
international trade activities services provided by commercial banks.
l trends in banking.

Bank accounts
Deposit account
12.1 Banking services The deposit account (also called a savings account)
is used by individuals, businesses and associations
Commercial banks to keep money in a safe place when it is not needed
for immediate use. While in the account, the
Banking is one of the aids to trade, that is, it (and money will also earn some form of income. With a
other commercial services) helps trade to take place. deposit account:
Commercial banks provide banking services l money is paid into the account with completed
to businesses and individuals. All of a country’s credit (paying in) slips, or by electronic banking
commercial banks have accounts at the central bank transfers
where they keep a substantial amount of the money l money is withdrawn from the bank in cash using
they hold for their customers and for borrowing in withdrawal slips. Cheques are not issued with
the case of any temporary and unforeseen shortages this type of account and, therefore, any transfers
of cash. to another person or account must be done
Everybody who engages in commerce needs banks. by drawing out cash or by electronic banking
They provide basic money transfer and transmission transfer.
service facilities, allowing users to go overdrawn The bank may require prior notice for withdrawal of
if necessary. large amounts of money, because it lends the money
The services that banks offer can be summarised as: deposited to others. As a reward for lending their
money to the bank, depositors are paid interest,
l Safety: they enable individuals and businesses which is calculated as a percentage of the money in
to deposit money they do not need immediate the account.
use of in a safe place.
l Spending control: they enable customers to Depositors cannot withdraw more money than they
decide when and how they want to use their have in the account. In other words, the account
money without the need to carry ready cash. may not be overdrawn.
l Interest: some forms of bank account pay a The banks lend the money deposited with them to
reward (called interest). borrowers and charge a higher rate of interest than
l Services: they provide a wide variety of services they pay to savers. This is one of the many ways
such as loans, overdrafts, cheques and other that banks earn money.

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 12.1 Banking services

Current account Other bank services

Also referred to as a cheque account, the current
account facilitates the transfer of money from one Night safe
person to another without the use of cash. The Night safes allow individuals and businesses to
account holder is issued with: deposit cash and cheques with the banks outside
normal banking hours. Deposits can be made
l a credit or book of paying-in slips to pay money using special envelopes provided by the bank. The
into the account, although money can also be depositor fills in, on the envelope, the details of his
transferred in electronically or her account and the amount being deposited.
l a cheque book so the account holder can make
payments to others, although this may also be Night safes offer greater peace of mind to users.
done in other ways, including electronically For example, a trader does not need to worry about
(see Figure 12.1) the safety of money earned through trading outside
l various bank cards. normal banking hours and the funds are added to
the trader’s account when the bank opens.
The current account provides a safe place for
keeping money that needs to be available for Automated teller machine (ATM)
immediate use. In some cases a bank may pay
The ATM is an easy way for customers to take cash
a nominal amount of interest while a minimum
out of their accounts outside banking hours and
balance figure is maintained, but the bank may also
almost anywhere in the world where there is an ATM.
charge for each cheque issued if a minimum balance
is not maintained. When a customer opens a bank account he or she is
issued with an ATM card (which also doubles as a
The bank sends the account holder a bank
debit card). To use an ATM, the user must enter a
statement (see Figure 12.2) on a regular basis to tell
personal identity number (PIN). The PIN consists
him or her:
of a secret combination of numbers or letters created
l how much has been paid in to the account by the user to protect the card from fraudulent use.
l how much has been paid out
Not all ATMs work in exactly the same way, but
l any charges the bank has deducted from the account
they all give clear instructions on a screen (or spoken
l the balance left in the account at the time of
instructions) to guide the user through the process.
issue of the statement.
The key feature is the PIN and the security it

Payee’s name

Gibbs Bank 18th January 2016

Port Louis Sort code number of
The counterfoil 40 - 38 - 04
18th January 2016

Mauritius branch of the bank

is provided for where the account
E. Fondin

your own use Pay E. Fondin or order is held

Thirty-eight dollars $ 38.70 Amount to be paid
38.70

and 70 cents Mary Chabert (in both words and

A/C Payee

M. Chabert figures)
$

100179 100179 403804 41144374

Serial number Sort code Customer’s Drawer’s

of the cheque number account number signature

Figure 12.1 Which five things has the drawer written on this cheque?

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12 BANKING

Gibbs Bank
Chaussée, Port Louis, Mauritius
CURRENT ACCOUNT STATEMENT
Account name Mr W Baudin
Account number Summary for 4 Mar−1 Apr 2016
70954331
Branch Start balance $5,946.70
Port Louis
Total in $2,950.35
Total out $2,139.12
Mr W Baudin End balance
4 Royal Road $6,757.93
PORT LOUIS
Mauritius

Transactions

Date Description Details Money out Money in

(debits) (credits) Balance
4 Mar Start balance
4 Mar Cheque 102070 5,946.70
5 Mar 163.72 5,782.98
Cheque 102068
9 Mar 820.40 4,962.58
Cheque 102069 300.00 4,662.58
10 Mar Received DIV Credit transfer
Received GL Ltd 258.80
Credit transfer
Received A Lee 616.62
Credit transfer
12 Mar Received Ales 100.00 5,638.00
Credit transfer
13 Mar Deposit 262.95 5,900.95
Cash and cheques
19 Mar Withdrawal 838.39 6,739.34
Cash machine 300.00
Deposit Cheque
20 Mar Deposit 227.18 6,666.52
Cash
21 Mar Cheque 150.00 6,816.52
102072 155.00
Received Carter Credit transfer
24 Mar Payment 496.41 7,157.93
Standing order 200.00
25 Mar Payment Teleph Direct debit 6,957.93
28 Mar 150.00 6,807.93
Service charges
1 Apr 50.00 6,757.93
End balance
6,757.93

Note: Different banks may use slightly different terms on their statement. Ask your teachers, parents and friends to show you as
many different kinds of statement as possible, or go to different banks and ask to see some samples.
Figure 12.2 A bank statement

provides. Once the user enters his or her secret PIN Users are able to view their accounts and perform
correctly, the machine connects to the bank account routine transactions such as account transfers,
and allows cash to be withdrawn. The machine bill payments and to lodge enquiries. With some
provides a receipt for the withdrawal and a record of financial institutions it is possible to set up standing
how much is left in the account (a balance). ATMs orders to make regular payments and to access and
can also print out a mini-statement of the account. manage loans and credit card applications.

Internet banking Online banking has many features and functions but
typically it includes:
Internet banking, also referred to as online banking
and virtual banking, is an electronic payment l carrying out financial transfers such as account-
system that enables account holders (and other to-account transfers, paying bills and so on
financial institutions) to conduct many financial l personal financial management (for example,
transactions on a website operated by their bank. viewing account status and switching funds
from one personal account to another).

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 12.2 Means of payment

Telephone banking Bridging loan

This service is provided by banks and other A bridging loan is provided by a bank (or some
financial service providers and enables customers other form of financial institution) as a temporary
to perform financial transactions over the telephone measure for a relatively short period of time (for
without the need to visit their branch. example, a few weeks) until other expected funds
become available (such as from the sale of a
Borrowing from a bank building or some other asset).

There are three main ways of borrowing from a

bank: overdraft, loan and bridging loan. Banks
Annual percentage rate
often require some form of collateral to safeguard Annual percentage rate (APR) of charge describes
against possible non-repayment of the amount the interest rate charged for a whole year
borrowed. Collateral can be property deeds, stocks (annualised) rather than a monthly fee, as applied
and shares, specific items of business equipment or to a loan, mortgage or credit card. APR provides
machinery. The items of collateral are sold by the borrowers with a simple ‘bottom line’ figure
bank if the debt is not repaid. that they can use to compare rates charged by
potential lenders.
Bank overdraft
With the prior permission of the bank, customers
can write out cheques or withdraw money beyond
12.2 Means of payment
the amount they have in their current accounts. This A variety of convenient methods are used by
will be up to an amount agreed by the bank, and businesses and individuals to make or receive
is the value of the overdraft. In this instance, the payments, access cash and carry out other
customer’s account is said to be overdrawn or ‘in financial transactions both in their home country
the red’. and in most places around the world. We will
An overdraft is particularly useful where a customer explore these below but note that, while they are
does not know exactly how much he or she needs incorporated in this chapter, some of these facilities
to borrow or for how long it will be needed. The are also offered by financial institutions other
amount of interest charged is calculated daily on than banks.
the actual amount overdrawn. So if any deposit is Cash is obviously a convenient method of paying
paid into the bank it reduces the overdraft and the for purchases at home and overseas because it
charges involved, while any payments made out of is always acceptable. However, when travelling
the account increases the overdraft. abroad, foreign currency is needed, which can mean
buying several currencies if visiting more than one
Bank loan country; this incurs a cost and it can be difficult to
In the case of a bank loan, the bank transfers assess how much cash is needed for each country. In
the total amount of a predetermined loan to the addition, cash carries the risk of loss or theft.
customer’s account. Repayment, including interest,
is then made in set amounts at regular intervals Cheque payment saves some need for carrying cash
over the period of the loan. The bank will make but is not realistic for all forms of purchase, such
a loan only to applicants whom they feel are as when the amount involved is relatively small
suitable borrowers. (for example, you would not pay for a bus ride by
cheque). Even for larger purchases, people are not
The bank loan is a better method of borrowing always happy to accept cheques, especially in a
money when the required amount and length of foreign country. But cheques still have advantages
time for repayment is known, because the annual for convenient payment of bills by post, especially
rate of interest on a loan is likely to be less than on in the home country.
an overdraft.

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12 BANKING

Credit transfer is an order to a bank from Credit cards enable the holder to buy goods
somebody (who does need to be a customer of the and services from traders without using cash or
bank) to pay money into the account of a person or cheque. The cardholder presents the card when
business who holds an account anywhere within making purchases (for example, at the point-of-sale
the banking system. The person instructing the terminal), verifies the card with a PIN and the credit
payment pays money into any bank, over the card company (the cardholder’s bank or some other
counter and completes a form (available on the provider) eventually charges the cardholder with the
bank counter) giving the details of the person or cost of the purchase (see Figure 12.3). The cardholder
company to receive the payment. The credit transfer has the option of making full immediate payment,
system has largely been replaced by electronic finds with no interest charge, or can delay payment, for
transfer (see later) but is still used today. which a charge is levied.
Standing order (banker’s order) is a convenient
way to make payments where a regular amount
has to be paid (for example, monthly instalments LAURA
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to repay a loan or hire purchase). A standing order 81014660 E, BEAU BA
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CARIBCA
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on cheques means the payment may be forgotten, or
delayed in the post, leading to the borrower (debtor) SALE
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defaulting on repayment. The standing order avoids
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account holder’s instructions and automatically BASE AM

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makes the payment electronically direct to the VIP AMO
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account to be paid on the precise payment date. TOTAL. EC
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Direct debit is a variation of the standing order ------------

---------- P. Ferier
service. Instead of customers instructing the bank I AGREE TO------------------------
ACCORD PAY A BOVE TO ----------------------
IN TAL
(the drawee) to make regular payments on their (MERCHA G TO CARD ISSUER AMOUNT
NT AGRE S AGREEM
TOP COPY EMENT IF
behalf, they complete and sign a form that allows MERCHA CREDIT VO ENT
NT BOTTO UCHER)
M COPY
someone else (the payee) to withdraw amounts from CUSTOM
ER

their accounts at regular intervals. The amount can

also be varied by the payee (with the permission of Figure 12.3 Example of a credit card receipt voucher
the account holder – the drawer). For example, if the
regular payment involves an amount that changes Electronic fund transfers (EFT) is the electronic
sometimes (such as rent, mortgage, telephone or exchange or transfer of money without any paper
electricity bills), the adjusted charge can be made money changing hands. This exchange can take place
without the bank customer having to visit the bank. within a single financial institution or across multiple
institutions through computer-based systems. Many
Debit cards allow bank customers to make
transactions are executed via EFT including:
purchases without the use of cash or cheque. Most
traders are happy to accept payment by debit l credit card and debit card transactions
card because the purchase price is withdrawn l direct deposits in which pay is deposited straight
immediately directly from the bank customer’s into an employee’s bank account
account. The purchaser presents the card to the l direct debit and standing orders.
trader, enters their PIN and the amount due is Money transfers can also be carried out across
withdrawn from their account. If there is not enough international borders, thus facilitating money
money in the account, the purchase will be rejected. transfers both at home and overseas.

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 12.3 Trends in banking

Documentary credit (also known as letters of Debit cards: are sometimes the only method of
credit) solves some of the difficulties that occur in payment some traders will accept other than cash.
international trade and is one of the most secure But the holder can also use them to obtain cash
payment methods used in this context. It enables direct from their bank account via a cash machine.
exporters to obtain payment before the documents
Credit cards: are popular with consumers because
of ownership are released to the importers. The
they allow the user to make purchases immediately
importers arrange for their banks to guarantee that
and pay at some later date. But some traders will
the payment will be made when the documents of
not accept the use of credit cards or impose a charge
title are handed over. In this way, both exporters and
for their use. This is because the trader is charged
importers are safeguarded and encouraged to trade.
a percentage fee by the credit card company. They
Bank drafts are a form of cheque drawn on the will sometimes pass this charge on to the user
issuing bank itself rather than the bank customer’s causing them to consider whether to use the card
bank account. This makes the banker’s draft as good or not.
as cash because the bank has guaranteed it for the
Electronic funds transfer: has a wide and diverse
customer, who has paid the value of the draft to the
use that makes it convenient and is chosen for a
bank in advance. Bank drafts are commonly used
wide variety of reasons. For example, it could be
by banks when they deal with each other, or when a
used by a business in the payment of wages. As
creditor or seller is unwilling to accept an ordinary
opposed to paying each employee with cash or
cheque from a debtor or buyer in another city or
cheque, the facility can be used to deposit wages
country. (In local transactions a certified cheque or
direct into each employee’s bank account. There
a cashier’s cheque serves the same purpose.)
are other ways that the business may employ the
facility, for example, to process point of sale (POS)
Choice of methods of payment transactions, which appeals to shoppers as well
Cash and cheque: is the traditional option for as retailers.
one-off payments. The presenter of the payment has Documentary credit: a seller/exporter engaged
full control over when and how much is being paid. in international trade would obviously prefer
Cash or cheque (or bank transfer) suits a business payment in advance by cheque or bank transfer,
receiving payments from relatively few customers but the buyer/importer will often be reluctant to
and where they are mainly collecting one-off part with payment before accessing the goods.
payments. The documentary credit (letter of credit) solves
Credit transfer: is used by many public utility the impasse.
companies who often attach a prepared credit
transfer form with the bills they issue to customers 12.3 Trends in banking
to facilitate easy payment. In this way a customer
can make a payment even if they do not hold a bank
account or participate in online banking. Global internet access
Standing orders: will be chosen by people who A growing on-demand economy has been fuelled
need to make regular fixed amount payments to and fulfilled by technology companies who
another person or a company on a specific date (e.g. meet consumer demand for goods and services.
the fifth day of every month) and do not want the Technological innovation is revolutionising
inconvenience of having to remember when to make commercial behaviour in countries around the world
the payment (and perhaps several others). and the consequent consumer behaviour, which
demands quick, direct supply.
Direct debit: a business will prefer to receive
payments by direct debit when they are regular The expansion of global marketing, opening up
payments, when payment is not needed instantly new and wider markets for goods, has led to a
and when the business has a lot of customers and demand for internet-based services, including
wants to reduce administration time. internet banking. Internet banking has experienced

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12 BANKING

explosive growth in many countries and has of names – gold, premium, premier, upgraded,
transformed banking practices, while facilitating reward and so on. The packages vary from one bank
on-demand purchasing. to another but include rewards such as personal
service counters, travel insurance, home insurance,
Mobile and digital banking motoring breakdown services, limited private
medical care, mobile phone insurance, bank cards
Mobile banking refers to the use of a smartphone protection, access to airport special lounges.
(or some other form of cellular device) to perform
online banking while away from the home
computer. In effect, with mobile devices it is
Cashless society
possible to carry out almost all the tasks normally Cashless society refers to a society in which
dedicated to the home computer. For example, it is purchases of goods or services are made by credit
possible to monitor account balances, transfer funds card or electronic funds transfer rather than with
between accounts, pay bills and even locate the cash or cheque. You will recognise that many
nearest ATM. elements of banking have given rise to the term
‘cashless society’.
Mobile wallet
This is essentially an app running on a mobile
Decline in personal banking
device such as a smartphone or tablet to manage Many banks are closing a number of their branches,
mobile commerce services, supporting payment particularly in less densely populated areas. Even
cards, loyalty cards and other items that may be in more populated areas, fewer staff are being
found in a conventional wallet or purse. Instead of employed as customers are being encouraged to
presenting a debit card when making a purchase, a engage in internet banking (even within branches).
mobile device can be used with some traders. This has led to a drop in staff numbers and fewer
personal services.
Credit card charges
Paying by credit card is a convenient way to
Implications of internet banking
manage spending without incurring charges. Internet banking has transformed banking activities
Wise shoppers can spend throughout the month by providing individuals and businesses with a
and at the end of the month pay the credit card convenient method of conducting bank business
company all they owe immediately, thus avoiding around the clock from their home or workplace
interest charges. and computer. However, this has not been without
adverse effects.
In this instance, there are no charges because the
credit card company charges the trader for the Internet banking has resulted in reduced teller
value of the transaction rather than the shopper. transactions, causing inconvenience to some
However, some traders now charge their customers customers who prefer personal service. It has also
a sum for purchases made by credit card. In other resulted in the unemployment of some banking staff
words, they are deflecting the charges made by as well as the closure of some bank branches. Sadly,
credit card companies by passing the cost on to it has also resulted in increased banking-related
the shopper. criminal activity.

Package accounts
Many banks and other financial service providers
offer a package account to customers who pay a
monthly service fee. These accounts have a variety

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 Things to do

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
legal tender online banking payee
commercial bank cash debit card
interest cheque credit card
deposit account standing order loan
current account direct debit overdraft
bank statement drawee mobile wallet
night safe drawer

Search and find

Copy the questions below and write out their 12 What is a cheque?
answers to form your own revision notes. You can 13 Explain the difference between a standing
find the answers by referring back to the chapter. order and a direct debit.
1 How does a commercial bank aid trade? 14 How does the function of a debit card differ
2 In what ways does a current account differ from that of a credit card?
from a deposit account? 15 What is electronic funds transfer?
3 What is the purpose of a PIN? 16 Why are documentary credits and bank drafts
4 How does a night safe benefit businesses particularly acceptable methods of payment?
in particular? 17 How is on-demand purchasing revolutionising
5 What is the significance of a PIN? commercial behaviour?
6 Give a simple explanation of how an 18 What is the ‘mobile wallet’?
ATM works. 19 What is meant by ‘cashless society’?
7 Summarise the term ‘internet banking’. 20 What are package accounts?
8 Explain the difference between a bank loan 21 In what ways are some traders changing
and a bank overdraft. the ways they deal with charges by credit
9 Under what circumstances might a bank loan card companies?
be more suitable than an overdraft? 22 What adverse effect is the decline in personal
10 Why is the figure of annual percentage rate banking having? Does it matter?
important to borrowers?
11 ‘Although cash is a most acceptable method
of payment, it is not necessarily always the
most convenient.’ Explain this statement.

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12 BANKING

Multiple choice
Choose the one most appropriate answer from 6 With a bank overdraft interest is calculated:
the four alternatives. A weekly
1 If a business wants to pay the wages of each of B monthly
its many employees electronically it will use:
C annually
A standing order
D daily
B direct debit
7 A bank loan:
C electronic funds transfer
A does not incur an interest payment
D bank draft
B consists of a fixed amount for a
2 If a bank customer wants to pay a regular fixed fixed period
amount to a trader it would use:
C is a varying amount for a varying period
A a standing order
D is available with a deposit account
B a direct debit
8 Which of the following does not contribute to
C a credit transfer the concept of a cashless society?
D a fixed payment A bank notes
3 Notes and coins issued by the central B credit card
bank are:
C cheque
A a form of government borrowing
D ATM
B government securities
9 When dealing with payments by cheque the
C treasury bills bank carries out the instructions of the:
D legal tender A payee
4 The person intended to benefit from a B drawer
cheque is:
C drawee
A the drawer
D debtor
B the payee
10 One of the services of commercial banks which
C the drawee allows customers to instruct their bank to meet
D the banker requests for payment from a named creditor
5 The correct name for the bank on which a is called:
cheque is drawn is: A debit payment
A the payer B credit payment
B the drawer C standing order
C the drawee D direct debit
D the payee

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 Things to do

Structured questions
Answer as many parts of the questions as you can. The marks available indicate the amount of detail
you need to supply/the level of difficulty of each question.
1 Consider the bank loan data in Figure 12.4 and answer the questions related to bank loans.

