Ch.1 – BUSINESS, TRADE AND COMMERCE

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   All human beings require different types of goods and services to satisfy their needs.  To satisfy such needs people are undertaking certain activities by way of production and selling of  goods and services.Business is a major economic activity in all modern societies as it is concerned with the production and sale of goods and services required by  people.

Human activities can be classified into two categories:
1. Economic Activities and  2.Non-Economic Activities.  

  1. Economic Activities: Activities which are undertaken by people with the object of earning  money are known as economic activities. The purpose of economic activities is to earn money  which is used for further creation of wealth or assets.  

   Eg. Production of goods in a factory, lawyer, working in a school, doctor, clerk, daily worker  etc… 

  1. Non-Economic Activities: The activities which are undertaken by an individual with a  motive of getting psychological satisfaction or out of sentiments or out of religious obligation  are known as non-economic activities.  

Eg.: Praying, social service, production for self consumption, charity etc… 

Economic Activities Non-Economic Activities  
To earn money or money’s worth For personal or psychological satisfaction
It can be measured in terms of money It cannot be measured in monetary terms
Money is the reward  Mental satisfaction is the reward

Types of Economic Activities: Economic activities can be divided into three categories: 
1. Business 2. Profession 3.Employment 

 

  1. Business: Activities which are related to production or purchase and sale or distribution  of goods or service with the main objective of earning profit come under  business. It should be on a regular basis.  

   Eg: Manufacturing, mining, farming, trading, fishing etc.. 

 

Characteristics of Business/ Features of Business 

  1. Economic activity: All business activities are considered as an economic activity  because its main aim is to earn money in the form of profit.  
  2. Dealing goods or services: Business involves transfer or exchange of goods or  services for value. Goods may be of consumer goods ( for direct use. Eg.clothes, food  item …) or capital goods (like machinery, tools…..). 
  3. Regularity in dealing: An isolated transaction cannot make a business unit. When transactions are repeatedly performed, it is considered as business.  
  4. Profit earning: The first and foremost purpose of business is to earn profit. Profit is the  return on capital employed.  
  5. Sale, transfer or exchange: Business must involve sale, transfer or exchange of goods  and services directly or indirectly.  
  6. Uncertainty and business risk: No one can predict the future of a business with  certainty. In every business there is a chance of loss or deduction of profit. It is called  business risk. 
  7. Profession: Profession refers to an occupation which requires specialized  knowledge, skill and training. Those engaged in professions are known as professionals.  Eg.: Lawyer, Doctor, Engineer, CA…

     

 Features: 

  1. A profession requires specialized knowledge, training and skill. Eg. A Doctor  must possess MBBS, Lawyer possess LLB etc.  
  2. The membership of the professional body is a must. Eg. CA must obtain  membership from ICAI, Doctor obtain membership from Medical Council of  India, Lawyer from Bar Council ….. 
  3. They charge fee in return of their services.  
  4. Every professional must follow certain rules and regulations enforced by the  professional body. It is known as code of conduct.  

 III. Employment: Employment refers to that type of economic activity in which people  engage in some work for others regularly and get salary/wages in return of their  services.  

 Eg.: officer, clerk, factory worker, government servants …. 

Features: 

  1. There must exist employer-employee relationship.  
  2. There must be a service contract between employer and employee.  
  3. Employees get salary or wages for their services.  
  4. Regularity in service.  

Comparison or Distinction between Business, Profession and Employment

Basis  Business  Profession  Employment
1. Commencement  Decision of entrepreneur  Membership of  professional body Appointment letter
2. Nature of work  Production or purchase 

 

 and sale of goods or  services

Rendering expert  service Performing the job  assigned by the employer
3. Qualifications  No minimum qualification  Professional  

 

qualification and  training

Prescribed by the  employer
4. Capital  Depends on the nature  &size of business Limited capital  No capital
5. Risk  High risk  Less risk  No risk
6. Transfer of interest  Possible  Not possible  Not possible
7. Objective/Return  Profit  Fees  Salary
8.Code of conduct  No code of conduct  Laid down by the  professional body Laid down by the  employer.

Classification of Business
Business activities may be broadly classified into two broad categories – Industry and Commerce.

