O Level
Commerce
Mary Trigwell-Jones
CAMBRIDGE UNIVERSITY PRESS Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, SĂŁo Paulo, New Delhi Cambridge University Press c/o Cambridge University Press India Pvt. Ltd. Cambridge House 4381/4, Ansari Road, Daryaganj New Delhi 110002 India www.cambridge.org
Š Cambridge University Press, 2010
This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published, 2010 Printed at ... ISBN-13: 978-0-521-72793-8
paperback
Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this book, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.
Contents
Introduction Topic 1 Production Chapter 1 Chapter 2 Chapter 3 Chapter 4
The Chain of Production Specialisation and Division of Labour Commerce The Relationship between Industry, Commerce and Direct Services
vii 1 1 11 18 24
Topic 2 Retail Trade
32
Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9
32 39 60 75 85
The Role of Retailer in the Chain of Distribution Types of Retailers Selling Techniques and Trends in Retailing Home Shopping Large-scale Retailing
Topic 3 Consumer Credit
94
Chapter 10 Use of Credit Chapter 11 Types of Credit
94 99
Topic 4 Consumer Protection
118
Chapter 12 Safeguarding the Consumer Chapter 13 Methods of Safeguarding the Consumer
118 124
Topic 5 Wholesale Trade
134
Chapter 14 The Role of Wholesaler in the Chain of Distribution Chapter 15 Functions and Services of the Wholesaler Chapter 16 Intermediaries in the Wholesale Trade
134 143 149
iv O Level Commerce
Topic 6 Documents of Trade
157
Chapter 17 Documents of Home Trade Chapter 18 Terms of Payment
157 172
Topic 7 International Trade
181
Chapter Chapter Chapter Chapter Chapter
181 189 197 201 212
19 20 21 22 23
The Importance of International Trade Balance of Trade and Balance of Payments Customs Authorities Trading Blocs, Free Trade and Protectionism Difficulties faced by Exporters
Topic 8 Advertising
223
Chapter Chapter Chapter Chapter
223 233 256 262
24 25 26 27
The Role of Advertising Advertising Media Methods of Appeal Sales Promotion
Topic 9 Communications
273
Chapter 28 Importance of Communication in the Global Economy Chapter 29 Methods of Communication Chapter 30 Post Office and Telecoms
273 278 305
Topic 10 Transport
320
Chapter Chapter Chapter Chapter Chapter
320 349 358 370 376
31 32 33 34 35
Transportation Containerisation Trends in Transport Transport Documents International Transport – Ports and Airports
Topic 11 Warehousing
386
Chapter 36 Role of Warehousing Chapter 37 Types of Warehouses
386 391
Topic 12 Insurance
402
Chapter 38 Purposes of Insurance Chapter 39 Business and Personal Risks Chapter 40 Principles of Insurance
402 410 421
Contents v
Chapter 41 Effecting Insurance Cover and Making a Claim Chapter 42 The Statistical Basis of Insurance
428 440
Topic 13 Banking
453
Chapter Chapter Chapter Chapter
453 463 480 488
43 44 45 46
Banking Services Means of Payment for Home Trade Means of Payment for International Activities Trends in Banking
Topic 14 The Business Unit
503
Chapter Chapter Chapter Chapter Chapter
503 513 519 536 544
47 48 49 50 51
Location of a Business Public and Private Sector Main Forms of Business Organisation in the Private Sector Franchises Multinationals
Topic 15 Business Finance
558
Chapter 52 Sources of Finance (Long-term) Chapter 53 Sources of Finance (Short-term, Medium-term and Methods of Self Financing) Chapter 54 Business Finance Chapter 55 Methods of Improving Turnover and Profit
558 570 581 603
Topic 16 Organisation Charts, Functions and Documents used within a Business (for commercial studies only)
613
Chapter 56 Organisation Charts Chapter 57 Functions and Responsibilities of Personnel Chapter 58 Main Documents used in Communication
613 622 636
Keys to Examination Success in Commerce
648
Resource Materials
649
Glossary
650
Answers to Short Answer Questions and Multiple Choice Questions
671
Index
697