Information required from the borrower to support an application for a personal loan: monthly income, monthly expenditure,
total disposable income, employment details, residential status (home owner or tenant).

$ $ $ $ $ $
Period
of loan: Amount of loan 300.00 400.00 500.00 600.00 700.00 800.00
18 months Total amount payable 351.72 468.90 586.08 703.26 820.62 937.62
Monthly repayments 19.54 26.05 32.56 39.07 45.59 52.09

Figure 12.4 Bank loan table for annual percentage rate 22.8 per cent

a Explain the meaning of the word ‘collateral’. [1]

b Give two examples of collateral that a manufacturing business might offer to secure a loan. [2]
c What is meant by the term ‘annual percentage rate 22.8 per cent’? [2]
d If a firm wanted to borrow $8000 over a period of 18 months, how much would it have to repay
each month and what would be the total overall amount repaid over the 18-month period? [2]
e Give a reason for three of the items of information this bank requires before it will grant a loan. [3]
f Describe fully the difference between a bank loan and a bank overdraft, and give examples of
when a business would use one in preference to the other. [10]
2 Refer again to the bank statement shown in Figure 12.2 and answer these questions related to it.
a Name the holder of this account. [1]
b What period does this statement cover? [1]
c Why is it important for customers to receive bank statements regularly? [2]
d Since the date of this statement Mr Baudin has written cheques for $28.40, $96.00 and $136.89.
A direct debit of $189.27 has also been paid. How much funds does Mr Baudin have access to?
Show all of your working out. [4]
e Give a clear explanation of the purpose of the debits, credits and balance columns, using
examples from the statement to illustrate your explanation. [6]
f Explain the difference between the services shown on this statement as direct debit and
standing order, and give examples of how a business might use each. [6]
3 Refer again to the cheque shown in Figure 12.1 and answer these questions related to it.
a Name the account holder related to this cheque. [1]
b With which type of bank account would this cheque be used? [1]
c What is the purpose of a cheque? [2]
d Why do you think that the amount to be paid is written in both words and figures? [2]
e Identify the drawer, the payee and the drawee of this cheque. [3]
f Give three reasons why a bank might not pass a cheque for payment. [3]
g State four things written on a cheque other than the account holder’s signature. [4]
h Which type of bank account would a business be likely to use most? Give reasons for
your answer. [4]

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12 BANKING

4 a What is a commercial bank? [2]

b In what way can a commercial bank be said to be an aid to trade? [2]
c A bank deposit account is sometimes referred to as a savings account. Why is it referred to
in this way? [2]
d What is ‘current’ about a current account? [2]
e ‘Everybody who engages in commerce needs banks.’ Give three examples to justify
this statement. [3]
f Describe three different ways that banks earn income from the service they provide. [3]
g Name and briefly describe three different bank services that illustrate how banks provide
electronic funds transfer. [6]
5 a What is a night safe and where will it be found? [2]
b Give a brief explanation of how the bank night safe facility works. [2]
c State two advantages of using a bank’s night safe facility from the point of view of a business. [2]
d List four different types of business that earn much of their income outside of normal
banking hours. [4]
e Explain how an ATM benefits traders as well as their customers. [4]
f Explain how the bank direct debit service benefits both bank customers and also those to
whom the bank customer must make payments. [6]

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13 THE BUSINESS UNIT
government intervention that facilitates cheap rents
BY THE END OF THIS CHAPTER YOU and training grants for workers.
WILL BE FAMILIAR WITH:
Enterprise zones are relatively small geographical
l location of a business, including retail units areas where businesses of all types are encouraged
l public and private sectors (by central or local government) to locate or expand.
l main forms of business organisation in the
Enterprise zones can encourage development
private sector
in rundown inner city areas where decay is
l franchises
l multinationals. particularly problematic. These areas can offer
incentives such as:
l reduced local rate charges by local government
for a period (for example, five to ten years)
13.1 Location of business l tax incentives from central government to locate
Where to site their premises is a major decision for within a zone
all firms. They will consider a variety of factors,
l simplified local planning procedures.
including:
l the size of the organisation 13.2 Public and
l the expected scale of its operations private sectors
l the type of trade the business is engaged in.
For example, a small independent retailer will
locate within a residential area, whereas a large
The public sector
hypermarket will locate outside a town. Most of the In most countries we say there is a mixed economy,
choices of site location are a compromise between because some businesses are privately owned
several advantages and disadvantages. Figure 13.1 and others are owned by the state. The private
shows the main influencing factors. businesses (or enterprises) are those that are owned
by private individuals (some of the public). Public
How governments try to sector businesses (often referred to as public
solve disparities enterprise) are the various forms of enterprise in
Governments have many options to encourage public ownership – these are owned by all of the
businesses to locate in preferred areas including public (through government ownership). These
the following. businesses fall into two broad categories: municipal
undertakings and state undertakings.
Development areas can be created and grants
offered to contribute to land purchase and Municipal undertakings
new buildings, leading to new jobs in areas of
These are enterprises or services operated on a
high unemployment.
commercial basis by local government authorities.
Intermediate areas can be identified where They are financed by local taxation and charges
unemployment is high, although not as high as in are made for the use of their services or other
a development area, but where there is a need for commercial activities. Sometimes municipal
preventive action. Usually this kind of area shows enterprises are subsidised by grants from central
signs of deterioration and rising unemployment. government. Examples include sports centres,
An intermediate area might be targeted for the theatres, bus services, conference halls, art galleries
provision of government-built buildings and and museums.

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13 THE BUSINESS UNIT

INDUSTRIAL INERTIA RAW MATERIALS Closeness COMMUNICATIONS

Sometimes firms stay at a to raw materials or to the FACILITIES This includes ease
particular site even though port where they enter the of access to transport
the original reason for siting country may influence choice facilities as well as
in that area (for example, of site. information networks.
near a source of raw
materials) no longer applies.

LAND Availability of sufficient MARKET PULL Businesses are

suitable land, at an attracted to sites close to
economically viable price, in where potential customers
a suitable position will attract can be found; shops near
business. where shoppers will be, hotels
near tourist areas.
INFLUENCES
ON
LOCATION OF BUSINESS

LABOUR Availability of GOVERNMENT INFLUENCE

suitable labour with a good Some governments try to
no-strike record. This will influence the location of
be influenced by availability businesses, for example, to
of social amenities such as improve regional balance, to
housing and medical facilities. reduce overcrowding in cities
and towns.

ENVIRONMENT Climatic FUEL OR POWER Closeness SUPPLIERS AND

conditions are important to to fuel or power are less COMPETITION Firms will
some businesses, particularly important today than in the locate near other businesses
those involved in agricultural past, but some firms still need on which they depend, or
products. to locate near to sources such near to other firms in a similar
as water. line of business.

Figure 13.1 A business will take many factors into account when deciding where to locate its premises. Look at the
examples given here. Where can you see examples of these influences on businesses in your locality?

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 13.3 Private sector business organisation

State undertakings l National security may have to be protected through

State undertakings, state ownership, public state ownership (for example, atomic energy).
ownership, public enterprise and nationalised
l To avoid equipment replication and duplication
industries are all terms that refer to a variety of of services (for example, a single national
enterprises operated by the government on behalf rail network).
of the public. Each public corporation is set up
l To save an ailing industry and protect jobs.
by an Act of Parliament to provide commercial Advantages of public ownership
or industrial functions, often in a monopolistic
l The government has the resources to fund a vast
position. Each corporation has a legal identity
separate from the government and may encompass industry, even if it is uneconomic.
l Ensures provision of essential services.
activities such as transport, telecommunications,
l Reduces possible duplication of services and
broadcasting, and water and power developments.
equipment (for example, competing rail services).
In effect, a public corporation is owned by all the l Enables large sections of the economy to be
public. General overall policy is decided by the planned towards a single strategy.
government in consultation with the corporation board, l Profit benefits the whole nation as opposed
the members of which are selected by the government. to a limited number of private individuals.
l The large scale of public corporations enables
Financially speaking, corporations are expected
to at least break even. However, sometimes other them to enjoy maximum economies of scale.
l Personnel are appointed because of proven
priorities are regarded as more important than
making a profit, such as providing a service at an ability as opposed to whom they know.
economic price for the public.
Disadvantages of public ownership
Any profits that are generated by public enterprise l Can be overcautious due to the fact that they are
are basically used in three ways: answerable to the public.
l Bosses are politicians who may not have the
l to pay interest on charges on capital borrowed
l set aside for future repayment of loans required expertise to run a major enterprise.
l Local issues may be disregarded in favour of
l reinvested to improve or expand the service.
political objectives.
Nationalisation and privatisation l A state monopoly can lead to inefficiency and

Some public corporations have been set up by the insufficient profit motive.
l Losses have to be met by the taxpayer.
government initially; others have at one time been
in private ownership and then taken into public
ownership by the government. In the latter case the 13.3 Private sector
enterprise is said to have been nationalised. When
the reverse situation occurs, that is, a government- business organisation
owned enterprise is passed into private ownership,
Private sector businesses ( free enterprises) are run
it is said to have been privatised.
for profit and not owned by the government. They
Reasons for state ownership are owned by individuals or commercial companies.
l To take a monopoly out of private ownership for
The main forms of private enterprise are:
the good of all citizens. l sole trader (sole proprietor)
l To keep a natural monopoly (for example, water l partnership
or gas) in public ownership. l limited company (private and public).
l Sometimes the initial cost of setting up an
If you look at the name of a business it often tells
enterprise may be too high for private enterprise
you something about the type of ownership. For
(for example, hospitals).
l Some forms of enterprise may be essential to our
example, the Kamran Khan Café indicates that the
business is probably owned by one person (a sole
welfare but uneconomic for private business.

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13 THE BUSINESS UNIT

trader). But if the name of the business is Khan & business has limited liability the investor is only liable
Partners Accountants, you know there is more than to lose the amount of money he or she has put into
one owner; there are partners involved. the business, and personal property cannot be taken
if the firm fails. Thus, the limited liability company
Limited liability is said to have a separate corporate identity, an
identity all of its own and separate from the identity
If you look at Figure 13.2 you will see examples of of the owners of the business. It can sue and be sued
business names. Some of them include the letters in its title name, which must include the word Limited
Ltd. This is an abbreviation of the word ‘limited’ (Ltd), or PLC if it is a public limited company.
and this indicates that the particular business has
limited liability.
Sole traders
The sole trader (or sole proprietor) is a popular form
Holidays Ltd
of business ownership where:
a personal service is provided
Grenot & Partner ltd
l
l limited capital is available to start up the business
l large-scale production is not required.
This type of business may be operated by the
Newtown Newsagents proprietor (owner) alone or it may employ several
people, but the main feature is that it is owned
by one person and tends to be a relatively small
Topcut Hairdressers business. You will probably be aware of many sole
proprietor businesses in your area.
International plc
Do not fall into the trap of thinking of a sole trader
only as a retailer. Any business, whether it is a small

ABC carhire factory, hair salon, gardener, removal firm, plumber,

taxi driver or gardener, is a sole trader if it is owned
by one person. This type of business is particularly
Figure 13.2 Examples of business titles popular for people starting up a completely new
business (often referred to as a start-up business).
The people who invest in businesses (entrepreneurs)
face many risks. The obvious risk is that the firm Small traders tend to have only a few employees,
does not make a profit, or, even worse, that it makes a and less machinery or capital than larger businesses.
loss. The most serious risk is that the business may go They also have less plant and fewer opportunities
bankrupt, that is, cannot pay the money it owes to its for economies of scale. Their market tends to be less
creditors. Under such circumstances, if the business diversified than larger businesses because their level
has unlimited liability, the owners of the business are of operations limits their output. See Figure 13.3 for
not only liable to lose the money they have invested in the advantages and disadvantages of sole proprietor
the firm, but they can also have their personal assets businesses.
(such as their homes or their cars) taken in order to Not surprisingly, the sole proprietor business
pay off their debts. Although smaller businesses have is more likely to fail than any other form of
unlimited liability, larger companies would be unable business and is particularly open to pressure
to attract sufficient investors if everyone faced the from larger businesses. However, although the
risks presented by unlimited liability. For this reason, individual output of these small businesses tends
the status of limited liability exists. to be relatively small, collectively they make an
Limited liability allows people to invest in a enormous contribution to the economy of a country.
business without having to face the risks of unlimited Most businesses try to expand in a natural attempt
liability, which have already been outlined. When a to make the business more stable and to give it

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 13.3 Private sector business organisation

greater continuity. One of the ways in which the sole Like the sole trader, the partnership has unlimited
trader may do this is by offering part-ownership to liability. Should the business go bankrupt, the partners
one or more people to form a partnership. are fully liable for the debts of the business. But the
partners do not necessarily have to face the debts
A small business like mine needs less capital
equally. For example, if a two-person business goes
bankrupt and one partner has no personal possessions
but I have to provide all the capital myself. while the other has many, the creditors can claim the
It can be difficult to get a loan because I’m total debt from the wealthy partner. On the other hand,
a bigger risk than a large company.
if both partners have sufficient personal possessions
When I make a profit it’s all mine to meet the debts they will make equal contributions.
but I have unlimited liability if the business goes A partnership deed sets out the rights of each partner
bankrupt. If I am unable to pay my creditors, regarding the division of the profits and so on. If such
they can take everything I own. a deed does not exist then it is assumed that the profits
I’m my own boss, make all my own decisions, or debts are shared equally, with the proviso that one
and I’m involved with every aspect of the partner could be obliged to meet all the debts.
business and all my clients.
A partner may be willing to introduce capital into
the business but may not wish to take an active part
in its running. He or she is known as a sleeping
partner. However, the sleeping partner will still
have to meet his or her share of the debts should the
business go bankrupt.
It is possible to have a limited partnership, but at
least one partner must have unlimited liability.
Consequently, limited partnerships are relatively
rare. Some professional associations do not allow
their members to form limited companies, including
solicitors, doctors and accountants.
Advantages of partnerships
l Easily formed.
l More people to contribute capital than a sole trader.
l Greater continuity than a sole trader.
Figure 13.3 Sole proprietor advantages and disadvantages l Expenses and management of the business
are shared.
Partnerships
Disadvantages of partnerships
A partnership can involve between two and 20 l Generally unlimited liability.
people, although there are some exceptions: a bank is l Possible disagreements between partners.
not allowed to have more than 10 partners and some l Each partner is liable for the debts of the business.
professional firms such as accountants, solicitors and l Membership limit of 20 restricts the resources of
stockbrokers can have more than 20 partners. the business.
This type of business offers a solution to some of the
problems faced by the sole proprietor. For example, Private limited companies
more people in a partnership means more experience
and knowledge, and some partners may have specialist Any company that is not registered as a public
knowledge, such as accountancy, to look after the limited company is a private limited company and
financial side of the business, or supervise some other must include the word ‘Limited’ (or Ltd) in its title.
aspect of the firm’s activities. In spite of the advantages A private limited company is allowed to have a
partnerships have over sole proprietor businesses, the minimum of one members (shareholder) and there is
partnership still has some disadvantages. no maximum. The capital of the business is divided

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13 THE BUSINESS UNIT

into shares, but the shares cannot be advertised for Public limited companies
sale publicly. Therefore, new shareholders must
be found privately; hence the term ‘private’. The Private and public limited liability companies
shareholders may or may not take an active part in are sometimes called joint stock companies
the running of the business. If the company makes a because each is an association of people who join
profit, it pays a dividend on shares. together to contribute money to a joint or common
stock, which is used in some form of business
Some private companies may wish to keep control
over the transfer of their shares. For example, a enterprise. The profit or loss is then shared among
family concern may want to ensure that ownership the contributors.
or control remains within the family. The private The public limited company must indicate its public
company may, if it wishes, write a rule into its status by including the letters PLC (or plc) in its title.
articles of association requiring members to
offer shares for sale to existing members before It takes a minimum of two people to form a public
attempting to sell them to non-members. limited company, and there is no maximum
membership. Such companies are allowed to sell
Carefully audited accounts have to be kept for
their shares to the public. The transfer of share
annual inspection. This can cause expense and
reduce privacy. The advantages and disadvantages ownership is simple and, therefore, the number
of a private limited company are shown in of owners or shareholders can be considerable.
Figure 13.4. Consequently, this type of business can raise almost
limitless funds.
We have more people to invest capital
Obviously, it would not be practical for all the
but we are not allowed to sell shares to the public on the
Stock Exchange. This may limit the capital we can raise. We shareholders to participate in the day-to-day
may decide to restrict share transfer, which would further operations of the business, so they elect a small
limit capital raised. committee called a board of directors to take
The burden of work and responsibility is shared rather decisions on their behalf. This board elects a
than falling on one person or partnership
chairperson to regulate their meetings.
but it can take a lot longer to reach decisions and take action
when many people are involved. There are still too many people on the board of
Our liability is limited directors for them all to take part in the day-to-day
but we must keep audited accounts. running of the business, so they appoint a salaried
person, known as the managing director, to carry
out this role. Private limited companies can also set
up a board of directors, a chairperson and a salaried
managing director.

Shareholders Directors

Managing Director

Finance and Administration

Accounts Purchasing

Employees

Production Stages

Sales and Marketing

Local Overseas
Market Market

Figure 13.4 Advantages and disadvantages of a private Figure 13.5 Typical structure of a joint stock company
limited company

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 13.3 Private sector business organisation

Figure 13.5 shows the structure of a typical joint Setting up a limited company
stock company. The business of this particular
company involves the manufacture and sale of All types of business, including sole traders,
goods. You will see that the shareholders have partnerships and private and public companies,
elected a board of directors, and the board have must register with the Registrar of Business Names
appointed a managing director. You can also see the if they wish to trade in a name other than that of
typical way that the company is managed through the owner.
departments and processes. When a limited company is being formed, it is
regulated by the Companies Acts of the country
Advantages of public companies to which it belongs and the name of the business
l Because they can advertise for inputs of capital is registered with the Registrar of Companies
from the public in the form of shares, public (variously named in each country). This registration
companies can often obtain large quantities of is carried out mainly by the presentation of two
capital and resources, transforming them into completed documents by those initially forming the
large, strong business units. company:
l Their size enables them to enjoy economies of
scale (advantages of size) such as:
l the memorandum of association
the ability to purchase supplies in bulk, thus
l the articles of association.
obtaining the most favourable prices Both private and public companies follow a similar
purchasing equipment that will save labour procedure, except that the private company passes
and cut costs through fewer stages than the public company
ease of borrowing money and obtaining credit (see Figure 13.6).
a greater opportunity to undertake research
programmes, which will enhance production
Private Company Public Company
and other operations.
Companies Acts
Disadvantages of public companies Registrar of Companies
l The main disadvantage of this type of business
stems from its size. When a company becomes Memorandum of Association
very large it can become burdened by too (external relationships) Name, Status (if public),
Situation, Objects, Association, Capital, Liability
much paperwork or ‘red tape’; employees and
shareholders can feel too detached from the day-
to-day activities of the business, and decisions Articles of Association (internal relationships)
Outlines the internal rules by
can take too long to be put into practice. which the company is operated
l The public company, like the private company,
has to send a copy of its audited accounts to Miscellaneous Statements and Declarations
the Registrar of Companies and to each of its Capital, Declaration, First Directors, Consent, Address
shareholders. Therefore, it is difficult for this
type of company to keep its affairs confidential. Certificate of Incorporation
l The fact that shares can be easily transferred
Start Trading Prospectus
is also a disadvantage to the business because
it allows the possibility of the firm being taken
Issue Shares
over by another company that has managed to
obtain a controlling number of shares.
Trading
l The management of a large company can
Certificates
become too impersonal and inflexible. It can also
Figure 13.6 Forming a limited company
become inefficient and overstaffed, and therefore
wasteful of resources.

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13 THE BUSINESS UNIT

Memorandum of association l list of the first directors

l a statement of consent by each director confirming
This document states the external relationships of
that he or she is willing to act in this capacity
the business, such as the relationship between the l the registered address of the company. Any
company and others. It states:
change in this address must be notified to the
l the name of the business and its status – public Registrar within 28 days of the change.
or private limited company
If the Registrar of Companies is satisfied that all
l the address of the registered office of the company
the requirements have been met, a Certificate of
l the objective for which the business is formed
Incorporation is issued. The business now has
(for example, food manufacture)
an identity separate from that of its owners. A
l the liability of the owners (that is, for the money
private company can now start trading and a public
they have invested)
company can proceed to raise the capital it has
l the amount of capital with which the company is
declared it needs.
registered and the manner in which it is divided
into shares
l association – this is a declaration signed by those 13.4 Franchises
forming the business confirming they wish to
form the company and that they are prepared
to take up and pay for the number of shares
shown on the form by their name. The minimum
number of signatories is two.