INDUSTRY

  1. A. Industry: Industry involves production or processing of goods used for consumption  or for further production. 

Types of Industry: Primary Secondary Tertiary  Extractive Genetic Manufacturing Construction  Analytical Synthetical Processing Assembling  

  1. Primary Industry; Primary industries are associated with extraction of natural resources  and reproduction of living organisms like plants, animals and birds. It is classified into  two:
  2. Extractive industry: Which engage in extraction of something from natural sources or  from nature. The products extracted are wither directly consumed or are used as raw  materials for further production. Eg. Fishing, mining, oil exploration etc.  
  3. Genetic industries: They are engaged in activities like rearing or breeding of animals,  birds and plants. Eg. Agriculture, dairy farming for milk, poultry farming for egg and  meat, Floriculture for flowers pisciculture for fish etc.  
  1. Secondary Industries: It deals with materials extracted at the primary stage. These  industries either process the material or produce goods. It is further classified in to  two;  
  2. Manufacturing industries: They engage in converting raw materials into finished  goods. The products manufactured may either be consumer goods or capital goods.  Eg. Producing steal, make furniture, making butter etc.  

It may be divided into following categories:  

  1. Analytical industry: In it the main products or rawmaterial is divided into various sub  products. Eg. Petroleum industry.  
  2. Synthetic Industry: In it one main product is made from various raw materials. Eg. Soap,  paint … 
  3. Processing Industry: In it different stages are involved in transferring raw material in to  finished goods. Eg. Textile industry.  
  4. Assembling Industry: In it different parts of the products are purchased from te market  and assembled to make a complete product. Eg. Cycle industry.  
  1. Construction industries; They engaged in construction of dams, bridged, airports etc.  The products of these industries are immovable, labour intensive and which are used  mostly for public welfare.  
  1. Tertiary industries; They concern with providing services that support the primary  industries and secondary industries. Eg. Transport, banking, insurance etc.  

  1. Commerce: All activities ensuring the free flow of goods from the producer to the  consumer comes under commerce. It is defined as “those activities involving the  removal of hindrances in the process of exchange of goods” Commerce includes trade  and aids to trade. 

     

                Commerce = Trade + Aids to trade 

Trade: It refers to the sale, exchange or transfer of goods on a continuous and  regular basis. A person who engaged trading activities are known as trader.  

⮚ The hindrance of person is removed by trade.  

 Types of Trade 

Internal/home/domestic trade , External/Foreign/International trade  ,Whole sale ,Retail ,Export ,Import ,Entrepot 

  1. Home trade: When trade taken place within the boundaries of a country
    a. Wholesale trade: Buying goods in bulk and sell them in the smaller quantities to  retailer. 
  2. b. Retail trade: Buying goods in small quantity from wholesaler or producer and sell  them to consumers. 
  3. Foreign Trade: When trade taken place beyond the boundaries of a nation is called  external trade. 
  4. Export: When goods are sold to a foreign country. 
  5. Import: When goods are purchased from a foreign country 
  6. Entrepot : When goods are imported for export to other countries. 

COMMERCE

Commerce is concerned with the buying, selling and distribution of commodities and it is an organized system for the exchange of goods and services in between the businessman and the customers. It is also concerned with the marketing aspects of business, i.e. supply of right type of goods to the right persons, at the right time and at the right price. Thus commerce includes trade and aids to trade.

Definition – Commerce can be defined as the sum total of all those activities which are involved in the removal of hindrances in the process of exchange of goods.

Functions of Commerce –

  1. Removal of Hindrance of Person: It refers to the lack of contact between the producers and customers. Here the trader acts as an intermediary among them and customers are able to find out the products which they are wanted from the market.
  2. Removal of Hindrance of Place: It is a common problem that the producers and customers are in distant places, hence the commodities should be transferred from the production centre to the hands of customers. This problem can be solved by the system of commerce by means of transport, packing and insurance.
  3. Removal of Hindrance of Risk: Goods and properties of business are subject to various risk such as fire, theft, damage etc., and they have to be protected by insuring the goods and properties.
  4. Removal of Hindrance of Time: There may be a gap between the production and consumption as the production is carried out in anticipation of future demands.Therefore, it becomes necessary to store the goods until they are sold. This problem can be solved by warehousing.
  5. Removal of Hindrance of Knowledge: Advertising helps in the removal of hindrance of knowledge among the buyers.
  6. Removal of Hindrance of Finance: The problem of finance can be handled by banks, which form part of commerce. It will also help the businessman in exchange of money between different persons at different places.