Introduction O Level Commerce is specifically written for international students studying for the Cambridge International Examinations (CIE) O Level Commerce syllabus, 7100/1 and 7100/2. This book would also be useful for students taking CIE’s O Level Commercial Studies Examination as well as other public examinations in Commerce. The contents of the book follow the latest examination syllabus. The book is broken down into 15 topic areas with an additional section to cover the functions and responsibilities within a business and organisation charts from the Commercial Studies syllabus. At the end of the chapters within each topic area, there are Practice Questions containing short answer questions, multiple choice questions and some questions requiring longer answers. Some of these questions are taken from CIE O Level past examination papers. There is also a summary of key facts at the end of each chapter called Points to Remember to enable students to revise the important points of the chapter. At the end of each topic, two Past Examination Questions with Model Answers are provided. Comment is also made on the Common Learner Errors that have been found by examiners in past examination responses. In addition, there are suggestions for activities relating to the topic as a whole. The Glossary at the end of the book provides a quick reference for students to aid their revision of commercial terms and concepts. Additional sections on study skills and examination technique are provided. These aim to provide suggestions for students to enhance their revision at the end of the course and to give them more confidence in their approach to the final examinations. The O Level Commerce examination consists of two papers. Paper 1 consists of 40 multiple choice questions covering the whole syllabus. Paper 2 consists of eight longer questions, either data response or structured from which candidates must select four questions to answer. This Commerce syllabus aims to provide an outline of commercial activities and how these activities are influenced by changes in the commercial environment. Candidates are expected to appreciate how commercial activities affect the consumer, the producer, the retailer and the wholesaler involved in home and international trade. They are also expected to recognise how the development of Information Technology has made an impact on
viii O Level Commerce
commercial activities and be aware of the significance of innovation and change on these activities. In the examination, candidates will be tested on their knowledge and understanding of basic commercial principles, techniques, facts, terms as well as commercial documents and the main functions and features of commercial activities. Candidates will be expected to apply commercial principles and ideas to given situations and to use relevant data in written, numerical and diagrammatical form. Candidates will also be asked to analyse problems and to identify and select significant issues in a commercial situation. They will be expected to evaluate problems, to make judgements and to give reasoned opinion. In each question in Paper 2, there will be some marks allocated for each of the four assessment objectives. Some of the answers are marked by rewarding points made with allocated marks. Other answers, usually in response to questions with large mark allocations and requiring analysis and reasoned opinion, are marked according to a ‘Levels of Response’ mark scheme. Levels of Response marking seeks to reward the quality of the answer rather than the quantity of the answer. The candidate who discusses one issue is likely to gain higher marks than the candidate who lists several facts. The CIE O Level syllabus aims to respond to the international make-up of the candidature for the examination which is taken by candidates in over 25 different countries. Credit is always given for answers which contain examples relating to the country of the candidate. This textbook attempts to reflect the international nature of the syllabus by using examples and material from many parts of the world (not just the UK). This textbook can be used in conjunction with the other resource materials as well. A list of suggested resources is supplied at the end of the book. Much commercial activity surrounds us every day. It is important for every student of Commerce to keep his/her eyes and ears open and to be receptive to the changing commercial environment.