Articles of association
The articles of association outline the internal
relationships of the business, that is, the broad way
in which the internal organisation will operate. It
must be signed by the same people who sign the
memorandum of association. The promoters of a
company must also make the following declarations
and statements to the Registrar of Companies:
l the rights of shareholders
l methods and manner of election of directors
l the manner in which meetings (particularly the
annual general meeting) are to be conducted
l division of profits
l the remuneration, appointment and removal
of auditors
l method of audit
l issue and transfer and forfeiture of shares. Figure 13.7 Franchising is not only found in the
fast-food trade
Miscellaneous declarations A franchise is a form of business in which a
Those forming the company must also make a firm that has a successful service or product (the
number of statements and declarations to the franchisor) enters into a contractual relationship
Registrar of Companies. These include: with another business (the franchisee). The contract
l the amount of registered capital and the way it is allows them to operate under the franchisor’s name
divided into shares with the franchisor’s guidance in exchange for a fee
l a declaration made under oath by the company (sometimes referred to as royalties).
secretary or a director confirming that all The franchisee receives the majority of the profits,
requirements have been met but must also meet the majority of any losses. In

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 13.5 Multinationals

addition to allowing the use of its name, products, l If the franchisor changes its operational
techniques or services, the franchisor usually techniques, the franchisee must adhere
provides extensive marketing backup in return for to the changes even if it doesn’t agree with
the money it receives. them.
l If the franchisor goes out of business this will
Fast-food giants such as Burger King, Kentucky
have a direct effect on the franchisee.
Fried Chicken, Pizza Hut and Wimpy are
l It can be more difficult to sell a franchise
particularly well known in the franchising sector
business than a non-franchise one.
(see Figure 13.7) but the range of franchising
activities goes beyond fast food. The following are
just a few examples of this type of business: 13.5 Multinationals
l car rental and automotive repairs
A multinational company is a business operating
l pet provisions
internationally, although its ownership is usually
l drain clearing
based in one country. When businesses expand it
l sign making
is not uncommon for the expansion to take place
l commercial cleaning
across international borders as a multinational.
l tool hire.
Similarly, companies sited in different countries
Advantages of franchises may combine to form a multinational company.
l They reduce the start-up risk for entrepreneurs.
Examples of well-known multinationals include
l They usually market an established brand name.
Ford and Shell.
l Financing the business can be easier because Multinationals make an important contribution
banks are more willing to lend money to people to each country where they are active. Some
buying into a franchise with a proven reputation. multinationals generate a turnover that exceeds
l The franchisor provides marketing and the gross national product (GNP) of many
advertising services, thus reducing the of the countries in which they operate. The
franchisee’s costs. expansion of the global economy has encouraged
l The franchisee gains the exclusive right to an increase in the number of multinational
market within a specified area. companies because it has expanded the
l The franchisor will have an established supplier opportunities for such businesses to locate in more
relationship, so the franchisee does not need to than one country.
create this.
l The franchisor provides considerable backup Advantages of multinationals
facilities such as training, marketing, l Cheaper labour may be found in different
advertising, promotional material, and perhaps countries.
national advertising. l They provide a means of entering tariff-
protected markets (see also Chapter 6).
Disadvantages of franchises l Multinationals are major employers and,
l If the franchisor has not researched the market therefore, they reduce unemployment.
correctly, the franchisee will suffer losses. l The factors of production are employed more
l Costs may be higher than expected. This will effectively because multinationals raise
affect the franchisee’s potential to make a competition levels.
significant profit. l Advanced technology is encouraged and also
l A franchise agreement includes restrictions on training for higher technological skills.
how the business should be run. This can restrict l Increased teamwork and shared goals are
the franchisee’s ability to adapt its approach to features of multinationals.
local market conditions. l A greater variety of product choice benefits
l Franchisees are required to agree to non- consumers in all participating countries.
competition clauses that will prevent them from l Increased employment choices are promoted,
expanding into a wider area. resulting in higher incomes.

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13 THE BUSINESS UNIT

Disadvantages of multinationals l Multinationals can use their economic power in

l Like all large businesses, the size of ways that are socially unacceptable; for example,
multinationals can be counterproductive – exploitation of cheap labour and diminishing
leading to too much red tape and a slowing down raw materials, and possibly ignoring
of decision making. environmental issues.
l The multinational (naturally) is motivated by self-
interest rather than the interests of the host country.

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 Things to do

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
mixed economy bankrupt articles of association
private sector limited liability franchise
public sector sole trader franchisor
nationalisation shareholders franchisee
privatisation dividend multinational
corporate identity memorandum of association

Search and find

Copy the questions below and write out their 13 List the advantages and the disadvantages
answers to form your own revision notes. You can of partnerships.
find the answers by referring back to the chapter. 14 Explain the main differences between
1 Give an account of what you see as the a private limited company and a public
significant influences on the location of limited company.
businesses in your country. 15 Why does a public limited company have a
2 What is meant by the term ‘mixed economy’? board of directors, and why does it need to
3 Explain the differences between the public employ a managing director?
and the private sectors of enterprise. 16 List the advantages and the disadvantages of
4 How does privatisation differ from a public limited company.
nationalisation? 17 Give a summary description of the process
5 Why might a government decide to nationalise followed in setting up a limited company.
a particular part of industry? 18 Clearly explain the following terms: franchise,
6 List the advantages and disadvantages of franchisor and franchisee.
public ownership of business. 19 Why is a franchise a suitable choice for a start-
7 What are the implications of limited liability to up business?
a business and its owners? 20 Why is the franchisor sometimes referred to as
8 Why is sole trader status a popular form of the ‘parent company’?
start-up business? 21 List three advantages and three disadvantages
9 What are the disadvantages of being a of franchises.
sole proprietor? 22 Define the term ‘multinational’.
10 How does a partnership solve some of the 23 What are the advantages of multinationals?
problems faced by a sole trader? 24 In what ways might the activities of a
11 What is the purpose of a partnership deed? multinational business be detrimental to a
12 What is a sleeping partner? host country and its people?

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13 THE BUSINESS UNIT

Multiple choice
Choose the one most appropriate answer from 6 A sole trader has:
the four alternatives. A limited capital
1 A sleeping partner is one who: B no employees
A does not receive a share of the profits C limited liability
B is not included in the deed or partnership D only one partner
C has no responsibility for the debts of 7 An enterprise that is taken out of the private
the business sector and into the public sector is said to
D takes no active part in running the business have been:
2 The owners of a public limited company A nationalised
are the: B privatised
A government C enterprised
B shareholders D denationalised
C local government 8 The document that gives a business an
D employees identity separate from that of its owners is:
3 The type of limited liability business that may A name clause
restrict the right of share transfer is called: B articles of association
A a public company C certificate of incorporation
B a private company D memorandum of association
C a public corporation 9 The best definition of a multinational is:
D a partnership A a company selling a multiple of products
4 Limited liability means: B one that has subsidiaries in more than one
A the business cannot make a loss country
B employees are insured against injury C it owns a chain of firms in its home country
C shareholders are only liable for the money D a business with many foreign customers
they invested 10 Which of the following is likely to be a most
D the company cannot be sued suitable form of business organisation for a
5 A sole proprietor may obtain additional group of lawyers?
business operational capital by: A a sole proprietor
A issuing shares in the business B a private limited company
B borrowing from a partner C a partnership
C selling the business D a public limited company
D borrowing from the bank

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 Things to do

Structured questions
Answer as many parts of the questions as you can. The marks available indicate the amount of detail you
need to supply/the level of difficulty of each question.
1 Figure 13.8 shows the letter heading of a limited company. Answer the following questions related to it.


   
: ( ­)€‚ƒ„ †

  , ,  , 

:
 ,   (  ),  

Figure 13.8

a How can you tell from this letter heading whether this is a private or a public company? [1]
b Who is the managing director of this company? [1]
c How does the function of a managing director differ from other directors? [2]
d What do you understand by the phrase ‘this company has limited liability’? [4]
e Give three advantages and three disadvantages of this type of business organisation. [6]
f If the firm that uses the letter heading were to expand, which type of organisation would it
change to? What would be the advantages and the disadvantages of making such a change? [6]
2 Examine the structure of a company shown in Figure 13.9 and answer the following questions.

Company Secretary

Chairperson

Managing Director

Chief Personnel Sales Chief Production Transport

Accountant Manager Manager Buyer Manager Manager

Figure 13.9

a There are two main forms of business organisation to which this diagram could be said to apply.
What are they? [2]
b Name the two groups of people missing from the diagram. [2]
c Explain the function of each of the two groups you identified in part b. [4]
d The chairperson is higher up in the company hierarchy, but has less day-to-day involvement
in the business than the managing director. Explain this statement. [4]
e The two types of company you identified in your answer to part a differ in the process that they
follow when forming and registering their businesses. What are these differences and
why do they exist? [8]

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13 THE BUSINESS UNIT

3 Franchising is one of the fastest-growing sectors of business and is particularly evident in start-up
businesses.
a Give a brief description of what you understand by franchising. [2]
b Franchising is particularly evident in the fast-food trade. What do you understand by
‘fast food’? [2]
c What are ‘start-up businesses’ and why is franchising popular with this aspect of business? [3]
d Give three contrasting examples (other than the fast-food trade) of services provided
by franchisers. [3]
e What are the benefits of franchise arrangements from the point of view of both the franchiser
and the franchisee? [4]
f Give a clear explanation of the difference in the organisation of a normal sole proprietor
business and that of a business with a franchise arrangement. Include mention of differences
with regard to capital formation and the distribution of profits. [6]
4 The questions given here are all related to the public limited company.
a Who owns a public limited company? [1]
b What is meant when it is said that a limited liability company has a ‘separate legal identity’? [2]
c Why is a multinational company more likely to be a public limited company than a private one? [3]
d Briefly distinguish between the memorandum of association and the articles of association of
limited liability companies and state one item of information contained in each declaration. [4]
e In what way does the process of forming a public limited company differ from that of a private
limited company? [4]
f Explain how the public limited company and the private limited company each meet different
requirements and appeal to different forms of ownership. [6]
5 The following questions all relate to local and central government ownership of enterprises.
a What is a corporation? [1]
b State two ways in which a state corporation differs from a public limited company. [2]
c Give three disadvantages of public ownership of enterprises. [3]
d Explain the difference between the terms ‘nationalisation’ and ‘privatisation’. [4]
e Give two reasons why a government might want to nationalise a business and two reasons
why it would privatise a state-run enterprise. [4]
f Should there be an extension of municipal and central government involvement in business
enterprise? Give reasons for your answer. [6]

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14 FINANCE
current assets, serve to swell the value of the
BY THE END OF THIS CHAPTER YOU business and increase the capital employed.
WILL BE FAMILIAR WITH: But, of course, a newly established business will
l sources of finance not have any retained profits.
l finance for commercial activity l Selling assets: involves selling things owned
l improving commercial performance. by the business (for example, part of a chain of
shops) to raise finance to expand another division
of the business (for example, its production plant).
14.1 Sources of finance The business must be careful not to sell assets
that are vital to the future prosperity of the firm.
Finance is a business’s most important resource l Owner’s personal savings (self-financing):
because, through it, the business can obtain all its the owner(s) could put more of their own money
other resources. The money used in a business is into the business. For example, a sole trader or
known as capital. The things that the business owns a partnership might consider this worthwhile,
that have a money value are known as assets and especially if the money is readily available, but
they are part of the capital of the business. Assets in the case of larger organisations this option is
can be divided into two broad areas: not realistic.
l fixed assets – things that are intended for
permanent use by the business (for example, External sources of finance
buildings, land, machinery, vehicles)
A wide range of sources of finance from outside the
l current assets (also called circulating assets) –
business are available and can be divided into two
things that are constantly changing and are
broad categories: short-term and long-term sources.
easily turned into cash (for example, raw
The most frequently used external sources are
materials, stocks of finished goods, debts owed
overdrafts, loans, hire purchase, leasing, share issue,
by customers (debtors), money in the bank).
debentures, trade credit and factoring, all of which
A business needs sufficient capital to get started are explored below.
(start-up capital) and once it is established, it
needs further finance to keep trading or to meet Most businesses need to borrow money. A newly
the cost of expansion. Finance is needed to meet formed business may need to engage in longer
expenses, such as wages and raw materials, or to term borrowing to see it through until it is a well-
buy machinery or premises. A business must be established firm; a business that has been operating
able to use money to create revenue (income) for for some time may need long-term finance in
the business. order to expand or modernise. Borrowing must be
long term if it is being invested in fixed assets (for
example, land, buildings or capital machinery).
Internal sources of finance Whether a business is new or has been operating for
l Retained earnings (retained profit): the some time it will at some point experience a need
profit left in the business after the owners have for at least short-term finance for an unexpected
received their share. It is sometimes referred to occurrence, such as to aid cash flow.
as ‘ploughed-back’ profit. This is an important
The cost of borrowing is interest, and this cost is
source of internal finance for an established firm
based mainly on:
because it does not have to be repaid and there
is no interest charged. These retained earnings, l the amount borrowed
when invested in additional fixed assets and l the length of time for which it is borrowed.

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14 FINANCE

In times of declining and fluctuating sales and machinery, vehicle) to another firm (the
profits, heavy interest charges may lead to problems lessee) under a rental agreement (the lease) in
with cash flow. return for an agreed rental payment. A leasing
arrangement can be useful to a business because
Short-term finance it enables it to employ assets without having to
tie up large amounts of capital for a long period
Short-term finance is normally for a period of of time.
less than three years and it is usually suitable for l Sale and leaseback: an arrangement whereby
a business that needs cash for its working capital. the seller of an asset (for example, a business)
The most common sources of short-term finance are immediately leases back the same asset from the
outlined below. purchaser. In this way the transaction functions
l Overdraft: a banking credit facility enables a as a loan, with payments taking the place of rent.
business to spend more than it has in the bank,
l Trade credit: a deferred payment arrangement
up to an agreed limit. Interest is charged on a whereby a supplier gives a business a certain
amount of time (for example, one or two months)
daily basis on the amount overdrawn on the day.
to pay for products after it has received them.
In the case of businesses, overdraft facilities
There is usually no charge for trade credit so
tend to be provided on an ongoing basis,
this is a good source of finance for a short period
thus giving the borrower a continuous credit
of time.
arrangement. An overdraft tends to be used to
l Factoring debts: a financial service provided by
finance working capital requirements and, if
one firm (the factor) to another firm (the client)
managed well, can be a relatively cheap and
by discounting unpaid invoices issued by the
flexible form of borrowing compared with some
firm to its customers. In other words, the client
of the alternatives.
‘sells’ the debts owed to it by its customers to
l Short-term loans: loans (such as bank loans)
the factoring firm, and the factor collects the
given for a fixed period of time at a fixed rate of
payment when they are due. This has the effect
interest. The loan and interest are usually repaid
of increasing the firm’s cash flow, but reduces
in regular monthly instalments. This kind of
its profit.
borrowing is more expensive than the overdraft
and will be used for the purchase of vehicles,
equipment and so on. With a secured loan the Long-term finance
borrower offers some form of collateral security l Shares: incorporated (limited liability) private
(for example, the deeds of property), which the or public companies can issue shares in order
lender can take if the loan is not repaid. In the to raise large amounts of money. Shares are
case of an unsecured loan, the borrower offers sometimes referred to as equities and, therefore,
no collateral against the loan. Because the sale of shares in a business is sometimes
lender faces more risk with this type of loan, the referred to as equity finance. The purchase of
interest charged tends to be higher. shares gives the shareholder a part ownership
l Hire purchase: in hire purchase (HP) a finance in the company, with voting rights. Because
company pays for goods (for example, equipment) shareholders are providing capital to the
that the business needs. Ownership of the goods company, it has a responsibility to earn enough
remains with the finance company until the end money to pay a dividend (a share of the profits)
of the payment period. The cost of borrowing the to the shareholders. The size of dividend paid
money (interest) is added to the purchase price is influenced by the type of share (there are
and the debt is repaid in instalments. This is an several), and the risks involved.
expensive form of finance and tends to be used l Preference shares: shares are speculative
mainly by smaller firms, usually when other because the investor could make a loss or
forms of finance are not available. a profit. Preference shares overcome the
l Leasing: refers to the hiring out by one firm speculative nature of ordinary shares because
(the lessor) of an asset (for example, building, they entitle the holder to a fixed dividend; when

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 14.1 Sources of finance

the company decides to declare a dividend, the factors affecting the choice of method of finance.
preference shares will be paid first. However, there are clear guidelines for both the
l Debentures (loan stock): a method of financing large and the small business:
companies through fixed interest long-term l If the finance is required for a short-term
loans secured against company assets. Most
purpose (for example, to purchase extra stock
debentures are redeemable at a specified date
to meet a sudden increase in demand), then the
(for example, 10 or 15 years) from the date of
source of finance will also be short-term.
issue. Failure to repay the loan gives the lender l If the finance is required for a long-term item
the right to seize the secured asset (for example,
(for example, purchase of a fixed asset), then the
buildings or machinery).
source of finance will also be long-term.
l Mortgage: the issuing of shares and debentures
is a method that is only available to incorporated As already stated, the length of time the finance is
companies. Sole proprietor and partnership needed for and the amount required will have an
businesses need long-term finance to provide influence on the method chosen; for example, most
for large capital outlays, such as the purchase of businesses will use an overdraft regularly for short-
property. A mortgage is a long-term loan against term cash flow. In the case of long-term finance,
which the property is offered as security. Failure businesses tend not to rely on just one source but
to repay the capital and interest means that the often use several depending on certain factors. An
lender can exercise a legal charge against the obvious influence will be the cost of obtaining the
property secured. finance. The firm will compare the alternatives and
choose the most economical.
Choosing the method of finance Sometimes the reason why the finance is needed
will determine the method of finance. For
example, purchase of a building will probably
RIS lead to a mortgage or issue of shares. A temporary
K? ST? borrowing, say to aid cash flow for a few weeks,
CO
will probably point to an overdraft facility.
Sometimes the degree of risk involved may mean
NG
? NA that only certain sources are available. For example,
LO TUR if the business needs finance to expand into a
W E?
HO trading situation where it could make a lot of profit,
but maybe none, it will find that the sources of
finance are very limited. In such a case, the business
may have to consider selling additional shares, or
taking in partners. This involves giving up some of
the ownership and control of the business, as well as
giving some of the profits to others, and the owners
will need to consider if they are prepared to do this.

The balance sheet

Figure 14.1 Choosing the method of finance
By looking at the financial facts and figures of a
All the sources of finance we have examined carry firm it is possible to get an idea of how ‘healthy’
advantages and disadvantages. In some cases the it is, and what can be done if it is ‘sick’. In other
type and size of a business will affect the number words, the facts and figures tell us how efficiently
of options available. Public limited companies have the assets are being used. A balance sheet provides
greater choice than smaller businesses such as a the basis for understanding the financial position of
sole trader or a partnership. Figure 14.1 shows the a firm, but it is not the whole story.

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14 FINANCE

A balance sheet is like a snapshot – it assumes that

the firm has been ‘frozen’, showing its position at a
14.2 Finance for
particular moment in time. A firm’s balance sheet is commercial activity
a summary of:
l liabilities/debts (things owed by the firm) Capital
l assets (things owned by the firm).
Capital refers to the value of things owned (the
The balance sheet in Figure 14.2 consists of two lists: fixed assets) by the business and this represents
l the list on the left shows the debts (liabilities) of the money invested in the business by its owners,
the business whether they are a single proprietor or the
l the list on the right shows the property (assets) shareholders of a large concern.
the business owns. It is often useful to divide capital into categories
The items in both sheets are placed in order of and use them in calculations to analyse and interpret
liquidity, that is, how readily they can be converted a balance sheet. The following are typical of the
into cash. The most liquid items (those easiest to categories and calculations commonly used, and are
turn into cash) are shown at the bottom of the lists. summarised in Figure 14.3.
The balance sheet shown in Figure 14.2 gives the l Fixed capital/assets are the durable (long-term)
financial position of the Karachi Trading Company assets of a business, which are used over a long
at a given time: 30 June. period of time and are tied up in permanent
There are other methods of presenting a balance use. Examples are land, buildings, machinery,
sheet. For example, liabilities and assets can be furniture, vehicles.
shown vertically. The balance sheet of most banks l Circulating capital/current assets (working
shows the more liquid items at the top, the reverse capital) is capital that is continually changing in
of the example shown here. Whatever the case, the quantity, total value or nature. Examples include
balance sheet serves the same purpose of analysis. stocks, cash, bank balance and the amount of
money owed to the firm by its customers (debtors).
From the ‘lists’ shown on a balance sheet we can l Employed capital is obtained by adding
easily classify the capital used by the firm in together the fixed and current assets of the firm.
various ways. This helps us to understand how In other words, it is the total of all the assets
effectively the business is using assets. being used by the business.