Aids to trade: Activities which assist trade are called aids to trade or auxiliaries to  trade. It includes banking, transportation, communication, insurance, advertising,  warehousing, packaging etc. 

Banking Service: Business activities cannot be undertaken unless funds are available  for its various needs. Banking services provides finance facility to business and thus it  removes the hindrances of finance.  

Transport and Communication: Production of goods generally takes place in  particular locations. But these goods are required for consumption in different part of  the country. Various modes of transport and communication facilities helps in the  movement of goods and removes the hindrance of place in the exchange of goods.  

Insurance: Business involves various types of risks. Insurance provide protection in  all these situations. Thus the hindrance of risk is removed through insurance.  

Advertising: It is practically impossible for producers and traders to contact each  other and every customer. For sales promotion, information about the product must  reach potential buyers. Advertising helps in this situation. The hindrance of  knowledge or information is removed through advertising.  

Warehousing: Usually goods are not sold or consumed immediately after production.  They are held in stock to be available as and when required. The function of storage is  called warehousing and it removes the hindrance of time in the exchange process. 

Objectives of Business: 

  1. Earning Profit: Business activities are primarily undertaken to earn profit. Profit is an  indicator of the performance of the business during its operation period. 
  2. Market standing: It refers to capture the market share. The business can survive only if  there is demand for its goods and services. So it must aim at satisfaction and winning of  customers.

     

  3. Innovation: To innovate means to introduce something new into the market. It  includes new products, new method of production, new method of distribution etc. Eg. Introduction of lap top, changes in mobile phone, conversion of traditional  photography to digital, direct marketing etc.

     

  4. Productivity: It is ascertained by comparing the value of output with the value of  inputs. Every business must aim at greater productivity through the best use of  available resources.

     

  5. Efficient utilization of physical and financial resources: Any business require physical  resources like plants, machines, materials… and financial resources. The business  enterprise must aim at acquiring these resources according to their requirements and  use them efficiently.

     

  6. Manager performance and development: Business need managers to conduct and  coordinate business activity, therefore improve managers performance and  development is an important objective of every business.

     

  7. Improve workers performance and attitude: Every enterprise must aim at improving  its workers performance. It should also try to ensure a positive attitude on the part of  workers.
  8. Social responsibility: Social responsibility refers to the obligation of business firms to  contribute resources for solving social problems and work in a socially desirable  manner. 

     

Business Risk

Business risk means chance of incurring losses or less profit than expected. It is found  in every business. Risk arises due to uncertainty about the future events.

 

Causes of Business Risk: 

  1. Natural causes: It includes heavy rain, famine, earthquake, fire, drought, Tsunami  etc. 
  2. Human causes: It includes theft, strike, lockout, negligence and carelessness, riots  etc. 

III. Economic causes: It includes change in demand and price, market conditions,  competitions, trade depression etc. 

  1. Political causes: It includes changes in government policies regarding expert import, taxation, licensing policy, ideology of political parties etc. 
  2. Management causes: It include poor planning, absence of research and  development, mismanagement etc.

Starting a Business- Basic Factors:  

Some of the basic factors, which must be considered by anybody who is to start the  business, are as follows: 

  1. Selection of line of business: It means nature and type of business to be undertaken. 2. Size of the business: Size or scale of operation is another important decision to be taken  at the start of the business. 
  2. Choice of form of ownership: The business organization may take the form of a sole  proprietorship, partnership or a joint stock company. Each form has its own merits and  demerits. 
  3. Location of business: Availability of raw meterial, labour, power, water and other various  services are important factors while making a choice of location. 
  4. Finance: Proper financial planning must be done before selecting form of business. 6. Physical facilities: Availability of physical facilities like buildings, machines, supportive  services …. are very important factor to be considered. 
  5. Plant layout: It means the physical arrangement of machines and equipment needed to  manufacture a product. 
  6. Work force: Plans should be made to bout the number of employees, their competence  and how they will be trained and motivated. 
  7. Tax planning: The founder of the business has to consider in advance the tax liability  under various tax laws and its impact on business. 
  8. Launching the enterprise: After consider the above factors, the business man can go  ahead with the actual launching of the enterprise.