TOPIC 1: PRODUCTION
Chapter
1
The Chain of Production In this chapter you will cover: • the production of goods and services to satisfy human wants and needs • the process of production through secondary to tertiary production showing how value increases at each stage of production • the chain of production • extractive, manufacturing and construction industries and tertiary activities
Production What is Production? The definition in a dictionary says it is the act of producing, of making something that was not there before or was not in the same form. Economists might describe production as the ‘creation of utility’ i.e. making something useful such as clothing from something that was not so useful such as cotton fibre. Production can take many forms (Fig. 1.1). It is not just concerned with making goods but with producing services as well. These may be services which are provided directly to the person requiring them such as medical services or services which assist the production of goods such as the transport of goods from the manufacturer to the retailer. Production
Primary (extractive industries)
Secondary
Tertiary
Exhaustive or Non-exhaustive
Manufacturing or Construction or Processing
Commercial Services or Direct Services
Fig. 1.1 The branches of production
2 O Level Commerce
Production may also be divided into two branches – industry and services (Fig. 1.2). Production Industry Primary
Services Secondary
Commercial
Direct
Fig. 1.2 Production
Why does Production take place? Production of goods and services is necessary to satisfy people’s needs and wants. They need or want what is produced. If they do not demand a product, the production will stop. Everyone has some basic needs without which they would not be able to survive. For example, food to eat, shelter such as housing, water, clothing to protect themselves from either heat or cold etc. Once people have satisfied their basic needs, they begin to want other things to make life more pleasant as they do not need these things. They can survive without them. These wants make people more comfortable, more fashionable or give them a better quality of life. These wants may be material wants i.e. visible items such as domestic appliances like washing machines or microwaves, sports facilities, hotels for holidays, designer clothes, the latest computer and software etc. These wants may be immaterial wants i.e. services such as entertainment including films and television programmes, transport such as cars and taxis, medical care, communication such as the telephone or email, hairdressing, holidays etc. Some of these wants have become necessities for some people. A person may not be able to find a job without having to travel from home. Many people commute to work. They wish to live in the country but the well-paid jobs are in the city so they must use transport to travel daily to the city. Can you think of some other examples of people’s needs and wants? Production may also be divided into two other strands: • Direct production – when a person tries to provide all he needs by his own efforts. For example, an African farmer who has a small area of land and farms it to support his family. • Indirect production – most kinds of production – when a person concentrates on one occupation and produces a surplus. For example, a Canadian wheat farmer who trades his wheat for goods and services produced by other people. He will use money as a medium of exchange.
The Chain of Production 3
Branches of Production Primary Production This is the first stage in any production process. It is concerned with obtaining or extracting natural resources from the earth such as minerals, fuel, raw materials or food. These natural resources usually need some processing or manufacturing to convert them into a usable form. The amount of primary production in many developed countries is declining, e.g. farming in UK. Many developing countries rely on the income from primary industries to buy finished goods. Botswana’s economy is very dependent on its exports of beef and diamonds. Swaziland has huge areas of forest and an important timber and wood pulp industry. Here are some examples of primary industries and occupations in these industries: Primary industries
Occupations
Mining Prospecting Farming Forestry Fishing Quarrying
Coal miner Gold prospector Farmer Lumberjack Fisherman Stone blaster
Can you give some more examples of primary industries or occupations? Primary industries may be further divided into two kinds: • Exhaustive industries – those industries that take resources from nature and these resources are not replaced, e.g. mining, quarrying. • Non-exhaustive industries – those industries that take resources that are renewed from time to time, e.g. farming, fishing. Primary industries are dependent on geological and climatic conditions. Copper mining is important in Zambia because it has large deposits of copper. The Middle East countries have plenty of oil supplies. The climate in Malaysia is suitable for growing palms to produce palm oil. Secondary Production This second stage changes the raw materials into finished goods. Natural resources are taken from a primary producer and their form is changed using labour, machinery and technology. Manufacturing usually takes place in a factory. It may involve many processes, e.g. cutting, stitching, assembling, welding etc. The processes may take place in many different countries particularly if the manufacturer is a multinational company such as a car manufacturer. While this is happening, the value of the product is increasing as it is changed into more usable form.
4 O Level Commerce
Here are some examples of manufacturing industries and occupations in these industries: Manufacturing industries
Occupations
Steel making Cars Toys Furniture
Foundry-worker Mechanic Machinist Carpenter
Can you give some more examples of secondary industries or occupations? In many developed countries such as France and Germany, the amount of manufacturing industry is declining as developing countries such as India and Pakistan are developing their manufacturing industry. Also, China’s manufacturing industry is growing on a yearly basis. Secondary industry also includes construction – building or assembling manufactured parts into a final product. Here are some examples of construction industries and occupations in these industries: Construction industries
Occupations
House-building Shipbuilding Dock and harbour construction Road making
Bricklayer Welder Engineer Labourer
Can you give some more examples of construction industries or occupations? Secondary industry also includes processing – changing raw materials into semimanufactured goods. Here are some examples of processing industries and occupations in these industries: Processing industries
Occupations
Food Textiles Oil refining
Baker Weaver Engineee
Can you give some more examples of processing industries or occupations? Tertiary Production The third stage of production involves the provision of services. These may be of two general kinds: • Commercial or indirect services – These are concerned with assisting the distribution of the output from both primary and secondary production (see Chapter 4). These services change the location of the goods and make them more available to those who want them. In many European and North American countries the range of commercial services available, the number of people employed in them and the earning from these services has increased considerably in the last ten years.