Balance sheet KARACHI TRADING COMPANY LTD

as at 30 June 2016

Liabilities $ Assets $
Capital 100,000 Fixed assets
Land & Buildings 80,000
Long-term liabilities
Equipment & Fittings 20,000
Capital 44,000 Vehicles 10,000
Current assets
Current liabilities
Stock* 32,000
Tax to be paid 2,400 Debtors 12,000
Bank overdraft 5,600 Bank balance 5,400
Cash float 600
Creditors 8,000
$ 160,000 $ 160,000
* at cost price

Figure 14.2 Balance sheet

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 14.2 Finance for commercial activity

the firm has been. Generally, the greater the

Fixed Circulating Employed
capital
+ capital
= capital
turnover the more business the firm is doing.
Net turnover is found by taking the value of total
Employed Current Capital sales and deducting the value of goods returned or
capital
− liabilities
= owned credits issued. For example, if a firm has total sales
of $100 000 but has given refunds of $20 000 to
Circulating Current Net working customers, net turnover would be $80 000.
capital
− liabilities
= capital
Rate of turnover, sometimes called ‘rate of stock
turn’ or ‘rate of inventory turnover’, is the figure
Figure 14.3 Categories of capital
which gives the number of times the average stock
l Current liabilities are debts that have held has been sold during the year. It shows how
to be repaid in the near future. Examples many times the stock has been turned over. There are
include bank overdraft, debts owed to two methods of calculating the rate of stock turnover:
suppliers (creditors) and taxes payable to the Cost of stock sold
Government. 1 Average stock at = Rate of stock turnover
l Capital owned is the net value of the
cost price
assets owned by a business. In other
words, it is employed capital minus current Net turnover
liabilities. 2 Average stock at = Rate of stock turnover
l Liquid capital consists of that part of the selling price
current assets that are cash or are easily
changeable into cash without delay; for Using method 2: if we assume that the average stock
example, bank balance, cash in tills and at selling price is $5000 and the net turnover is
debts owed by others (debtors). Liquid $50 000, the calculation is as follows:
capital is important because it can be used
to pay creditors immediately and, therefore, $50 000
= 10 = Rate of stock turnover
it should always be above the current $5000
liabilities figure. This means that the stock is turned over ten times
l Net working capital is the current assets in a year. Whether this is good or not depends
minus the current liabilities. It is important on the type of business. For example, it would be
because it takes into account the possibility acceptable for a confectioner to turn over the stock
of all the creditors of the business calling only ten times a year but if a greengrocer did this,
for payment. Therefore, it is important for a his or her stock would perish.
business to have sufficient working capital
to exist as far as possible without borrowing So, the rate of turnover can be seen as an indicator
from a bank. of how old the goods in stock are. In making the
calculations it is important to remember that the
Example figures used must either both be at selling price or
(CA – CL= NWC) both at cost price.
Current assets = 50 000 Importance of rate of turnover
Current liabilities = 16 000 As stated, the rate of turnover indicates how busy
a business is. This is a valuable indicator when a
Net working capital = 34 000
business is bought, sold or valued because it allows
comparison with similar businesses.
Turnover
A low rate of turnover is associated with sellers
Turnover refers to the total sales of the business of high-value goods or consumer durables
over the previous year and can indicate how busy (long-lasting goods).

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14 FINANCE

Rate of stock turnover Gross profit can be expressed as a percentage of

the cost or of the selling price.
Jewellers 3
Electrical goods 6 Example
$
Furniture and books 6
Selling price 100.00
Confectioners 12
Cost price 75.00
A high rate of turnover is associated with businesses Gross profit 25.00
selling perishable goods.
Mark-up 25
= × 100 = 33%
Rate of stock turnover (on cost price) 75
Butchers 78 Profit margin 25
× 100 = 33%
Dairies 67 (on selling price) 100
Greengrocers 53 Gross profit takes no account of overheads (ongoing
Bakers 42 business expenses) the business has to meet such as
If the rate of stock turnover is increasing, it rent, utilities, taxes and indirect wages.
indicates that the business is doing more business As a plain monetary figure, gross profit tells us
in real terms; it is selling more so profit should be little about a firm. However, if we turn it into
increasing, although this is not always the case. a percentage it can be compared with previous
years’ figures and with the gross figures of similar
Factors that can affect turnover businesses, indicating how competitive the business
The following situations can increase the turnover is. The method of calculating the gross profit
of a business: percentage is as follows:
l when the price is not too high Gross profit
l the types of goods being sold (for example, × 100 = Gross profit percentage
Turnover
consumable goods will have a high turnover)
l granting credit facilities to customers Example
l the variety of goods made available by the sellers $
l the goodwill and reputation of the seller Turnover 800 000
l the advertising and sales promotion made by
the seller. Cost of goods 600 000
Gross profit 200 000
200 000
Profit As a percentage 800 000 × 100 = 25%
Profit is the reward someone receives for taking Most businesses require a gross profit of between
the risk involved in business enterprise and for 20 per cent and 40 per cent to ensure that they are
acquiring or producing goods or services and selling covering their overheads (expenses) easily, and to
them. In order to make a profit, the firm’s sales reward the owners sufficiently. Over the years, the
revenue (turnover) must be bigger than its operating gross profit should remain relatively stable; if it
expenses (the costs of running the business). drops too much the business may fail to cover its
The profitability of a business can be seen as either overheads and start to make an overall loss. There
gross profit or net profit. are a number of reasons for a falling gross profit
percentage.
Gross profit l Staff of the business may be stealing stock or takings.
This is the revenue obtained from the sale of goods l Stock may be getting damaged or allowed to perish.
or services, minus their cost price. For example: l New stock may have been bought in at a higher
Sales Cost of goods Gross profit cost price and the increases may not have been
$40 000 – $30 000 = $10 000 passed on to customers.

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 14.3 Improving commercial performance

l The business may be employing more staff than Review pricing arrangements
is necessary (overstaffing) for the volume of Pricing should be reviewed regularly. Comparison
the business. with others in the marketplace may show that it is
l Expenses are rising (for example, wages, possible to raise prices (increase mark-up) a little
utilities) and this is not being incorporated without risking sales. Customers will sometimes
into prices. tolerate price rises as long as they are competitive
Net profit (profit for the year) with other businesses. However, it is wise to
test any price rise before making it permanent.
Net profit is the real profit made by the business Alternatively, the firm could reduce prices. If this
after taking into account the expenses incurred by stimulates increased sales, this increase may exceed
operating the business, such as wages, rent, taxes, the loss incurred by the price reduction. This could
advertising and bills of all kinds. even be a special temporary event, such as a one-
Net profit = Gross profit minus all expenses week sale, or related to a few products (for example,
a ‘buy-one-get-one-free’ (or half-price) occasion).
Example
Gross profit = $200 000 Improve marketing techniques
The firm could identify its best customers – those
Expenses = $50 000
who buy large amounts and who are the most
Net profit = $200 000 – $50 000 = $150 000 profitable. These customers might even be cultivated
at the expense of less-profitable customers.
Again, this figure is better expressed as a
The business could concentrate on these ‘best’
percentage so that it can be used in comparison.
customers by selling them products that give the
Net profit best contribution to profit – by analysing what they
Net profit percentage × 100 buy and offering them complementary products.
Turnover
150 000 However, less-profitable customers should not be
× 100 = 18.5% disregarded and new customers should still be sought.
800 000
A review of existing advertising techniques, or the
introduction of new ones, could increase demand and
14.3 Improving commercial attract new customers. Advertising content should be
refreshed and new wording introduced. Consumer
performance wants are constantly changing and sellers need to be
aware of changes in fashion and trends so that they
can meet current demands and avoid holding on to
Improving turnover unfashionable stock.
As already stated, the rate of turnover (sales)
indicates how ‘busy’ a firm is and how it can Online shopping and home delivery
be compared with other similar businesses. Businesses, particularly those in the retail trade, are
Obviously, the busier the firm the greater the introducing online shopping and home delivery to
opportunities to make a satisfactory profit. boost turnover. Although there are cost implications
Turnover (sales) can be improved via a number of delivery, they can be offset by setting a minimum-
of methods. value order for free delivery. An alternative could be
a ‘click-and-collect’ facility whereby the customer
Increasing margins orders online and collects from the trader at a
A margin is the difference between the selling price mutually convenient time and place.
of a good or service and what it cost the business to
buy or produce it. There are two ways to increase Prompting existing customers
margins – raise prices or reduce the cost of buying The business might create a database of details of
or producing the good or service. existing customers and their buying habits. Prompting

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14 FINANCE

circulars, emails, or phone messages can then be sent essential in order to increase profitability. Does the
out, making customers aware of current offers and new business need to review its finance facilities? Is it
lines available. By running a simple competition with a getting the most competitive terms? Are loans and
prize, the business can require participating customers overdrafts being used effectively? Are employees
to provide contact details to add to the database. using resources – telephone, internet, stock materials
– for their personal use? All these questions must be
Extend product range addressed if profit is to be improved.
A trader could diversify by identifying needs
and then developing the products or services to Closely monitor inventory
meet them. Using a variety of advertising media, By monitoring stock records (inventory) regularly,
potential customers can be made aware of existing the business can see what products are selling and
or new products or services, and in this way sales which are not. In this way it can determine if it is
can be increased. Many businesses invest money in purchasing too many poor-selling products and
research and development (R&D) with the aim of not enough top-selling items, or storing goods that
updating their range of products or services and also are out of date or out of fashion. Storage space is
identifying new, profitable lines. expensive and must be used wisely.

Provide credit facilities Develop a database

Credit facilities can be an effective way of promoting Businesses need to be continually aware of which
increased sales. Today, many people buy on credit, customers are buying what – it is known that 20 per
often just for convenience and pay for their spending cent of customers generate 80 per cent of sales (the
at the end of the month. But many are tempted by the Pareto principle). By creating a database, a business
buy-now-pay-later incentive, particularly when linked can track customers’ spending habits. It can then
to special offers. However, there are cost implications see which customers to focus on and which products
for the business, especially if the business funds the should be purchased or produced as a priority.
credit itself, but the cost of facilitating credit by other
agencies can be less expensive. Reducing marketing costs
A business will invest in methods that increase
Improving profitability profit and stop using methods that show minimal
results. For example, the business could use
The more profitable a business, the higher its return email and other electronic methods to contact its
on the capital employed. Because businesses may customers rather than via the post. Social media are
suffer competitively if they try to increase prices, other useful means of contact. The business also
they normally aim to improve profitability by needs to ensure it is marketing to the appropriate
becoming more efficient. A firm becomes more segment (for example, the young, the elderly, male/
efficient (that is, its productivity increases) when it female, sporty people). It is wasteful to direct
can either produce more output without increasing marketing at an inappropriate segment. Advertising
its costs or produce the same output at less cost. is a costly aspect of a marketing budget and all
Profit is very dependent upon turnover. In theory, the the alternatives (for example, internet advertising)
greater the volume of sales, the greater the profitability should be considered. Some advertising can even be
– but this is not always the case. Sales are likely to free – give something free to charity and reap the
increase if the sale price is reduced, but it could be that benefit of free newspaper coverage thus promoting
the income from increased sales will not exceed the good public relations.
loss of earnings due to the price cut. However, there
Seek add-on sales
are other methods of increasing profitability.
When a customer buys an item, the seller can offer
Control of administration expenses a free compatible item that enhances the value of
All the savings incurred by controlling expenses add the original purchase. In this way, the customer may
to profit. Careful budgeting can be painful but it is be encouraged to buy the compatible item in the

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 14.3 Improving commercial performance

future, and perhaps refer other potential customers to fewer working hours or fewer resources be used
the business. to maintain the same output?
l Ways of increasing efficiency can be explored
Reducing production costs including automating existing manual processes,
Production costs are the costs of making or introducing more computer-controlled
acquiring goods or services that generate income equipment, containing labour costs, saving
(revenue) for the firm. Although primarily related on energy and reducing fixed costs wherever
to manufacturing, production costs also relate to possible. Can production processes be adapted
those who buy and sell goods (traders). Reducing so they are more streamlined?
these costs offers major scope for improving l Are there ways of reducing the cost of utility
profitability. bills? Perhaps employees should be encouraged
to switch off lights and other electrical apparatus
l Is the business getting the best deal from its
when not in use and to avoid wasting water.
suppliers? Are other suppliers more competitive?
Every little helps to safeguard their employment
Can it negotiate better terms? Can it get
as well as improve profitability.
extended free credit/delayed payment? Is there
scope to reap the benefit of economies of scale Addressing site issues
by buying larger quantities at lower prices?
Is the firm getting the best use out of its working
l Can the business use just-in-time (JIT)
space? Are there more effective ways of using the
purchasing? This will improve cash flow and
premises? Could some space be sublet? Is there a
make better use of working capital. Can wastage
case for moving to a less costly site where rents
be cut and thereby lower the costs of materials
are cheaper? For example, it is often less costly to
and stock? A zero wastage policy will benefit
site premises outside an inner-city area, but only
profitability. Can production processes be
some forms of business operations (for example,
adapted so they are more streamlined? Can
manufacturing or very large retail units) find this a
existing manual processes be automated? Can
realistic possibility.

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14 FINANCE

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
balance sheet fixed cost retained earnings leaseback gross profit
finance current assets fixed assets factoring overheads
cash flow debtors capital employed hire purchase net profit
capital start-up capital overdraft trade credit turnover
assets revenue leasing shares

Search and find

Copy the questions below and write out their 13 Explain each of the following categories of capital:
answers to form your own revision notes. You can fixed capital; circulating capital; employed capital.
find the answers by referring back to the chapter. 14 What are current liabilities?
1 What is a balance sheet? 15 How can we establish what is the capital owned
2 Explain the difference between assets by a business?
and liabilities. 16 Why is liquid capital important to a business?
3 Why is finance so important to a business? 17 What is net working capital and how is it
4 Explain the difference between fixed assets and calculated?
current assets. 18 Explain the terms ‘turnover’ and ‘net turnover’.
5 Why is revenue so important to a business? 19 What is the rate of turnover and how is it
6 Give two examples of internal finance and two calculated?
of external finance. 20 What is the relevance of knowing the difference
7 Why can an overdraft work out cheaper than between the rate of turnover of comparable
a loan? businesses?
8 What is the difference between a secured loan 21 How does gross profit differ from net profit?
and an unsecured loan? 22 Why is it useful to express gross profit as
9 Make a comparison between a loan and a percentage?
hire purchase. 23 If a firm’s gross profit percentage is falling, what
10 Explain the difference between leasing are the possible reasons for this?
and leaseback. 24 Summarise three ways of improving turnover.
11 Describe three forms of long-term finance. 25 Why is it important that a business aims to
12 State two considerations a business would improve profitability?
take into account in deciding which method of 26 Describe three methods that a business should
finance it will use. consider in an attempt to improve profitability.

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 Things to do

Multiple choice
Choose the one most appropriate answer from 6 The capital of a business is the:
the four alternatives. A total of the fixed assets of the business
1 Which of the following would be the likely rate B gross profit of the business
of stock turnover for a butcher?
C money used to start up the business
A 6
D value of the stock held by the business
B 12
7 The term ‘rate of turnover’ is best defined
C 3 as the:
D 78 A total sales over a given period
2 A partner who does not take an active part in a B gross profit minus the cost of goods
partnership is called:
C rate of loss due to stealing
A a sleeping partner
D number of times the average stock is
B a normal partner turned over
C a limited partner 8 Which of the following equations would
D a general partner enable you to calculate the fixed capital of
3 The person who rents property from another is a business?
known as: A employed capital – circulating capital
A the lessor B employed capital + circulating capital
B the lender C employed capital – current liabilities
C the lessee D employed capital + current liabilities
D the lease 9 Net working capital is found from which of the
4 An overdraft is: following equations?
A a method of borrowing in regular amounts A circulating capital – current liabilities
B an agreement that allows more money to B current liabilities – liquid capital
be taken than is in an account C liquid capital + circulating assets
C the same as a current account D circulating assets + current assets
D a loan used to buy property 10 Capital that is used to purchase stock and raw
5 Olive Groves Shoe Shop buys shoes for $40 materials is called:
and sells them for $50. The mark-up is: A employed capital
A 15% B working capital
B 20% C capital owned
C 25% D fixed capital
D 50%

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14 FINANCE

Structured questions
Answer as many parts of the questions as you can. The marks available indicate the amount of detail you
need to supply/the level of difficulty of each question.
1 Look at the trading figures shown in Figure 14.4 and answer the following questions.
$ $ $ $ $
1 Fixed capital 80,000 + ? + 10,000 = 110,000
2 Circulating capital ? + 12,000 + ? + 600 = ?

3 Employed capital 110,000 + ? = ?

4 Current liabilities ? ? ? = 16,000
5 Captial owned ? – ? = 144,000
6 Liquid capital 12,000 + ? + ? = 18,000
7 Net working capital ? – 16,000 = ?

Figure 14.4 Karachi Trading Company Ltd trading figures

a What is a balance sheet? [1]

b Why is a balance sheet sometimes referred to as a ‘snapshot’? [2]
c If another company were considering buying the Karachi Trading Company, why would the
contents of the balance sheet be important to them? [3]
d Why is the balance sheet important to both the owners and the workforce of the business? [4]
e Refer to the balance sheet shown in Figure 14.2 and complete the analysis of the trading
figures of Karachi Trading Company Ltd in Figure 14.4. [10]
2 The following questions are all related to improving turnover.
a What is turnover? [1]
b What is the main significance of turnover to a business? [1]
c What is meant by rate of turnover? [2]
d Why is the rate of turnover figure important? [3]
e Give two contrasting examples of rate of turnover and explain why the difference exists. [3]
f Explain how rate of turnover can be used to usefully compare businesses. [4]
g Describe two possible ways that a business might improve its turnover. [6]

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 Things to do

3 Look at Figure 14.5 that shows a business flow chart and answer the following questions.

Sales INVOICE Payments from

Products debtors
Prospectus
(customers)

Assets

Fixed Current
buildings cash/bank Gross profit
machinery stock Sales minus
vehicles cost of goods

Creditors
(suppilers) Business Payment of
materials, stock, finance expenses
etc.

Net profit
Capital
• Repayments
• Loan capital • Dividends
$ • Share capital • Reinvestment
• Reserves (plough back)

Figure 14.5 Business finance flow chart

a List four examples of sources of business capital. [2]

b Briefly explain the difference between fixed assets and current assets. [2]
c Explain the difference between gross profit and net profit. Why do you think it is important to
distinguish between these two aspects of profit? [4]
d The diagram in Figure 14.5 shows that net profit may be used in three ways: for repayments,
dividends and reinvestment. Briefly explain each of these. [6]
e A shop’s capital is $50 000. It has stock that cost $30 000 that is turned over three times a year,
making 20 per cent gross profit on sales. Expenses are $7000 for the year. Find the net profit to
capital. Show your figures for working out. [6]
4 Two retail stores have recorded the trading
Store A Store B
figures shown in Figure 14.6.
$ $
a Which store has the greatest sales? [1]
Sales 100,000 16,000
b Name two expenses that both stores are Average stock at cost 5,000 4,000
sure to incur. [2]
Profit margin 8% 30%
c Clearly explain what is meant by profit Expenses 4,000 800
margin and its significance to trading. [3]
Net profit 4,000 4,000
d What sort of goods is Store B likely to be
Figure 14.6 Trading figures
selling? Give reasons for your answer. [4]
e Explain the fact that both stores have a
net profit of $4000. Is this significant? [4]
f If you had $80 000 invested in Store A, what would be your return on capital invested?
What could be done to increase your return? [6]

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14 FINANCE

5 Refer to Figure 14.7 related to the assets and liabilities of Malé Trading Company Ltd and answer
the following questions.