History of Trade and Commerce

Trade and commerce have played a vital role in making India to evolve as a major actor in the economic world in ancient times. Commercial cities like Harappa and Mohenjodaro were founded in the third millennium B.C. The civilisation had established commercial connections with Mesopotamia and traded in gold, silver, copper, coloured gemstones, beads, pearls, sea shells, terracotta pots, etc.There were diverse types of coins and weighing practices which used to vary from place to place.

Indigenous Banking System

As economic life progress, metallic money had been introduced which in turn accelerated the economic activities. Documents such as Hundi and Chitti were in use for carrying out transactions in which money passed from hand to hand.

Hundi as an instrument of exchange, it involved a contract which warrant the payment of money, the promise or order which is unconditional and capable of change through transfer by valid negotiation.

Indigenous banking system played a prominent role in lending money and financing domestic and foreign trade with currency and letter of credit. With the development of banking, people began to deposit precious metals with lending individuals functioning as Bankers or Seths.

Rise of Intermediaries

Intermediaries played an important role in the promotion of trade. They helped the producers especially in foreign trade. They consist of commission agents, brokers and distributors for wholesale and retail of goods.

Transport

Transport by land and water was popular in the ancient times. Roads as a means of transportation had assumed key importance in the process of growth especially in inland trade.

The northern trade route from Bengal to Taxila was an example for the same.

Maritime trade was another important branch of global trade network. Muziris (ancient harbor) in Malabar Coast (near to the present-day Cochin) has a long history of international maritime trade.

Calicut was also an important market for Chinese to acquire items like frankincense, pepper (black gold), pearls, cotton etc.

Pulicat on Coromandel Coast (Tamil Nadu) was a major port in the 17th century. Textiles were the principal export item from Pulicat to Southeast Asia.

Trading Communities

Different trading communities strengthened in ancient India and they dominated trade in different parts of the country. Some of them are as follows:

Punjabi and Multani – Merchants in northern region

Bhats – Gujarat and Rajastan

Mahajan – Western India

Chatt – South India

Merchant Corporations

They were autonomous corporations (guilds) formed to protect the interests of the traders. These corporations were organised on formal basis, framed their own rules and code of conduct, which even kings were supposed to accept and respect. The guild chief directly dealt with the king or tax collectors and settled the market toll (tax) on behalf of its fellow merchants at a fixed sum of money.

Major Trade Centres

  1. Pataliputra – Patna in Bihar today. Commercial town and major centre for export of stones.
  2. Peshawar – City in Pakistan. Very popular for export of wool and for the import of horses. Major transactions between India, China and Rome in the first century.
  3. Taxila – City in Pakistan, also called Thakshashila. Popularly known as the city of financial and commercial banks.
  4. Indraprastha – Located in the region of present-day New Delhi. It was a commercial junction where most routes leading the east, west, south and north converged (joined).
  5. Mathura – City in UP. It was an emporium of trade and people here subsisted (lived) on commerce. Many routes from South India touched Mathura and Broach (Bharuch in Gujarat).

India begins to Reindustrialise

After independence, the process of rebuilding the Indian economy have been started. As a part of this the first five year plan was implemented in 1952. Due importance was given to the establishment of modern industries, modern technological and scientific institutes, space and nuclear programs.

To overcome the problems of lack of capital, rise in population, huge expenditure on defence, inadequate infrastructure etc. India relied heavily on borrowings from foreign sources and finally, agreed to economic liberalization in 1991.

The Indian economy is one of the fastest growing economies in the world today. The high growth sectors have been identified, which are likely to grow at a rapid pace and the recent initiatives of the Government of India such as ‘Make in India’, ‘Skill India’, ‘Digital India’, Foreign Trade Policy 2015-20 etc. is expected to help the economy in terms of exports and imports and trade balance.