The Chain of Production 5
•
Direct services – These services are of a personal nature and are given directly to the person receiving them. The people who provide them do not make goods. They give services to people to make them healthy, happy, safe and to amuse them. These services often help people to work more productively – a healthy person is likely to work harder than someone who is feeling unwell. Some examples of people who provide direct services are: teachers, accountants, lawyers, nurses, soldiers, police, dentists, actresses, footballers, writers, pop singers and hairdressers.
Can you give some more examples of people who provide direct services? The importance of this sector has increased in many parts of the world as people have become wealthier and have more leisure time. People nowadays spend more money on entertainment, education and alternative health services. It is sometimes difficult to distinguish between a commercial service and a direct service. An airline pilot provides a service. The airline pilot flying a passenger airline is performing a service directly for the people who are sitting in the aircraft. The airline pilot may, however, be flying an aircraft carrying only freight. He is then performing a commercial service because he is transporting goods. It is sometimes also difficult to decide the branch of production to which some of the occupations belong. A carpenter may have to fit a cupboard into a kitchen. As he is making the cupboard, he is involved in secondary production. He is also providing an individual service for his customer so it could be argued that he is giving a direct service to his customer. A farmer who grows crops but also owns and runs a farm shop is concerned first with primary production and then as a retailer with tertiary production. Producers and Consumers Producers provide goods and services to consumers. Consumers are the final users of goods and services. They buy goods or services to satisfy their needs and wants and not for resale. Without consumers there would be no need for production as it the consumer who buys the goods and services that are provided.
The Chain of Production The chain of production is the various stages through which the production of goods passes to reach the consumer. The three kinds of production are linked together in the production process. The chain of production begins with primary production and is not complete until the goods reach the consumer, as can be seen from Fig. 1.3. PRIMARY PRODUCTION OF RAW MATERIALS
services
SECONDARY PRODUCTION OF GOODS
services
WHOLESALER
services
Fig. 1.3 The chain of production
RETAILER
services
CONSUMER
6 O Level Commerce
The chain of production includes not only the industrial production but also the commercial services necessary to link production to the consumer. The relationship and interdependence between industry and these commercial services (commerce) is considered in Chapter 4. In order to understand the concept of the chain of production better, it would be useful to study the chain of production for a wooden chair (Fig. 1.4). The chain of production shown in the figure consists of several industrial processes and also commercial services such as transport and storage to link the producer to the final consumer. PRIMARY PRODUCTION Growing of trees, Felling of trees Stored to season the wood Transported to sawmill SECONDARY PRODUCTION a. IN SAWMILL Sawn into planks or suitable lengths, Transported to factory b. IN FACTORY OF FURNITURE MANUFACTURER Wood is turned for the legs, Seat and back are made, Parts are glued/screwed together, Chair is sanded and varnished Advertised Stored with other chairs Transported Communication with buyer TERTIARY PRODUCTION WHOLESALER AND/OR RETAILER Ready for sale Advertised for sale Transported to consumer Communication concerning order CONSUMER Who uses the chair at home
Fig. 1.4 Chain of production for a chair
The Chain of Production 7
Adding Value at Each Stage of Production Added value is the difference between the value of a firm’s output and the cost of the materials, components and services used to create it. Adding value focuses attention on the value that a company adds to the materials and services it has bought by its own production and marketing skills. Added value can be calculated as follows: Selling Price – Bought-in Materials and Services = Added Value As goods pass from one kind of production to another, they gain in value and their worth increases. The work carried out on them adds value to them. Commercial services are needed to move raw materials to factories and to move semi-finished goods to other factories. Storage, advertising, banking and insurance services are required by manufacturers, wholesalers and retailers, and