Assets $ Liabilities $

Factory 300,000 Trade debtors 10,000

Creditors 10,000 Reserves 100,000
Petty cash 500 Finished goods 18,000
Share capital 209,000 Tax due 4,000
Office typewriters 10,000 Overdraft 18,000
Typing paper 500 Machinery 100,000
Cash at bank 6,000 Raw materials 11,000
Debentures 87,000 Loans 105,000
Computer 10,000 Factory fittings 20,000
Unfinished goods 16,000 Trucks 40,000

Figure 14.7 Assets and liabilities of Malé Trading Company Ltd

a How do you know that the business involved is not a public company? [1]
b What are assets? [1]
c Write one sentence to define the following terms and calculate their values from the
above figures:
i fixed capital [2]
ii circulating capital [2]
iii liquid capital [2]
iv current assets [2]
v net working capital. [2]
d Draw up a balance sheet for the Malé Trading Company Ltd using the data shown. [8]

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 THE CHANGING ENVIRONMENT
15 OF COMMERCE
Social
BY THE END OF THIS CHAPTER YOU
WILL BE FAMILIAR WITH: Technological

l commercial activity and the external (Legal)

environment (Environmental).
l commercial and environmental effects of
e-commerce Businesses can use it as a tool to analyse the
l commerce and the environment commercial environment they operate, or are
l Consumer protection. planning to operate, in (for example, to launch
a new product or service, or engage in a new
geographical area). The analysis tries to address the
15.1 Commercial activity following questions:

and the environment l P – What is the political situation of the

country and how can this affect the business/
industry?
The environment of commerce l E – What is the current economic climate of the
country and how is it affecting the business?
From your studies, you will now be fully aware that l S – How significant are the current social and
commerce embraces the activity of buying and selling
cultural factors and what are their determinants?
goods and services and all the activities, functions l T – What technological developments are
and institutions involved in transferring goods
current and which new developments are on
from producers to consumers. The ‘environment
the horizon? How can the business use these
of commerce’ consists of all the external factors to
developments?
which commerce is exposed and by which it may be l L – What legislation regulates the business
influenced while it is carrying out its functions.
or industry and are any changes imminent that
This environment within which commerce takes affect business activity?
place includes the legal, economic, political, social, l E – What environmental issues concern the
cultural and technological systems that are in business or industry?
operation in any country or internationally. For
Political: identifies the extent to which the
example, economic factors include employment,
government of a country may influence the
income, inflation, interest rates and wealth, all of
economy or industry government stability,
which influence the buying behaviour of consumers
government spending and taxation (for example, the
and institutions, and thereby commercial activity.
imposition of new policies, tax, trade tariffs).
We will also explore the effect that commercial
activity has on the environment and ways that Economic: addresses the general economic
businesses can embrace environmental issues. performance of the country as it impacts on
business and industry and any long-term
PEST analysis effects. For example, a rise or fall in inflation
will influence the pricing policy of a business
PEST analysis (sometimes referred to as PESTLE or industry, and the rate of inflation, interest
analysis) is a concept used in marketing. It stands for: rates, monetary policies, foreign exchange rates
Political all affect imports and exports. Interest rates
and levels of unemployment are also significant
Economic economic factors.

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15 THE CHANGING ENVIRONMENT OF COMMERCE

Business A statements Business B statements

‘We have begun charging ‘My business can’t provide the

a deposit on plastic bottles resources to charge a deposit
and will refund the charge when and give a refund on plastic
empty bottles are returned to bottles. It would drive me
our collection point for recycling.’ out of business.’
(Retail chain owners) (Small retailer)

‘It takes a minimum of ten

‘For every tree we years for a tree to grow to
use we replant three.’ a useful size.’
(Toilet tissue producer) (Environmentalist)

‘We make our residents sort ‘Rubbish sacks take 20 years to

their refuse into three categories degrade so recycling in this
of plastic rubbish sacks so that way makes no sense to me.’
it is easy to recycle.’
(Local resident)
(Local government officer)

‘I would love to supply organic

‘All my produce is created
produce, but it is more
organically. I don’t use any
expensive and my customers
artificial fertilisers. My farming
won’t pay the price needed
is environmentally friendly!’
to cover the extra cost.’
(Local farmer)
(Food products supplier)

‘All our vehicles operate on ‘I find diesel vehicles last longer

non-diesel fuel – and that’s and use less fuel. This is better
better for the environment.’ for the environment.’
(Car hire company) (Car hire company)

‘All my employees are from my ‘The only way I can compete in

own country and each of our the market is by employing
employees receives a fair people who will work for the
living wage.’ lowest wage.’
(Clothes manufacturer) (Clothes manufacturer)

Figure 15.1 Notice the contradictions revealed by these statements

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 15.2 Commercial and environmental effects of e-commerce

Social: examines the social environment of

the market (for example, cultural trends, social
15.2 Commercial and
lifestyles, population movements and growth or environmental effects
decline, education levels and income distribution).
of e-commerce
Technological: innovations and trends in technology
may affect the operations of a business/industry
and the markets in which it is engaged. Knowledge E-commerce and e-shops
generation, conversion of discoveries into products Online shopping (or e-shopping) is a form of
and rates of obsolescence, are all important factors. electronic commerce (e-commerce) which allows
Legal: legislation that affects the business consumers to buy a wide range of goods or services
environment either in its home country or in other directly from a seller over the internet via a website,
countries where it has, or intends to have, business transmitting payment electronically. This has
interests. For example, if a government implements a increased the volume of electronic communications
new regulatory body for certain aspects of industry, taking place (with a corresponding decline in
all the related businesses will be similarly affected. the use of traditional postal services). The online
business transactions can take place:
Environmental: factors that influence or are
determined by the surrounding environment. This is l business-to-business
particularly relevant for those businesses that have l business-to-consumer
a close relationship with economic activities such l consumer-to-consumer
as tourism, farming and agriculture. The location of l consumer-to-business.
countries would, of course, also influence the trades An e-shop is an online business that sells a variety
that businesses engage in and the way that consumers of goods and services electronically (e-tailing) via
react towards a particular product or service. the internet through a website. Customers are given
Let us now look at an example of how we can see quite precise delivery dates and can even track
a PEST analysis in practice, taking the airline consignments along the stages of their journey, with
industry as an example. easy arrangements to return unsuitable goods. An
e-shop deals almost entirely business-to-consumer.
Political: a government decides to increase the
number of airports and to provide the related
necessary infrastructure (such as road and rail Commercial effects of e-commerce
connections) to make air travel easier. BUT there are In Chapter 2, we examined the profound effect that
concerns about the environmental impact of air travel. e-commerce has had on commercial activities, and
Economic: rising incomes lead to higher disposable on retail trade in particular. Consumers can now buy
incomes and increased popularity of travel holidays, a wide range of products via the internet, direct from
resulting in increased demand for air travel. BUT… the e-shop warehouse. Demand from conventional
retailers and their stores has fallen and changed
Social: increased popularity of travel holidays leads to dramatically. This is particularly the case for many
further increased demand for air travel facilities. BUT… of the product lines they had previously moved into
Technological: modern aircraft are more (for example, electronic and household goods). This
economical to run and, therefore, air travel costs fall has led to considerable marketing problems for
in real terms. This leads to further demand for air many retailers; some have encompassed e-tailing
travel. BUT… into their operations while others have been forced
to rethink the product range they sell.
You will have the picture by now. The big loser of
course is the environment, and we will return to Online shopping has broadened the horizons of
this many times within this chapter, but you need to consumers with direct purchasing from other countries
consider other examples of PEST issues that are directly becoming the norm, so that global shopping is now
linked to commercial activity. (See Figure 15.1.) common. It expands consumers’ options and gives

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15 THE CHANGING ENVIRONMENT OF COMMERCE

them ease of access to goods and services 24 hours are established to make this happen. However, the
a day and seven days a week. They can compare the facilities created to accommodate tourists contribute
products of many competing sellers online before to the erosion of the very places that attract them in
placing their order and making payment electronically. the first place.
Delivery is made direct to their home address and
consumers can track their purchase online.
15.3 Commerce and
This expansion into the global market via
e-shopping has resulted in smaller packages, that
the environment
is, more individual items as opposed to large
consignments. It has also led to increased use of air Adverse effects of
transport for speedy freight movement and many
commercial activity
more courier companies facilitating individual
deliveries. Many countries, such as India and China, The main aim of business is to identify products
have been able to expand their contributions to or services that consumers want, supply them at
commercial activity on a worldwide basis. an economic cost and make a profit in the process.
Consumers, of course, want to obtain good quality
Environmental effects products or services at the lowest price they can get.
However, sometimes these apparently compatible
of e-commerce aims can have an adverse effect on the environment
All this has been good for consumers and for many – our natural world. Below are just some of the
forms of business. For example, shoppers can obtain ways that commercial activity can affect our
goods conveniently and at a competitive price, environment:
and courier services have expanded considerably l Retail developments have been encouraged to
(leading to increased employment). Similarly,
locate outside city centres, but this often means
the demand for air freight has risen; benefiting
the loss of natural environment such as farmland
many businesses. But other businesses, such as
or parkland and means that transport is needed
retailers and traditional transporters, have been
to reach the store.
forced to reconsider their positions dramatically. l Many buildings are created from materials that
However, global trading brings with it significant
are not easy to recycle when the building needs
environmental implications.
replacing.
The movement away from large consignments to l Air conditioning, central heating and lighting
smaller, individual packages has led to a greater in workplaces and homes pump greenhouse
volume of vehicle emissions, damaging the emissions into the atmosphere and use up vast
atmosphere and contributing to global warming. amounts of electricity. Many buildings are not
This has underlined the need to search for designed with energy-efficient systems that
sustainable solutions for the movement of goods. In reduce the amount of energy they use. Some of
addition, the overall amount of packaging used has these facilities are even active when no one is at
increased, some of which is not biodegradable. work, particularly in city centres.
l Factories, offices, shops and warehouses also
It could be argued that less trade in conventional
use enormous volumes of electricity to power
retail stores reduces the use of power (for example,
machinery, equipment and lighting. Again, some
lighting, heating and cooling), but more people
of this electricity is still used when no one is
are using computers and accessing the internet
actually working.
than ever before and this implies greater use l Most commercial activities result in waste
of electricity – again, not good news for the
material. For example, offices use paper
environment.
and ink, factories and traders use packaging
Overseas tourism relies on people travelling to other material. Where this is not recyclable it not
countries to visit attractive sites. Consequently, only wastes resources but also contributes to
hotels and airports are built and transport networks global warming.

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l Using non-biodegradable packaging has l Fumes and smoke from factories damage
become a major contributor to pollution. the atmosphere.
This persists even though environmentalists l Open land is taken over for building purposes.
and pressure groups are continually raising
awareness of its harmful effects. What can businesses do?
l Electronic equipment such as computers, copiers Businesses can voluntarily:
and televisions not only use electricity but, in l use renewable energy: for example, fit solar
our increasingly technological society, quickly panels or buy energy that uses renewable sources
become obsolete and end up in landfill sites. such as wind or tidal power
l Advertising encourages consumers to buy l recycle waste: for example, reuse products that
dangerous or unhealthy products – warnings would otherwise have been disposed of such as
should be given to discourage such purchases. wood offcuts, paper and used clothing
l Pollution from factory chimneys results in l reduce resources used: for example, employ
poor air conditions as well as contributing to ‘lean production’ methods (cutting out waste
global warming. while maintaining quality)
l Transport emissions, by land, sea or air l focus on using environmentally friendly
transport, have undoubtedly increased with the products: for example, replace conventional
expansion of the global market and pollution has products (such as plastic carrier bags) with
increased correspondingly. biodegradable products (paper bags)
l Careless waste disposal, often easily avoidable, l move away from the use of fossil fuels
continues to pollute land, sea and air. Although l produce goods ethically: for example, produce
public awareness of this issue has been goods that can be recycled or which use
raised in many countries, it continues on an recycled materials; create goods using labour
international scale. that is fairly rewarded; produce food that is
l Exploitation of labour and natural resources in grown organically.
poorer countries continues, fuelled by pursuit
of lower prices and poorer countries desperate The alternatives
for employment.
What are the alternatives if businesses are
l Road traffic continues to increase all over the
unwilling or unable to give higher priority to
world – trucks carrying freight, commuters
environmental issues?
travelling to and from work, increased leisure
opportunities all contribute to the use of fossil Legislation
fuels and greenhouse gases. The search for
The government can implement legislation that
sustainable solutions for the movement of
restricts aspects of commercial activity and prevents:
people and goods remains one of the world’s
major challenges. l building on land designated as parkland or for
agricultural use
The solutions to all these problems are costly and l dumping of harmful waste products on land or in
complex. The following are just a few examples of
sea or rivers
the benefits and costs related to commercial activity. l pollution of the atmosphere through harmful
Benefits emissions
l using products that cannot be readily recycled
l Jobs and local wealth are created.
such as non-biodegradable packaging
l Other businesses are encouraged to
l production of goods that cannot be recycled.
locate locally.
l Businesses pay taxes to the government.
Penalties
Costs Governments can impose financial penalties
(specially directed taxation) on products or
l Waste by-products cause land, sea and
harmful materials that industries use or produce
air pollution.
(for example, fossil fuels). The revenue from the

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15 THE CHANGING ENVIRONMENT OF COMMERCE

penalties can be used to promote research into recognised this as a business opportunity. Waste
sustainable production materials. disposal is not only more environmentally
friendly but also economically viable.
Pressure groups l Landfill sites have been improved in appearance
Groups such as Greenpeace and Friends of the Earth by eventually returning them to parkland, and
have been spectacularly successful in persuading are also used to extract methane gas.
the public, businesses and even governments to l Methane gas that is created naturally is more
act more responsibly with regard to environmental environmentally friendly than conventional gas.
issues. They are often effective because they: It can be used to power ‘green’ vehicles as well
as being used for industrial and domestic use.
l have public support for their aims
l Trees provide an important ecosystem that
l obtain positive media coverage
supports the climate. Deforestation destroys this
l are well-organised, independent and financed by
important resource, but reforestation is now
voluntary contributions
encouraged in countries rich in, and dependent
l draw adverse publicity to businesses that are
upon, such resources.
acting unethically.
l Recycling waste paper into packaging
Because environmental issues are given prominence material is a profitable business opportunity,
by pressure groups, governments and media, and if properly managed, it need not damage
businesses are encouraged to adopt environmentally the environment.
friendly practices and lead research to solve these l Used glass is recycled into fibreglass and used in
environmental issues – and avoid adverse publicity! buildings’ insulation and many other products.
l Overfishing – some governments impose fish
The way forward quotas to sustain fish stocks in the sea. An
Businesses and governments are not always alternative is fish farming in coastal waters.
reluctant to embrace or promote environmentally l Farming has begun to use manure to create
friendly processes. The following are just a methane gas and the industry is embracing the
sample of ways in which environmental issues are knowledge that some artificial fertilisers harm
being addressed: the environment.
l Catalogue shops have been accused of creating
l Although wind farms and solar panel farms
pollution with their paper-based catalogues,
result in the reduction of green areas (a loss to
but online catalogues now eliminate some of
farming and recreation) and are unattractive,
this criticism.
many governments recognise their benefits.
l Retailers in some countries have begun to bow
For example, offshore wind farms represent
to pressure from governments, pressure groups
an attempt to harness energy without ruining
and the media and have begun to impose charges
the countryside.
for plastic-based carrier bags, created ‘bags for
l Tidal power harnessed in tidal estuaries is still
life’ and switched to biodegradable bags.
in its infancy but has potential for success in
l Bamboo cane has been used for furniture for
countries that experience tidal flows.
many years but the surplus is also being used by
l Building dams in flowing rivers is very
some countries (for example, Africa) to produce
expensive but they are a long-term, cost-
fabric (for example, for bed coverings) and even
effective method of creating electricity. For
items such as bicycles have been created from
example, the Hoover Dam (Colorado, USA) cost
the waste.
around $53 million to build in the mid 1930s,
l Surplus residue of sugar cane has been used to
but it is still effective today and now generates
create electricity in some Caribbean countries as
more than the amount of that initial investment
well as providing animal feed.
in income every three months. In addition, it is
l Internet technology has encouraged greater
‘clean’ energy!
opportunities to work from home, resulting
l Sorting waste for recycling has evolved as
in less traffic on the roads and reducing
a commercial industry for those who have
some pollution.

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 15.3 Commerce and the environment

Consumers can also address environmental issues compost, as well as separating rubbish to meet
and are often encouraged by their governments (by the needs of businesses engaged in recycling.
the award of subsidies) to embrace measures such l Clothing recycling is now commonplace
as the following: and enables second-hand clothes and rags
to be converted into felt. Even selling
l Water meters can be installed, where they do not
second-hand clothes on the internet is more
already exist, to make people more aware and
environmentally friendly than putting them into
more careful of water use and to reduce water
landfill sites.
wastage.
l The internet has made it easier for consumers
l Householders, as well as businesses, are
to research environmental issues. This has
encouraged to install solar panels that not only
raised awareness of the need to recycle, preserve
reduce their utility bills but also contribute
energy, reduce greenhouse gases, reduce
energy to a national grid.
carbon footprint and purchase environmentally
l Householders are encouraged by pressure groups
friendly products.
to recycle household and garden waste to create

It is costly for those involved in Those engaged in commercial

commercial activity to act in an activity have a responsibility for
environmentally friendly manner. the environment.

Reducing waste, recycling Global pollution affects

materials and reducing harmful everyone, so we are all
transmissions is costly. responsible for the environment.

Businesses may have to Environmentalists argue that

increase prices in order to be commercial activity is causing
environmentally friendly. permanent environmental
damage.

Increased prices can result in Using scarce natural resources

loss of competitiveness against results in higher prices
businesses that are less because demand ends
environmentally friendly. up exceeding supply.

Consumers are more aware and

Higher prices will result in
demand more environmentally
less demand from consumers
friendly products.
and a fall in profits.

Some environmentally friendly

Pressure groups can give practices actually benefit
adverse publicity to businesses commerce (for example,
that act irresponsibly. solar panels).

Figure 15.2 It can be costly, but we all have a responsibility for the environment

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15 THE CHANGING ENVIRONMENT OF COMMERCE

The main rights of consumers are that goods or

15.4 Consumer protection services should be:
l accurately described
The need for consumer protection l fit for their normal purpose (of merchantable
Consumers are the people who buy goods or quality)
services. The term consumer protection refers l accurately described
to the ways that consumers are safeguarded when l fit for their intended purpose.
making purchases. That is, the laws, policies and
agencies that help to protect the rights of consumers
Consumerism
as well as encouraging fair trade and accurate Consumerism is an organised movement with
information when purchasing goods or services. policies that aim to protect the interests of
With the expansion of global trading the need consumers by forcing businesses to behave in
for consumer protection is even more important a socially responsible manner. This movement
than ever. has encouraged businesses to use ‘honest
packaging’ and advertising, give more transparent
When consumers buy goods and services they can guarantees and improve safety standards. The
be exploited in the following ways: regulations that implement consumerism may be
l Advertisements can be misleading and make statutory, institutional or embodied in a voluntary
false claims. code of practice accepted by a business or a
l Incorrect weights and measures may be given. particular industry.
l Goods can be incorrectly labelled. In short, we can say that consumerism aims to
l Businesses may act together to charge protect the interests of consumers by:
higher prices.
l Credit arrangements may not be clearly defined. l raising consumer awareness
l Health issues may be ignored in a bid to make l forcing businesses to behave in a
a sale. responsible manner.
l The need for protection from hazards may not Heightened consumer awareness and protection
be recognised. have arisen as a result of the increased complexity
Sometimes, consumers need protection from of products and services and the growth in pressure
themselves because they are not always as from marketing forces. Progress has certainly been
knowledgeable or as careful as they should be when made in addressing these problems, but the Latin
making purchases. Consumer associations help to term caveat emptor, ‘let the buyer beware’, is still
make consumers aware of what they must do in important and buyers must be vigilant and take care
order to be ‘wise buyers’. when making purchases.

Consumer rights 15.5 Organisations and

In order to make an informed decision, consumers
have the right to be fully aware of what they are codes of practice
buying. Products should be safe and healthy and
the price should be clear and unambiguous. Sellers
should provide sufficient information on labels and
Agencies protecting consumers
other descriptions, including verbal advice. Only Local government
with these provisions can the consumer make an
While central government plays its part in
informed decision.
supporting consumers, local government also plays
When these rights are breached, consumers should a particularly significant role. For example, much
have their problems addressed, whether they have of the legislation initiated by central government
purchased goods or services. is enforced by local government (for example,

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 15.5 Organisations and codes of practice

councils). These usually have trading standards Codes of practice

departments and local inspectors who enforce laws,
and which are the usual sources of local advice and A code of practice is a set of rules that define how
help for consumers. people or organisations in a particular industry
or profession should behave. These rules help to
In many countries there are consumer bodies that ensure customers get a fair deal from a trustworthy
combine to raise consumers’ awareness and to business, and that advertisements are not misleading.
protect them. Some of these agencies are promoted
directly by governments, and some are created Most major organisations will have their own code
by industry. of practice, but also groups of related businesses
will establish a common code of practice. Typically,
Consumers’ associations a code of practice will include statements, examples
Consumers’ associations are independent of which are given below.
organisations, financed by: l We are committed to treating you fairly if
l charitable donations problems arise.
l contributions from members (although
l We guarantee you good customer service.
information is available to all)
l We will give you clear information about our
l the sale of consumer related literature and so on. goods or services.
l We will provide user-friendly procedures when
Central and local government will often assist dealing with complaints.
such organisations, but their independence is l We will use just and fair contracts.
essential. In the UK, one of the best-known l We will offer free and fair arbitration facilities if
consumers’ associations publishes a respected we are unable to resolve a complaint.
magazine called Which? Sales of the magazine
supply funds that enable the association to In certain situations, codes of practice are difficult
carry out objective research into consumer- to impose, such as on the use of the internet,
related issues, and investigations into products because of its widespread and diverse use. Although
and services. the internet has its own set of guidelines for users,
it is often the users who create their own internal
Consumers’ associations aim to promote codes of practice. For example, most universities,
awareness of issues in the marketplace, and to colleges and schools will have their own set of
provide help and guidance when things have gone policies that, while encouraging students to use the
wrong. They also: internet for research purposes and scholarly debate,
l publish guidance booklets will impose restrictions. For example, it is not
l operate consultation offices acceptable to use the internet in a way that may
l create consumer-related press releases bring the educational institution into disrepute.
l petition the Government on issues of concern
to consumers. What to do when things go wrong
Many industries also make their own contribution Traders cannot always be sure that items they sell are
to consumer protection, such as manufacturers’ not going to have some fault or become faulty. Nor
associations or consumer protection councils, and can they be completely sure that buyers will get fair
professional associations. Such organisations tend wear out of them. When a genuine fault is brought to
to establish codes of practice that they expect their their notice, most traders will readily want to rectify
members to follow. They can be approached by the fault, either with a replacement item or a refund
consumers with unresolved complaints and will act of the amount paid. But what can the consumer do
as arbitrators. Sometimes such associations will if the trader does not have this reasonable attitude?
impose a penalty on a member if it is in breach of There is a simple four-step procedure the consumer
the code of conduct. can follow to get the matter put right.

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15 THE CHANGING ENVIRONMENT OF COMMERCE

1 Stop using the item and take it back to the shop 3 If you are not getting anywhere with your
as soon as possible. Take proof of purchase (for complaint, it is time to get help and advice.
example, the purchase receipt). Always ask to Ask your local consumer protection agencies
see a senior person such as the manager. Clearly, to advise you, or even send a letter to the press.
calmly and courteously explain why you are Or, if the situation is covered by a code of
dissatisfied and ask for a refund or replacement. practice, you can complain to the appropriate
If you make your complaint by telephone be sure trade association. Most trade associations prefer
to make a note of the name of the person you’re the complaint to be in writing and they often
dealing with. provide a special form that can be used for
2 If complaining to the trader does not result complaints against traders.
in a refund or replacement, write a formal 4 Usually, the foregoing steps will solve the
letter to the shop and send a copy to the situation but occasionally this is not enough. You
firm’s head office. Do not enclose original can bring a court case against the trader, and
receipts or proof of purchase (you may need this is not always expensive in a small claims
these later) but quote purchase references and court. But it is important to get advice from a
send photocopies. consumer adviser before going down this route.

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 Things to do

Things to do
This section contains a variety of exercises to test your understanding, and
to help you create a glossary of terms, revision notes, and to prepare you for
your examination.

Key words
Find out the commerce-related meaning of each of the following terms.
Write a separate sentence for each term to show your understanding.
environment consignment tracking labour exploitation consumers
e-commerce recyclable materials fossil fuels merchantable quality
e-shop greenhouse emissions renewable energy refund
global shopping biodegradable materials legislation replacement
global market global warming pressure groups purchase receipt

Search and find

Copy the questions below and write out their detrimental way.
answers to form your own revision notes. You can 9 List ways that businesses can actively demonstrate
find the answers by referring back to the chapter. they are addressing environmental issues.
1 What do you understand by the ‘environment 10 What are the alternatives if businesses are
of commerce’? unwilling to embrace changes to benefit the
2 How can PEST analysis support environment?
commercial activity? 11 What do you see as the way forward to
3 Take any three elements of PEST analysis address the conflict that exists between
and show how they could help to guide the commercial activity and the environment?
forward planning of a business. 12 What roles can consumers play in helping to
4 How can PEST analysis reveal conflicts of protect and improve the environment?
interest? Give examples. 13 What is consumer protection?
5 Explain the relationship between the terms 14 Why do consumers need protection?
‘e-commerce’ and ‘e-shops’.
15 What rights do consumers have?
6 How has e-commerce affected commercial activity?
16 What is consumerism?
7 In what ways has e-commerce had adverse
17 What are the implications of ‘caveat emptor’?
environmental effects?
18 Describe actions a buyer could take with
8 Describe three ways that commercial
regard to faulty goods or services.
activity has affected the environment in a

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15 THE CHANGING ENVIRONMENT OF COMMERCE

Multiple choice
Choose the one most appropriate answer from 6 Pressure groups are successful in changing
the four alternatives. attitudes to environmental change
1 PEST analysis aids: because they:
A implementation of government policies A expose unethical businesses
B reduction in pollution B are financed by the government
C business forward planning C impose fines
D formation of legislation D implement environment laws
2 The implementation of a tax on the 7 Deforestation:
use of plastic carrier bags would have an A is another name for tree farming
effect on: B uses trees for commercial purposes
A the environment C consumers C replaces trees it uses
B retailers D all of these D only uses specially grown forests
3 Which of the following is not an example of 8 Online business transactions that involve
renewable energy? consumers selling their unwanted goods are
A solar panels C wind farms generally classed as:
B lean production D tidal power A consumer-to-business trading
4 Which of the following is an environmental B business-to-business trading
benefit of internet technology? C business-to-consumer trading
A the amount of packaging is reduced D consumer-to-consumer trading
B transportation use is reduced 9 E-shopping has resulted in:
C more people can work at home A an increase in retail chain stores
D products are cheaper B reduced use of transportation
5 Recycling household waste is particularly C increased volume of air freight
dependent on: D reduction in packaging use
A consumer cooperation 10 Which of the following makes a positive
B government legislation contribution to the environment by
C increased use of landfill sites commercial activity?
D taxation policies A using renewable energy resources
B using non-biodegradable packaging
C advertising hazardous products
D employing only vehicles that use diesel fuel

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 Things to do

Structured questions
Answer as many parts of the questions as you can. Identify these three statements and
The marks available indicate the amount of detail you explain why each can be said to relate
need to supply/the level of difficulty of each question. to the factor you have identified. [9]
1 3 The Harmony Waste Disposal Company
‘We are determined to reduce our country’s
specialises in recycling and disposal of waste
carbon footprint. It is for this reason we are
collected by local government agencies from
introducing legislation that will result in a
both householders and businesses. Harmony
special tax on all packaging materials that are
has invested in incinerator plant to dispose
not biodegradable. We urge the governments
of some waste, but a substantial quantity has
of other countries to follow our lead.’
to go into landfill sites. Harmony has recently
(Statement from a government spokesperson.) purchased a large disused gravel pit that is
bordered by five local government districts.
Look at the above statement and answer The local government collects household and
these questions. commercial pre-sorted waste and delivers it to
a Explain the meaning of the words the Harmony site. Harmony operates a tonnage
shown in italics. [3] charge to the local governments based on three
band categories and a colour-coded system:
b Give reasons why packaging material is
particularly identified as contributing to Band A – Lowest charge: Code Green – garden
a ‘carbon footprint’. [3] waste: grass cuttings, hedge trimmings, and
other related biodegradable, compostable waste.
c What effect would this legislation be
likely to have on manufacturers? [4] Band B – Medium charge: consists of two
colour codes: Code Yellow – glass; Code
d Why would the effects of such legislation
Pink – paper, cardboard, tins.
be sure eventually to hit the pockets of
the consumer? [4] Band C – High charge: Code Grey – landfill,
e Take any three elements of PEST non-recyclable waste.
analysis and demonstrate how it could a What do you think is meant by a
be applied to legislation such as this. [6] ‘tonnage charge’? [2]
2 Refer to Figure 15.1 and answer the b Why would Harmony charge less for
questions given here, which are linked to Band A waste than the other two bands? [2]
PEST analysis. c What is an ‘incinerator plant’? [2]
a What does each of the letters PEST d Give three reasons why Harmony’s
stand for? [2] choice of site for its operations
b What is PEST analysis? [2] was suitable for both the company
c How does PEST analysis effectively and also the environment. [3]
help to guide the forward planning of a e Considering the fact that Harmony
business? Give at least two examples. [3] accepts ‘pre-sorted waste’, what
d Each of the pairs of statements of implications does this have for the
Business A and Business B in Figure local government? [3]
15.1 shows a contradiction of views. f Take one Code Yellow item and one
Take any two pairs of statements Code Pink item and explain how
and say why you think such a Harmony could gain revenue by
contradiction exists. [4] recycling the item you have chosen. [4]
e Within the statements from Business g Taking Band C waste in particular,
A and Business B there are matching describe ways that Harmony is likely
pairs of statements that are clearly and to dispose of the waste and discuss
separately related to the PEST factors the environmental issues it creates. Are
environment, economic and social. there any possible positive outcomes? [4]

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15 THE CHANGING ENVIRONMENT OF COMMERCE

4 The Laminated Furniture Company (LFC) 5 Refer to the newspaper headlines

manufactures flat-pack, self-assembly shown in Figure 15.3 and answer the
household furniture such as kitchen and following questions.
bedroom units. LFC claims that its products are a What are fossil fuels? [2]
environmentally friendly because the boards it b In what ways does commercial activity use
uses are constructed from recycled woodchip, fossil fuels? [2]
cardboard and similar waste materials and it
c Why are fossil fuels bad for the atmosphere?
uses lean production methods. LFC products
[2]
have been independently assessed and it has
been confirmed that the units LFC creates are d List four ways, other than using
86 per cent biodegradable. LFC has also been fossil fuels, that commercial
given a government award in recognition activity causes pollution in
of its contribution to addressing environmental some form. [4]
issues. e Briefly describe two ways that governments
a Explain the terms ‘flat pack’ and ‘self can force businesses to adopt
assembly’. [2] environmentally friendly practices. [4]
b Why can LFC claim that its products f Describe three ways that businesses can
are ‘environmentally friendly’? [2] reduce harmful activity by voluntarily
adopting more environmentally friendly
c What is meant by ‘lean production’? [2]
practices. [6]
d LFC claims that because its products
are picked up by buyers, there is less FARMER FINED FOR RIVER POLLUTION
need for trucks for delivery purposes
and, therefore, this reduces vehicle hing

gh
fis

ou
er
emissions. To what extent do you

en
v

st
agree with this? Give reasons for
fo

fa
g
do

in
your answer.
ge
[3]

in
e

cl
us illa

de
e Why do many businesses want
cc sp
ot
to be seen as environmentally a sn t e
ei
en as
us

responsible? [3]
m
el

er rw
fu

f Even though LFC can claim that its h fo

sil

Fis
os

final products are environmentally d

sf

te
m

u
ai

friendly, we cannot be sure from the

ec
cl

os
p

information given how its manufacturing

ou

r
gr

processes may be causing environmental yp

re

r
su

damage. Describe some of the to

es

c
Pr

manufacturing processes LFC could fa

be using and say how they might be harmful al c
to the environment in spite of LFC’s good Lo
Oil-spill culprit company named
intentions. What could LFC People p
do to eliminate such problems? [8] ower kee
ps forest
standing

Figure 15.3 Does all commercial activity have to be

harmful?

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 Things to do

6 a What is a consumer? [2] a State two possible targets of this

advertisement. [2]
b What is consumer protection? [2]
b State two items of information that
c Why is there a need for consumers to be
the potential customer need to have
protected? [3]
in order to make an informed decision
d State three ways that consumers might related to this offer. [2]
be protected. [3]
c To what extent does the advertisement
e Briefly describe two rights that shown give information that could
consumers have. [4] potentially assist the customer in
f How does ‘consumerism’ help to making an informed decision? [4]
promoted consumer protection? [6] d Examine the advertisement carefully
7 Look at the advertisement shown in and say whether you consider the
Figure 15.4 and answer these questions. advertisement really does give the
bargain that it implies. Give reasons for
your answer and show any calculations. [6]

BACK TO SCHOOL e Recreate this advertisement in a manner

that you believe would be more ethically
PACK correct and fair for consumers. Give a
brief explanation of the changes you
only $18.50 have implemented. [6]

Individual item prices

Lunch box $1.30

6 pencils $0.60
12 felt tips $1.20
4 highlighters $1.60
2 scrap pads $0.50
Stencils set $3.60
3 ring binders $2.40

Figure 15.4 This trader is claiming to offer a bargain.

But is he?

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16 EXAMINATION PREPARATIONS
You are required to take a multiple choice paper and
BY THE END OF THIS CHAPTER YOU a written paper:
WILL BE FAMILIAR WITH:
l The multiple choice paper consists of 40
l the assessment objectives multiple choice questions, and you are required
l the multiple choice paper (Paper 1) to answer as many questions as you can. This
l the written paper (Paper 2) paper has a weighting of 30 per cent of the total
l how to prepare for the examination
marks (40).
l examination technique
l examination terminology.
l The written paper requires you to answer four
questions. This paper has a weighting of 70 per
cent of the total marks (80).
We will now address the requirements of these two
16.1 Assessment objectives papers in more detail.
At the end of your course you must be able to
demonstrate: 16.2 The multiple choice
1 Knowledge and Understanding paper (Paper 1)
basic principles, techniques and ideas
in commerce The time allowed for this exam is one hour and there
facts and terms relevant to commerce are 40 multiple choice questions, each with four
key features and functions of options. This paper is worth 30 per cent of the overall
commercial activities assessment, with a total of 40 marks available.
main documents used in commerce. Some of the questions require you to analyse
2 Application diagrams and charts and perform simple
application of commercial principles calculations relevant to Commerce using basic
and ideas to given situations, using numeracy (addition, subtraction, multiplication and
appropriate terminology division), percentages and simple ratios.
use of relevant data and information in
written, visual and numerical form including As you will have seen from the practice questions
simple calculations. in this book, you will be given a selection of
3 Analysis responses to choose from. Often the responses are
identification and selection of the significant very similar so you need to think very carefully
issues in a commercial situation about which response is actually the right one.
analysis of written and numerical problems Sometimes two or three of the responses appear
relating to a commercial situation. to be correct so you should take your time when
4 Evaluation choosing. Answer any questions you find easy first
distinguishing between evidence and opinion and then return to those that need more thought.
making reasoned judgements and Take care when filling in the answer sheet to shade
communicating in an accurate and in the response for the correct question number.
logical manner. It is not unknown for students to lose track of the
If you study this book carefully, complete the question number they are working on and to choose
many activities provided, and follow your teacher’s the right answer, but for the wrong question! Be
guidance, you will be well prepared for your very careful about this, particularly if you leave
assessment examination. blank lines to return to later. Your teacher will help

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 16.4 Prior to the examination

you with this as you work through the syllabus and they consider to be important. Exam nerves are
carry out the tests in this book. nothing to be ashamed of!
Use some scrap paper while you are working on Stress
multiple choice questions so that you can do any
workings out before you make your choice. Take Stress is a feeling of tension or strain at a time when
care to bring a soft, clean eraser and a soft pencil you are under pressure. Stress can be good for you
(type B or HB) and a ruler and a protractor, as these and act like a fuel; it can drive you. For example,
are not provided by the exam board. some sportspeople find that stress gives them a buzz,
helping them to achieve their best. However, stress
It is important to shade in your response in pencil can also be volatile and upsetting – so much so that it
clearly and tidily. The electronic device that ‘reads’ can prevent you from performing to the best of your
the answer sheets may not register your answer if it ability. The symptoms of stress can be problematic if
is only faintly shaded. It is also important that you they are not recognised and harnessed usefully.
erase thoroughly any answers that you change or
the computer will not be able to read your correct Myths
response. One suggestion is to lightly shade in your There are many myths or misconceptions about
answer the first time (so you can rub it out easily exams, and some of these may cloud your mind and
if necessary) and then go back and shade heavily, stop you achieving your full potential. Let us look
although you will need to leave enough time to do this. at a few – but do bear in mind as you read them that
Keep a close eye on the time throughout the exam. they are all untrue.
I have got a terrible memory.
16.3 The written I am no good at exams.

paper (Paper 2) I have not understood anything

really, so how can I take the exam?

The written paper consists of structured questions

which are worth 80 marks, representing 70 per cent
of the assessment. You must answer all the questions. I do not write quickly enough
Some questions may involve simple calculations. to be successful in the exam.
You will write your answers on the question paper. My life will be
ruined if I fail!
The duration of the exam is two hours.
You will have experienced this type of question
many times as you worked through this book.
Bear in mind that, for convenience, the structured
questions are all related to the chapter in which they The questions are always incomprehensible;
are located – but in your examination the structured I will never understand them properly.
questions will span the full range of the syllabus. I need to revise until
the very last minute!
Again, keep a close eye on the time throughout your
work on this paper.

16.4 Prior to the examination The exam will expose

my inadequacies.

I need to read everything that is

Exam preparation remotely connected with the course.

People often get worried as they approach their

examinations. If this happens to you, do not see it is
a sign of weakness. Most people suffer from exam
nerves when they are approaching a situation that Figure 16.1 Myths associated with exams

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16 EXAMINATION PREPARATIONS

All the worries shown in Figure 16.1 are both into the exam room. However, here are some other
normal and common. However, it will help you if suggestions:
you try to remember the following points: l Do not try to cram new information into
l Failing an exam is not the end of the world. your head the evening before the exam. Just
Even if you do fail, it does not mean that you lightly flick through your notes and gather any
have not learnt something useful – it is just equipment you need ready for the next day.
a little more difficult to prove without the l Go to bed early and get up in plenty of time to
exam certification. avoid a last-minute dash to the exam room.
l The subject that you have studied, Commerce, l Try to avoid friends who put you off by saying
contains knowledge that will be useful to you things that may only confuse you, especially if
throughout your life. they are panicky. It is your exam and it is you
l Exams are devised to test what you have who have prepared for it.
understood, not expose what you do not know. l Go into the exam room and try to block out what
l In some aspects of Commerce there is only one others are doing. Take six deep, slow breaths
correct answer, but there are many elements to relax you. Perhaps repeat this each time you
where you need to demonstrate the skill of feel a little stressed. You might want to suck a
analysis and application. glucose sweet to boost your energy (but do not
l Exams tend to be less about testing your rustle sweet papers that will disturb others).
memory, but rather testing your ability to put
into practice what you have been taught during
your course of study.
16.5 Examination technique
l Exam questions can look daunting at first. It is
important not to panic and always remember Don’t stress – just focus
that the examiner is not trying to catch you out,
but is giving you the opportunity to show what When students first open their exam paper they
you can do. can feel overwhelmed. They see what seems like
l Some people write masses in exams but say a tremendous amount of information. If it happens
little. A single, well thought-out sentence or to you, do not worry. Many people experience this.
some careful calculations or diagrams will tell It is important to prepare yourself for this initial
the examiner more about your knowledge than a reaction, but it is also important to focus your
page of ‘waffle’. attention. Whichever paper you are facing, don’t
start writing straight away. Read through the exam
paper and spend a few minutes checking the:
Why consider exam preparation
throughout the course? l instructions
l questions – maybe jot down a few initial
Exam preparation should start at the beginning thoughts.
of the course and not just prior to the end. That is
why it is recommended that you read this chapter at Always concentrate on one question at a time to
the beginning and look on your course as a steady avoid overloading yourself. This is relatively easy
build-up to the examination. If we return to the with the multiple choice paper, but can be a little
myths and fears people have about examinations, more difficult with the written paper. But read on to
it may be possible to dispel them throughout the find out how.
course by tackling the work set by your teacher in a
careful and diligent manner. Solutions, solutions!