all these services add value to the products being made for the consumer. This can be seen in the production of the chair as well. The chair is much more valuable than the wood it was made from. As the wood goes through the manufacturing process, its value increases. The timber in the sawmill is worth more than the trees in the forest. The parts of the chair are worth more than the planks of wood they are made from. The various commercial activities such as transportation, advertising and display in the shop, all add value to the chair. The customer will therefore pay more for the chair than for the lump of wood it came from. The retailer will increase the value of the chair as he will provide a local supply so that the consumer does not have to waste time looking for a chair. Timber
Adds value
Stored to mature
Adds value
Sawn into planks Adds value
Chair is varnished
Adds value
Chair is sanded
Adds value
Legs, seat and back made, Other materials added
Adds value Packaged to prevent damage
Advertised to consumer
Adds value
Adds value
May have a seat cushion
Transported to wholesaler/retailer
Adds value
May be branded Adds value
Adds value
Adds value Sold to consumer (Hence, value has increased) Fig. 1.5 Adding value to a chair
May be part of a set
8 O Level Commerce
Points to Remember • • • • • • • • • •
Production refers to providing goods and services to satisfy the human needs and wants. Human wants are the individual requirements to make life pleasant. Human needs are the necessities to maintain life. Primary production is concerned with extracting natural resources. Secondary production is concerned with manufacturing, assembling and processing products from raw materials. Tertiary production refers to the provision of commercial and direct services. Direct services is providing services directly and personally to the person needing them. Industry involves activities concerned with obtaining raw materials and changing into finished goods, e.g. primary, extractive, manufacturing and construction. Consumers are the users of goods or services. Added value is the difference between the value of a firm’s output and the materials and services bought to create it.
Practice Questions Short Answer Questions 1. Using examples, distinguish between the primary and secondary industry. (June 2003) 2. Why is construction a secondary industry? 3. What chain of production would be most suitable for a local fisherman who owns a small boat? 4. Which of the following is a service (S) and which is a good (G)? fixing a car engine reading news on television filling a tooth a set of chairs clay pots today’s newspaper serving a meal washing soap teaching children a bag of maize guarding a prisoner brading hair packet of biscuits a mechanical toy cooking oil acting in a play decorating a house repairing a shoe pet food bag of charcoal
The Chain of Production 9
5. The pictures show three stages of furniture production. Identify the three stages of production shown in A, B and C. Who is the person that you would expect to find at the end of the chain of production in D? Explain why this person is important. (adapted from Nov 2002) A
B
C
D
6. How does a person providing a direct service differ from one providing a commercial service? Multiple Choice Questions 1. What is the meaning of production? a. creation of utility b. exchange of goods and services c. extraction of raw materials d. manufacture of finished goods 2. The satisfaction of human wants and needs is best achieved when people: a. buy all they need b. produce goods and services c. produce all they want d. purchase goods on credit 3. Through what stages does a product add value? a. primary – secondary – tertiary b. primary – tertiary – secondary c. secondary – tertiary – primary d. tertiary – secondary – primary
10 O Level Commerce
4. Which industry is wrongly paired with its type of production? Industry Type of product primary a. farming b. car making secondary c. boat building primary d. banking tertiary 5. Which of the following would be regarded as secondary production? a. engineering b. farming c. insurance d. drilling 6. In which stage of production would a tractor be used? a. primary b. secondary c. tertiary d. direct service Essay and Long Answer Questions 1. Identify and explain the stages of production through which a wool jumper must pass before you can wear it. 2. What is shown in the picture given below? Into what kind of production would you classify the occupation? Give reasons for your answer.
3. ‘Consumers have many wants and needs which are satisfied by both home and international trade’. Explain, with examples, the meaning of this statement. (Nov 2005) 4. Show how commercial activities assist the satisfaction of human wants. (June 2000)