The final preparation The multiple choice paper

There are many strategies for ensuring your success
It could be that a candy bar and six deep breaths in multiple choice exams. One strategy is to practise
will set you up and help you to relax before going as many such questions as possible prior to the

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 16.6 Examination terminology

exam. Well, if you have diligently worked through should spend on a particular part of the question.
this book, you will certainly have had a lot of For example, you would not spend as much time on
opportunity to do this, and probably your teacher a section that is worth 3 marks as you would on a
will have also provided some opportunities. section that is worth 9 marks.
A good tip is to cover up the answer choices with Keep an eye on the time. Do not spend too much
one hand while you read the stem (the body of time on any one question. It will not make a
the question). Try to anticipate the response before question worth any more marks if you spend an
you are distracted by seeing the options that hour on it. Divide your time sensibly and stick to
are given. the time allotted to each question. Obviously, you
will spend more time on parts of questions that are
When you uncover the options offered, if you see
worth more marks. If you get stuck on part of a
the response you expected, then you mark that
question, leave it, with sufficient space, and come
one as your choice. If you do not see a response back to it later if you have time.
that you expected, then try to eliminate those that
clearly seem wrong – this reduces the options. If Finally, take care to:
you cannot identify an appropriate answer within l develop your answers in context and use
a minute or less, skip it and plan to come back to it examples, where appropriate
later if you have time. l offer succinct and accurate definitions of any
commerce-related terms (this book will help you
The written paper to learn and revise these)
Again, do not write straight away. Read through the l develop reasoned answers rather than presenting
paper thoroughly. Analyse the questions carefully – brief notes or a list of points
ensure you answer the actual question that is asked. l offer arguments both for and against the
As you work through the paper, consider carefully question that has been posed
the structure of each of your answers before l show your working out in any questions that
committing to write. require calculations.
Don’t panic if you see others around you writing
while you are still considering and planning. 16.6 Examination
Do bear in mind that a carefully considered and
carefully constructed answer will usually get higher
terminology
marks. Your answer must be 100 per cent relevant to Here is a summary explanation of the main
the question asked. ‘command words’ that you will experience in
Imagine you are in a supermarket trolley dash structured questions and what they mean and require
where you have a few minutes to run around the you to do.
supermarket and fill your trolley free of change. Calculate: work out the value.
You will obviously choose items that have the
highest value. Think of the strategy you would Compare: look for similarities and differences
use in the supermarket race and apply it to your and perhaps reach a conclusion about which is
exam paper – get as many marks as possible in the preferable.
time allowed. Describe: Set out characteristics in a detailed or
It is extremely important to look at what is graphic account.
required and to ascertain exactly what you have to Discuss: Present key points, give reasons for and
do. It is certainly not about writing down everything against; give advantages and disadvantages and
you know about the topic in question. Pay particular examine implications.
attention to the mark allocation shown for each
Explain: Set out purposes or reasons.
section of the question. This will indicate how much
you are expected to write and how much time you Evaluate: Judge from available evidence.

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16 EXAMINATION PREPARATIONS

Illustrate: Explain the meaning of, or make clear Finally, an essential piece of advice – always
and explain using relevant examples; it does not answer the question, the whole question, and
mean produce diagrams, although you might nothing but the question.
include a diagram to aid your explanation. You will be well prepared for this exam if you
Identify: State name or otherwise characteristic. have worked solidly through all the topics and
have done your revision. Be confident and believe
Outline: Give the main features or the general that you can do well. In the classroom, you have
principles of a topic, omitting minor details. your teacher to help you, but in the exam you must
State: Express in brief but clear form. depend on yourself. Do not feel you cannot do
something. Have the confidence to try any question.
Always read the questions very carefully, making Remember, no answer means 0 marks, but even a
particular note of these terms where they arise (you guess at an answer is more likely to earn you marks
could underline them in the question). Only then will than nothing at all.
you be sure what the question demands of you. You
Best of luck in your examination!
might want to make a brief plan which organises
your answer around the terms used in the question. Alan Whitcomb

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INDEX
advertising 2, 7–8, 14, 63–9 charge cards 15 division of labour 4
advice notes 43 cheques 41, 129, 131, 133 documentary bills 59
agents 36, 58 codes of practice 65, 175 documentary credit 59, 133
aids to trade 2, 6–7 collective advertising 64 documents of trade 41–8, 95–9
airports 94–5 commerce 3, 4–7 e-commerce 6, 15, 16, 19, 20, 34,
air transport 92, 100–1 environmental issues 20, 67, 99, 169–70
air waybills 59, 95, 96 170–3 electronic communication 75–7
annual percentage rate environment of 167–76 electronic fund transfers
(APR) 25, 131 commercial banks 128 (EFTs) 132, 133
articles of association 145, 146 communication 6–7, 8, 72–82 email 74, 76, 77
assets 153 competitive advertising 64 email advertising 67, 68
automated teller machines computers 18, 19, 76 enterprise zones 139
(ATMs) 129–30 environmental issues 20, 170–3
consignment notes 43, 98, 99
balance of payments 55 e-tailers 15, 16, 34
consumerism 174
balance of trade 54 exchange rates 58
consumer protection 174–5
balance sheets 155–6 export licences 59
consumers 1, 3
bank accounts 128–9 exports 2, 7, 36, 53, 54, 55, 58
consumers’ associations 175
bank drafts 133 extended credit 28, 29
containerisation 93–4, 100
banking 2, 6, 7, 128–34 external communication 73
contextual advertising 68
bank loans 131, 154 factors 36
corporate advertising 64
below-the-line promotions 21 finance 2, 6, 7, 153–61: see also
courier services 81, 82
bills of exchange 59 credit
credit 25–9, 35, 154, 160
bills of lading 59, 95, 97 foreign trade, see international
credit cards 28–9, 132, 133, 134
bonded warehouses 35, 55, 107 trade
credit notes 45
branding 17–18, 69 formal credit 26, 27–9
credit transfers 132, 133
bridging loans 131 forwarding agents 36
current accounts 129
brokers 36 franchises 16, 146–7
customs authorities 55–6, 94
business inter-relationships 7–8 free ports 57–8
debentures 155
business risks 115–16 free trade 57–8
debit cards 132, 133
business units 139–48 freight notes 59, 98
debit notes 46
capital 153, 156–7 global business communication
debt factoring 154 72–3
cash and carry warehouses 107,
108, 131 Del credere agents 36 global markets, see international
certificates of incorporation 145, delivery notes 43, 98, 99 trade
146 department stores 15 hire purchase (HP) 27, 29, 154
certificates of origin 59, 98 deposit accounts 128 hypermarkets (superstores) 16
chain of distribution 4–6 digital banking 134 immigration authorities 55, 94
chain of production 1–2 direct debits 132, 133 import licences 57, 59
chain of supply 13 direct (personal) services 3, 7, 8 imports 2, 7, 36, 53, 54, 55, 58
chain stores (multiples) 14–15 distribution channels 33 indemnity 118

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INDEX

informal credit 26, 29 nationalisation 141 short-term finance 154, 155

informative advertising 63 night safes 129 small retailers 17
insurable interest 117 oral communication 73–4 social networking 66
insurance 2, 7, 113–22 orders 42–3 sole traders 14, 142–3, 145
insurance brokers 119–20 overdrafts 131, 154 specialisation 3–4, 5, 53
insurance claims 120–2 package accounts 134 specific advertising 64
insurance contracts 118–19 partnerships 143, 145 standing orders 132, 133
intermediate areas 139 personal risks 116 statements of account 46
internal communication 73 persuasive advertising 64, 67 state undertakings 141
international trade 53–9: see PEST (PESTLE) analysis 167–9 store cards 28, 29
also exports; imports pipelines 93 subrogation 118
internet 19, 76–7, 172, 173 pooling risks 114 supermarkets 15
internet advertising 66–7, 68 postal services 79–81 tariffs 55, 57
internet banking 130, 133–4 primary production 1, 2, 3, 5 telephone banking 131
intranets 76 private limited companies telephonic communication 74–5
invisibles 55 143–4, 145 television advertising 69
invoices 43–4, 98 private sector 139, 141–6 tenders 41–2
just-in-time (JIT) system 107, privatisation 141 terms of payment 47–8
108, 161 production 1–8 tertiary production 1, 2, 3, 4–6
large-scale retailing 16–17 profitability 160–1 tourist industry 7, 55, 92, 170
leasing 154 profits 1, 153, 158–9 trade credit 154
letters of credit 59 protectionism 57 traders 3, 7
limited companies 143–6 public limited companies 144–5 trading blocs 56–7
limited liability 142 public sector 139–41, 144–5 transportation 2, 7, 88–101
long-term finance 154–5 quotations 41–2 transport costs 35–6
manifests 59, 98 rail transport 90, 94, 100 transport documents 95–9
mark-up (MU) 47–8 receipts 43, 46–7 turnover 157–8, 159–60
mass advertising 64 retail trade 1, 13–21, 108 uninsurable risks 117
m-commerce 20, 99 road transport 89–90, 94, utmost good faith 117
memorandum of 99–100 videoconferencing 77
association 145, 146 sale and leaseback 154 visible/invisible trade 53
mobile phones (cell sales promotions 67–8 visibles 54–5
phones) 75–6, 78, 82, 134 sales techniques/methods 17–19 visual communication 77–8
moneylenders 29 seaports 94 warehousing 2, 7, 34, 35, 55,
mortgages 116, 155 sea transport 100 106–9, 131
multinationals 147–8 secondary production 1, 2, 3, 5 waterways transport 91–2
multiples (chain stores) 14–15 shares 131, 143–4, 145, 146, wholesalers 2, 17, 33–6, 108
municipal undertakings 139 154–5 written communication 74

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ANSWERS
Answers to multiple choice questions
Question 1 2 3 4 5 6 7 8 9 10
Chapter 1 C D A C C C B D B A
Chapter 2 C D B D C B A D A C
Chapter 3 C D A D A C C B D C
Chapter 4 D C C A B A A D B A
Chapter 5 B C D C B C C D A D
Chapter 6 C B B D A C B D A B
Chapter 7 C A B C A D C B D A
Chapter 8 D B C B A D A C B D
Chapter 9 C A C D C C A B A D
Chapter 10 C A D B A B D C B D
Chapter 11 A D C B D A A C B D
Chapter 12 C A D B C D B A B D
Chapter 13 D B B C D A A C B C
Chapter 14 D A C B C A D C A B
Chapter 15 C D B C A A B D C A
Chapter 16 B B A D A C D C B A

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ANSWERS

Answers to selected structured questions

Chapter 1 – Question
1 a Give one example of a primary industry. [1]
b How do the extractive industries support other forms of production? [2]
c What is secondary production? Name and define the two main categories into which this form of
production can be divided. [3]
d Wholesalers, retailers, exporters and importers are sometimes referred to as the ‘distribution
trades’. Explain why they are referred to in this way. [3]
e ‘Tertiary production is very different from the other forms of production but it is just as important.’
Discuss this statement. [5]
f Take a particular product and describe its development from primary production through to the
tertiary stage. Explain why each stage is important to the others. [6]

Chapter 1 – Answer
a A farmer is an example of a primary industry (and so are fishing and mining).
b The extractive industries provide the basic goods and raw materials that other industries need to make
their contribution to the production process.
c Secondary production is the industries that take the materials of the primary producers and change their
form. The two elements of secondary production are manufacturing and construction.
d The distribution trades are those that take the products created by the primary and secondary producers
and make the change of ownership of goods possible. They are referred to in this way because they are in
effect passing (distributing) the products to a wider group of users. They are just as important as the other
forms of production because without them, producers and manufacturers would have to make their own
arrangements for distribution.
e Producers are those engaged in the production of goods or services. The primary industries mainly
produce food crops and raw materials extracted from the land or sea. Secondary industries produce
goods relating to manufacturing and produce various types of finished goods from the output of primary
producers. The tertiary industries refers to those commercial activities that provide services to consumers
such as retailing, transport and finance and the many other facilities that enable the change of ownership
to take place.
Thus it can be seen that, while commercial industries are reliant on the primary and secondary producers
to create the goods they sell to consumers, those engaged in tertiary activities are equally important in
providing an outlet for the goods created by the primary and secondary industries.
f For example: a farmer grows maize. When the maize is ripe he will harvest the crop in order to sell it and
be able to plant his next crop. The farmer sells part of the maize crop to manufacturers and part to a retail
chain. The manufacturer will process the maize and can it, selling his output to retailers. The retailer will
sell both canned and fresh maize to its consumer customers.
At each stage in the process of production and distribution, value is added to the maize, enabling each
trader to earn from the process, thus demonstrating how all those involved in the overall process are
dependent on the other participants in the chain of production and distribution.
Other intermediaries will also be involved. For example, transportation will be required between each
stage of the overall process, and finance will be needed to fund the processes as well as facilitating the
transfer of payments.

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 Answers to selected structured questions

Chapter 2 – Question
5 The following questions are all related to buying and selling via the internet.
a What is the internet? [2]
b Define the terms ‘e-commerce’, ‘e-tailing’ and ‘m-commerce’. [3]
c Why are e-tailers often able to offer more competitive pricing compared with
conventional retailers? [3]
d Describe two ways that consumers benefit from an e-tailer, other than keen prices and home
purchasing convenience. [4]
e E-tailing is one way for consumers to buy from home. Briefly describe two other methods of
home shopping. [4]
f What steps are conventional retailers being forced to take to compete with e-commerce? [4]

Chapter 2 – Answer
a The internet is a worldwide network of interconnected computers.
b E-commerce is the name given to a range of ways of buying and selling via the internet. These include
e-tailing and internet auctions, and other forms of online buying and selling.
E-tailing refers to businesses that carry out their retail selling via the internet and are a feature of
e-commerce.
With m-commerce (correctly referred to as mobile commerce) consumers use their mobile phones to seek
information about goods and services, carry out purchases via the phone and make payments through the
phone as a form of online buying.
c E-tailers can access a wide geographical base of customers who can conveniently buy in the comfort of
their own home. This results in enabling the e-tailer to place larger orders from their suppliers and achieve
lower purchasing costs that they can pass on to their own customers. In addition, the e-tailer does not
require the same volume of staff or extent of premises as the conventional retailer.
d There are many benefits to the shopper of buying through an e-tailer, other than competitive prices and
convenience. These benefits include: ability to compare a wide range of competing products for features
and delivery schedules, as well as for price comparison; shoppers can pay electronically and even track
the progress of their purchases along their journey to delivery.
e Other home shopping methods: buying online from a conventional retailer and having purchases delivered
to the home; mail order purchasing of goods from a catalogue that offers home delivery; television
shopping, for example, viewing a shopping channel and purchasing by telephone or online; telesales,
whereby a telesales person telephones the home offering products or services (sometimes by ‘cold
calling’ – opportunism).
f Conventional retailers have been severely affected by the movement towards increasing online shopping
and are reacting in many ways. Some have embraced the development and have created e-tailing facilities
alongside their conventional business. Many of the large retailers now also offer online shopping where
consumers can buy in their normal manner, having viewed the retailer’s range of goods online, and the
retailer delivers the purchases. Many retailers are having to rethink the range of products they offer and
concentrate more keenly on those areas that e-tailers cannot supply, for example, fresh foods.

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ANSWERS

Chapter 3 – Question
3 Consumer credit has become a prominent feature of modern society.
a What is consumer credit? [1]
b Why are there cost implications of consumer credit? [2]
c How does formal credit differ from informal credit? [3]
d Give one example of informal credit and two examples of formal credit. [3]
e Why do so many people use consumer credit to make purchases when there are no cost
implications of using cash? [3]
f ‘The consumer needs to be able to budget sensibly to wisely use consumer credit.’ Discuss this
statement. [4]
g In what ways do both retailers and finance companies benefit from the use of credit by consumers? [4]

Chapter 3 – Answer
a The provision of funding to buy consumer products. Buy now, pay later.
b Because there are obligations to pay back the money borrowed (plus interest charges), in regular
instalments, on time.
c Informal credit is provided by small retailers as a kind of ‘stop-gap’ loan for very short-term borrowing
and generally for relatively small purchases, with repayment made on a weekly or monthly basis. Formal
credit tends to be for more substantial needs and for longer-term borrowing and repayment. Formal credit
is more closely regulated than informal credit.
d Formal – credit card; hire purchase, extended credit.
Informal – money lenders, pawnbrokers, payday loans.
e Ease of purchase: many purchases are made by telephone or internet where cash is not viable. In addition,
it enables consumers to make unplanned purchases such as dealing with immediate emergencies or
taking advantage of special low prices.
f Buying on credit involves the obligation to pay back the money borrowed, regularly, and on time. In order
to do this the buyer needs to consider carefully whether the purchase is really necessary and worthwhile.
The buyer also needs to take into account future possible buying needs. The buyer has to recognise that
creating a debt now means reduced future buying power.
g i Retailers achieve higher sales, which results in scope to buy in larger quantities and obtain lower
prices (economies of scale). This can result in lower consumer prices, resulting in even higher sales.
ii Finance companies receive income via the charges they impose – either from consumers (interest), or
from retailers (charges for processing retailers’ sales to consumers by credit card).

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 Answers to selected structured questions

Chapter 4 – Question
1 Look at Figure 4.4 illustrating the chain of distribution and answer these questions.
a What is the chain of distribution? [2]
b Name the four elements of the chain depicted in the illustration. [2]
c Why is every element of the chain dependent on another? [3]
d What do you see as the main functions of a wholesaler? [3]
e Who are the wholesalers’ customers? Why has the number of these customers declined over
relatively recent years? [4]
f What are cash and carry wholesalers? How do both the retailer and the wholesaler benefit
from this kind of trading? [6]

Chapter 4 – Answer
a The chain of distribution is the stages that products pass through starting with the producer and ending
with the consumer.
b The four elements are: the producer (or manufacturer), the wholesaler, the retailer, and the consumer.
c Producers need others to sell and distribute their products; without producers and retailers wholesalers
would have no purpose and consumers would not gain easy access to the goods they need.
d The wholesaler plays an important function in distributing the producer’s products, thus allowing the
producer to get on with his or her main role – producing goods. Wholesalers do this by distributing the
producers’ products. The wholesaler also gathers the many relatively small orders from retailers, thus
making mass production possible.
e Retailers are the customers of wholesalers. Retailers have experienced a decline in some of the ranges of
goods they sell to the consumer. This has particularly been caused by the expansion of e-commerce and
e-tailing, which has resulted in many former customers buying some products online.
f Cash and carry wholesalers are different from conventional wholesalers in that they require the retailers
to come to them to make purchases and take them away. In addition, the retailer is expected to pay cash
at the time of purchase, whereas a conventional wholesaler would offer a period of credit. Obviously,
cash and carry wholesalers benefit because they have immediate access to the cash paid by retailers and
this gives them cash flow, and retailers benefit in local access to products on a kind of pay-as-you go
basis. Although immediate payment has some inconvenience for retailers, it does afford them immediate
recognition of their financial status and enables them to peruse products in a way similar to customers in a
supermarket.

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ANSWERS

Chapter 5 – Question
4 The following questions are all related to the application of mark-up.
a Define ‘mark-up’. [2]
b i If the cost of an item is $5 and the profit made is $2.50, what is the selling price?
ii If a product is sold for $100, marked up from $75 cost, what profit has been made? [2]
c What do the letters CP, MU and SP represent? [3]
d i If the MU on an article is $10, how much profit has been made on the sale of 10 articles?
ii If CP = $20 and SP = $30, what is the profit made on the sale of 12 items?
iii If SP = $100 of an item with a CP of $70, what profit will be made on five items? [3]
e Imagine a situation where a business chooses to give mark-up as a percentage of the selling price
instead of the cost price. Complete the data and answer the question that follows the example.
CP = $40 MU = ? SP = $50
MU on CP = ?% MU% on SP = ?%
Use the data you have formulated to explain how this illustrates that this method misrepresents the
true percentage of profit made. [4]
f Copy and complete the columns below, calculating the mark-up as a percentage of the cost price in
each case.
CP MU SP MU % of CP
$100 $50 $150 ?%
$10 $10 $20 ?%
$100 $? $120 ?%
$? $5 $15 ?%
$20 $? $30 ?%
$7.50 $? $15 ?%
[6]

Chapter 5 – Answer
a Mark-up is an amount added to the cost price for an article to fix the selling price. It is the difference
between the cost price and the selling price.
b i $7.50
ii $25
c CP = Cost Price, MU = Mark-up, SP = Selling Price
d i $100 profit ii $120 profit iii $150 profit
e CP = $40 MU = $10 SP = $50
MU on CP = 25% MU% on SP = 20%
From this it can be seen that the mark-up when calculated on selling price is lower than the mark-up
calculated on cost price.
f CP MU SP MU % of CP
$100 $50 $150 50%
$10 $10 $20 100%
$100 $20 $120 20%
$10 $5 $15 50%
$20 $10 $30 50%
$7.50 $7.50 $15 100%

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Chapter 6 – Question
4 Look at this data related to the balance of payments of the country of Noland.
$m
Visible exports 71 840
Visible imports 80 090
Invisible exports 74 880
Invisible imports 67 720
a What is the visible balance? [2]
b What is the invisible balance? [2]
c What is the current balance? [3]
d How does international trade benefit consumers? [3]
e What problems are faced by businesses that trade internationally, which are not faced by those
engaged only in home trade? [4]
f Considering the importance of international trade, why do countries implement protectionism? [6]

Chapter 6 – Answer
a Visible balance = –8250
b Invisible balance = +7160
c Current balance = –1090
d International trade benefits consumers because:
i consumers get a wider choice of products
ii consumers get keener prices because foreign trade results in increased competition
iii successful international trade results in higher living standards.
e i Differences in language.
ii Suitability of products to foreign safety requirements.
iii Import regulations of the overseas country.
iv Exchange fluctuations can result in a loss.
f i To protect newly formed producers in the home country.
ii To resist ‘dumping’ of cheap foreign products.
iii To safeguard jobs.
iv To protect consumers against hazardous products.
v To correct a balance of payments deficit.
vi To counter political conflicts.

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ANSWERS

Chapter 7 – Question
1 These questions are related to the illustrations shown in Figures 7.1, 7.2 and 7.3.
a Who do you think pays for the informative advertisement in Figure 7.1? [1]
b What is the message that is being given in Figure 7.1 and who is the message intended for? [2]
c Why can informative advertising be said to be beyond criticism? [2]
d What elements of persuasion are used in Figure 7.2? [2]
e What aspects of persuasion can be seen in the advertisement in Figure 7.3? [3]
f Summarise the differences between informative and persuasive advertising. [4]
g What are the possible harmful effects of advertising? How can these be controlled? [6]

Chapter 7 – Answer
a The government health authority.
b The advertisement warns us that inhaling cigarette smoke is not only harmful to the smoker but also to
others.
c An informative advertisement gives information about something but leaves the target audience to decide
whether they wish to react to the advertisement without undue influence.
d The advertisement in Figure 7.2 aims to impress consumers that using the energy drink shown will make
someone healthy, happy and fit, and that this is better than being unhealthy and inactive.
e The advertisement in Figure 7.3 uses the personality appeal of a celebrity to give substance to the claim
that the advertised product makes you attractive and gives you the energy needed to live a busy life.
f Informative advertising presents the basic facts about something without using subliminal communication
to influence the viewer of the advertisement.
Persuasive advertising uses techniques that appeal to our inner emotions to influence the person viewing
the advertisement to buy the product, and sometimes for the wrong reason.
g When advertising influences people using persuasion and subtle subliminal techniques, consumers are not
always able to make rational decisions. The result is that consumers may be induced to buy a particular
commodity that they do not need, or that they cannot afford.

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Chapter 8 – Question
3 Read the newspaper article in Figure 8.5 and then answer the questions that follow.

Prior to the Industrial Revolution Two main factors have led to remote
almost everyone worked at or near working. First has been the develop-
their homes. During the Industrial ment of telecommunications and
Revolution, this completely changed computer technologies – the advent
as workers flocked to the factories to of email and other ways of instantaneous
look for employment. After that, transmission of information.
home working became progressively Second, there has been a trend for
low status and poorly paid, but all employers to recruit a wider range of
this has changed. workers than before. Now employers
‘Telecommuting’ , ‘teleworking’ or want people able to work more
‘remote working’ are names that have flexible hours and with the technical
been given to the modern trend of skills to embrace modern technological
working from home using computer ways of working. Teleworking helps to
and internet-related technology, embrace these changes.
for at least part of the week.

Figure 8.5 Newspaper article

a What is teleworking? [1]

b Why is teleworking dependent on communication systems? [2]
c One of the advantages of teleworking from the point of view of the employer is that it saves on
office space. How does it do this? [2]
d State two possible savings for the employer, other than that of space. [2]
e State one advantage and one disadvantage of teleworking from the point of view of the employee. [2]
f What is email and how can this assist teleworking? [3]
g Briefly describe two specific ways that the internet can contribute to teleworking, other than
by email access. [4]
h There are some kinds of commercial work where the methods of communication necessary make
teleworking impracticable. Describe two examples where this would be the case. [4]

Chapter 8 – Answer
a Teleworking refers to employees working from their own homes using computers and internet technology
and other equipment such as the telephone.
b To be independent from their normal workplace, the home worker needs access to a computer and to the
internet in order to replicate their normal working practices.
c When a worker is operating from his or her own home, even for a couple of days a week, this releases the
workspace and equipment the worker would have used in the office. If others work similarly, the result is
that more employees can be accommodated within the space available.
d The employer will save the cost of having to duplicate some equipment because more than one employee
can be employed using less equipment. The employer will also save on accommodation when they need to
employ extra personnel, for example, when expanding. It is possible that some of the equipment may even
be provided by the employees in their own homes.
e The employee will not have to spend so much time and expense travelling to and from work. But
working from home will also have personal cost implications for the employee – electricity, heating, air
conditioning and so on.

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ANSWERS

f Email is the process of creating communication in written format using a computer and transmitting it to
others via the internet. Having access to email and the internet plays an important part in enabling many
employees (for example, office personnel) to carry out many tasks at home that they would have carried
out in their traditional workplace.
g The internet provides many facilities for the home worker other than email. For example, meetings and
conferences can be carried out with just sound or with both sound and vision. Prices of supplies needed
by the firm can be researched and ordered from the employee’s home without the need to be in the
workplace. Similarly, the employee can access the company’s intranet from home, thus further extending
activities the employee can participate in, for example, dealing with customer enquiries.
h It is impracticable to carry out some work tasks from the home. If there is a need to visit a customer’s
premises to, say, create an estimate for bespoke work, it may not be possible to carry this out from
the employee’s home. Similarly, where there is a need for a potential customer to visit the firm for a
demonstration of equipment, this would not necessarily be convenient at the employee’s home. It should
also be recognised that any work undertaken at the employee’s home should not necessitate use of
specialist machinery that is located only at the company’s premises.

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Chapter 9 – Question
1 a State two major factors account when choosing a
that have to be taken into site for an airport. [2]
b Why do airports rely on other forms of transport? [2]
c What is the function of an airway bill? [2]
d What part does a freight forwarding agent play in the transportation of goods? [3]
e Describe examples of goods for which air transport would be appropriate and others for which air
transport would be impracticable. [5]
f What are the requirements for an efficient and safe airport? [6]

Chapter 9 – Answer
a i Within easy reach of a major city.
ii Good road and rail connections.
b All airports are terminals that do not directly link with where travellers want to get to or where
goods need to be delivered. So road and rail transport are essential to air travellers and commercial
organisations.
c An airway bill is given to the consignors by the carrier as a receipt for cargo to be transported as air
freight.
d A freight forwarding agent is a business that specialises in arranging the storage and onward shipment on
behalf of those needing to send freight. The freight forwarding agent will obtain shipping space and deal
with documentation required, for example, to meet exportation and importation requirements.
e Air transport is a relatively expensive form of transportation in comparison with other forms of transport.
It is also limited in the size and weight of cargo it can economically carry. For these reasons, air transport
is used for relatively small, light, high-value items such as mail, fresh high-value foods and flowers, and
jewellery. It is also used for items where there is an urgent need for delivery such as medicines.
Air transport would be unsuitable for large or low-value items such as vehicles, coal or wheat. It is also
unsuitable for hazardous items such as fireworks and explosives, flammable liquid, toxic and infectious
items, and aerosol sprays.
f Airports need sophisticated equipment to safely manage aircraft movements on the ground and in the air.
Aircraft use highly flammable fuel and safeguards are required such as fire equipment and firefighters.
Airports also need strict arrangements and specialist personnel to provide security. These are required
not only to protect the security of people in the airport, but also to safeguard against the possibility of
passengers carrying illegal or dangerous substances. Some of the personnel responsible for safety may
also be armed. Because large numbers of people pass through airports, there will be times when people
are taken ill, or even found to be carrying contagious infections. For this reason, medical facilities must be
provided for the safety of others.

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ANSWERS

Chapter 10 – Question
1 Read the following statement and answer the questions that follow it.

‘Storage of commodities is vital, so large warehouses may be found at most seaports, airports and
in many cities, to store goods until they are required on the home market or the foreign market. Raw
materials and finished or semi-finished products are stored so that demand can be met at any time. This
enables production to take place ahead of demand, which is convenient for the producer and also helps
to avoid changes in prices that are caused by shortages and gluts.’
a Give two examples of commodities and say what is ‘vital’ about them. [2]
b State two places where warehouses are found in addition to ports and cities. [2]
c ‘In all warehouses, goods are only stored temporarily.’ Explain this statement. [2]
d Explain the terms ‘raw materials’, ‘semi-finished products’ and ‘finished goods’. [3]
e How does the existence of warehouses enable manufacturers to produce ahead of demand? [3]
f List and describe four different types of warehouse. [4]
g Which kind of warehouse would be likely to be found in a port and which in a large city?
Give a reason for each of your choices. [4]

Chapter 10 – Answer
a A commodity is an item produced to satisfy our needs or wants. For example, a manufacturer has a vital
need for raw materials and we have a vital need for food.
b A factory would have a warehouse on its site containing the production materials it needs, and a
wholesaler would have a warehouse in proximity to the retailers it serves.
c The purpose of a warehouse is to store items for a short period only and to move them on as soon as
possible.
d Raw materials are items that are used by producers or manufacturers to create the items they sell. Semi-
finished products are component parts or partly created items that are assembled into finished goods.
e A warehouse is a building for temporary storage. It bridges the time-gap between the time something is
produced and the time when it is needed. Therefore, a producer can create a product when it is convenient
to do so, and store it in a warehouse until it is needed.
f i Supply warehouse: used to store resources needed by a manufacturer for manufacturing purposes.
ii Transfer warehouse: holds goods for short periods during transfer from one mode of transport to
another, for example, seaport to road transport.
iii Regional warehouse: operated by large retail chains as a kind of satellite storage for a collection of
related shops in a region.
iv Wholesale warehouse: an intermediary between producers and manufacturers and individual retailers.
g i A bonded warehouse would be found in a seaport or an airport under the supervision of the Customs
and Excise Department. Although they are found in other places they are found in these places most
frequently.
ii A regional warehouse could well be located within a large city because it would be used to supply
many related chain stores within the city and in its surrounding suburbs.

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Chapter 11 – Question
1 Refer back to Figure 11.4, which gives examples of the kind of questions that are asked when
someone is completing an application for motor insurance.
a Give two reasons why an insurance company would want to know the age of the proposer for
motor insurance. [2]
b Explain the relevance of questions 4 and 5 to the premium that will be charged. [4]
c Clearly explain the differences between third party, fire and theft motor insurance and a
comprehensive policy. Include an explanation of the implications for the motorist and any
other injured party. [6]
d Take any four questions from the list not considered so far and explain the purpose of including
them on a motor insurance proposal form. Try to choose questions that deal with different factors
that influence the amount of premium to be charged. [8]

Chapter 11 – Answer
a A younger driver will have less experience than an older driver and may be a greater risk, but an elderly
driver will have slower reactions than a young person and so the very elderly will have a higher risk.
b A larger size of engine will be more powerful than a smaller engine and, therefore, is likely to be a greater
risk.
If an engine has been modified to increase its performance it will be of more risk than the original engine.
c With third party, fire and theft motor insurance the insured is covered for damage to other people and
their property, plus damage to the car of the insured if it is damaged by fire or it is stolen. The vehicle of
the insured will not be covered for damage caused in a road accident.
A comprehensive policy not only compensates for damage to the vehicle of another person (the third
party) but also compensates for damage to the vehicle of the comprehensive policyholder.
For a third party (someone other than the insured), he or she is assured that damage to his or her car by the
insured is covered by the other driver’s insurance. But only comprehensive cover ensures that the vehicle
of the insured will be repaired.
d Question 6: The year of registration shows the age of the vehicle. In most cases, the older a car is, the
lower its value and, therefore, the financial risk is lower.
Question 7: If a car is kept secure in a garage the risk of theft is lower than if it is parked on the street
overnight.
Question 8: As a general rule, the longer a person has been driving, the more experienced the driver is,
and the less risk he or she poses.
Question 9: If a car is used for business purposes it is likely to cover more miles in a year than one used
for leisure purposes only. Consequently, a car used for business purposes will be a greater risk.

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ANSWERS

Chapter 12 – Question
2 Refer again to the bank statement shown in Figure 12.2 and answer these questions related to it.
a Name the holder of this account. [1]
b What period does this statement cover? [1]
c Why is it important for customers to receive bank statements regularly? [2]
d Since the date of this statement Mr Baudin has written cheques for $28.40, $96.00 and $136.89.
A direct debit of $189.27 has also been paid. How much funds does Mr Baudin have access to?
Show all of your working out. [4]
e Give a clear explanation of the purpose of the debits, credits and balance columns, using examples
from the statement to illustrate your explanation. [6]
f Explain the difference between the services shown on this statement as direct debit and standing
order, and give examples of how a business might use each. [6]

Chapter 12 – Answer
a Mr W Baudin
b 4 March to 1 April
c Customers need to be aware of the funds they have available in their account in order to avoid
overdrawing. They also need to be able to check in case any errors have been made by the bank.
d Payments made out Account balance
28.40
96.00 Starting balance 6757.93
136.89 Payments out 450.56
189.27 Result balance 6307.37
Total 450.56
e The debit column refers to money taken out of the account. This results in a reduction in the balance
column. For example, on 4 March the balance was $5782.98, then cheque number 102068 for $820.40 was
issued. This reduced the balance to $4962.58.
The credit column represents money paid into the account, which has the effect of increasing the amount
in the balance column. For example, on 12 March a credit transfer of $262.95 was added to the account,
increasing the balance from $5638.00 to $5900.95
f A standing order is an instruction given by an account holder to the bank to transfer a regular fixed
amount from his or her account to another account at regular stated intervals. For example, if a business
has purchased a vehicle on credit that requires a fixed payment of $500 on the 12th of every month for the
next two years, a standing order would be a convenient and suitable method of doing this.
A direct debit is an authorisation given by an account holder to allow a third party to withdraw a varying
amount of money, up to a specified amount, from his or her account. This method of payment is useful
when the amount to be taken is not known in advance and the third party is reliable. For example, a
business would probably allow its utilities’ providers to draw their payments using this service.

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Chapter 13 – Question
4 The questions given here are all related to the public limited company.
a Who owns a public limited company? [1]
b What is meant when it is said that a limited liability company has a ‘separate legal identity’? [2]
c Why is a multinational company more likely to be a public limited company than a private one? [3]
d Briefly distinguish between the memorandum of association and the articles of association of
limited liability companies, and state one item of information contained in each declaration. [4]
e In what way does the process of forming a public limited company differ from that of a private
limited company? [4]
f Explain how the public limited company and the private limited company each meet different
requirements and appeal to different forms of ownership. [6]

Chapter 13 – Answer
a Its shareholders.
b Once a limited company is registered (incorporated) its identity is separate from that of its owners. It can
sue and be sued in its corporate name.
c A multinational is a company that has business units in more than one country. Such an extent of
operation requires considerable capital. While a private limited company is not prevented in participating
as a multinational business (and many do), the considerable costs involved make it more suitable to a
public limited company that has access to more capital contributors.
d The memorandum of association states the external relationships of the company, in other words, the
relationships with those outside the business. It states, for example, the objective for which the business is
formed and its limited liability status.
The articles of association state the internal relationships of the business. This document states, for
example, the method of election of directors and the manner in which general meetings (such as the AGM)
are to be organised and conducted.
e The private limited company is generally smaller than the public limited company and has fewer capital
raising opportunities. However, it has the advantage of limiting and maintaining ownership to a defined
number of people.
f The public limited company is able to attract many more capital contributors through the sale of shares
on the open market. Although this gives the public limited company access to a considerable volume of
capital it makes it vulnerable to a takeover by competitors that gain an overall majority of ownership.

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ANSWERS

Chapter 14 – Question
2 The following questions are all related to improving turnover.
a What is turnover? [1]
b What is the main significance of turnover to a business? [1]
c What is meant by rate of turnover? [2]
d Why is the rate of turnover figure important? [3]
e Give two contrasting examples of rate of turnover and explain why the difference exists. [3]
f Explain how rate of turnover can be used to usefully compare businesses. [4]
g Describe two possible ways that a business might improve its turnover. [6]

Chapter 14 – Answer
a The term ‘turnover’ refers to the total sales of a business over the past year.
b The greater the turnover, the more business a firm is doing.
c The rate of turnover is a figure that shows the number of times the average stock is turned over in a year.
d The rate of turnover indicates how busy a business is. It is a useful indication of the value of the business
and can be compared with other similar businesses.
e Electrical goods trader – rate of turnover 6. Butcher – rate of turnover 78.
The reason for the difference is that the electrical goods trader sells slow-moving consumer durables,
whereas a butcher sells fast-moving perishable goods.
f The rate of turnover of two businesses in the same line of business can be usefully compared because their
rates of turnover should be relatively similar. For example, a confectioner would have a rate of turnover of
about 12. If two businesses in this same trade have significantly different rates of turnover it will indicate
that one is ‘busier’ than the other, or one is not performing as well as the other.
g i The business could increase its price margin (the difference between the selling price and what it cost
to produce or acquire the good). It can do this by increasing the price of the good, or by reducing the
cost of producing or acquiring the good.
ii The business could review its marketing techniques. For example, it could review its advertising
strategy and use a variety of ways to attract new customers. Or it could focus its marketing towards
customers who buy goods that show the highest profit margin.

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Chapter 15 – Question
1 ‘We are determined to reduce our country’s carbon footprint. It is for this reason we are introducing
legislation that will result in a special tax on all packaging materials that are not biodegradable. We urge
the governments of other countries to follow our lead.’
(Statement from a government spokesperson.)

Look at the above statement and answer these questions.

a Explain the meaning of the words shown in italics. [3]
b Give reasons why packaging material is particularly identified as contributing to a
‘carbon footprint’. [3]
c What effect would this legislation be likely to have on manufacturers? [4]
d Why would the effects of such legislation be sure eventually to hit the pockets of the consumer? [4]
e Take any three elements of PEST analysis and demonstrate how it could be applied to legislation
such as this. [6]

Chapter 15 – Answer
a Carbon footprint refers to the amount of carbon dioxide released into the atmosphere as a result of human
activity.
Legislation is the process of creating or enacting laws imposed by government.
Biodegradable refers to any substance or object capable of being decomposed by bacteria or other living
organisms and thereby avoiding pollution.
b i Much packaging used by manufacturers is plastic-based and slow to degrade.
ii As global marketing has increased so has the amount of packaging used.
iii Producers are more able to change packaging than the products they create.
c Such legislation would force manufacturers to explore better ways of packaging their products. Overall
there would be an increase in their production costs even if only because research is costly. It may well be
that some forms of packaging cannot be replaced; for example, some international trade relies on sound,
conventional packaging. This being the case, the manufacturers would have to absorb any additional
taxation into their costs.
d Producers would pass on the tax levied on them to their customers (for example, wholesalers and
retailers). These intermediaries might try to absorb some of the higher charge by manufacturers by
reducing their profit margins, but inevitably most of the tax would be passed on to the consumer through
price rises. This will mean that the cost of living of consumers will rise, leaving them with less disposable
income and a reduced standard of living.
e Political: The increase in taxation will eventually hit the pockets of the consumer. Although people are
generally sympathetic to environmental issues they will not be favourable towards a government that, in
effect, reduces their standard of living. This could result in the government being voted out of office.
Technological: Industry could collectively be encouraged by the legislation to place a greater degree of
funds into research for alternative, environmentally friendly forms of packaging. The difficulty could
be in managing to develop collective responsibility to fund such research and development. But if the
government used the income from taxation to fund research this could satisfy both the public and the
manufacturers.
Environmental: There is general recognition that the countries of the world collectively need to tackle
the damage being done to the atmosphere. This kind of initiative contributes to the improvement needed.
But more needs to be done and the difficulty is finding economic ways of achieving this and getting all
governments and their people to accept the responsibility and costs involved.

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