Chapter 1 Business, Trade and Commerce

Business is a major economic activity in all modern societies concerned as it is with the production and sale of goods and services required by people. The purpose behind most business activities is to earn money by meeting people’s demands for goods and services. The topics that are covered in this chapter are History of Trade and Commerce, Indigenous Banking system, Transport, Trading and communities strengthened, Concept of Business, Characteristics of Business Activities, Comparison of Business, Profession and Employment, Classification of Business Activities- Industry and Commerce, Objectives of Business and Nature of Business Risks.

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Exercise 1 ( Page No. : 26 )

  • Q1 List any five major commercial cities of ancient India?

    Commercial cities of Ancient India are:

    1. Pataliputra
    2. Peshawar
    3. Taxila
    4. Indraprastha
    5. Mithila

    Q2 What is Hundi?

    Hundi is an instrument of exchange, which was prominent in the subcontinent. It involved a contract which -

    • Warrant the payment of money, the promise or order which is unconditional.
    • Capable of change through transfer by valid negotiation.

    Q3 List the major exports and imports in ancient India.

    Major export items of India are spices, wheat, sugar, indigo, opium, sesame oil, cotton, parrot, live animals and animal products- hides, skin, furs, horns, tortoise shells, pearls, sapphires, quartz, crystal, lapis, lazuli, granites, turquoise and copper etc.

    And major imports items are horses, animal products, Chinese silk, flax and linen, wine, gold, silver, tin, copper, lead, rubies, coral, glass, amber, etc.

    Q4 What were the different types of Hundi in use by traders in ancient times?

    Different types of Hundi use by traders in ancient times are:

    1. Dhani-jog Darshani: Payable to any person- no liability over who received payment.
    2. Sah-jog Darshani: Payable to a specific person, someone ‘respectable’. Liability over who received payment.
    3. Firman-jog Darshani: Hundi made payable to order.
    4. Dekhan-har Darshani: Payable to the presenter or bearer.
    5. Dhani-jog Muddati: Payable to any person- no liability over who received payment, but payment over a fixed term.
    6. Firman-jog Muddati: Hundi made payable to order following a fixed term.
    7. Jokhmi Muddati: Drawn against dispatched goods. If goods lost in transit, the drawer or holder bears the coasts, and the Drawee carries no liability.

    Q5 What do you understand by maritime trade?

    The trades which involve the transportation of goods over the water are known as maritime trade. Maritime transportation is exploring over the sea, ocean, lakes or rivers by boat, ship or barge.

    Q6 State the different types of economic activities.

    Different types of economic activities are:

    1. Business: Business is an human activity directed towards the acquisition of wealth through the production and exchange of goods and services. Business is an institution organised and operated to provide goods and services to society under the incentive of private gain.
    2. Profession: Profession is an occupation involving the provision of personal services of a specialised and expert nature. Example: Lawyer, doctor. Minimum educational qualification is required to practice a profession.
    3. Employment: It involves working under a contract of employment for or under someone known as the employer in return for wages or salary.

    Q7 Why is business considered as economic activity?

    Business is considered an economic activity because it has got the following features:

    1. Profit Motive: Business means production, purchase and sale of goods with profit motive. Earning profit for satisfying needs make the business an economic activity.

    2. Business activities require use of scarce resources: To run business concern the owner must have adequate capital, raw materials and skilled workers. Business requires sufficient funds to be invested in it. All these activities involve monetary transactions. So business is an economic activity.

    3. Satisfying human wants: business is a source of income for businessmen and their families. Business can, therefore, be regarded as an economic activity not only as a means of earning income by businessmen but also as a means of satisfying the wants of people.

    Q8 State the meaning of business.

    The term business is derived from the word ‘busy’. Thus, business means being busy. However, in a specific sense business refers to any occupation in which people regularly engage in activities with a view to earning profit.

    Q9 How would you classify business activities?

    Business activities are classified into two categories:

    1. Industry: Industry refers to economic activities, which are connected with conversion of resources into useful goods. The term industry is used for activities in which mechanical appliances and technical skills are involved. This includes activities relating to producing or processing of goods as well as breeding and raising animals.

    2. Commerce: Commerce includes two types of activities that are: (i) trade and, (ii) auxiliaries to trade. Buying and selling of goods is termed as trade. But there are lots of activities that are required to facilitate the purchase and sale of goods. These are called services or auxiliaries to trade and include transport, banking insurance, communication, advertisement, packaging and warehousing.

    Q10 What are the various types of industries?

    Various types of industries are:

    1. Primary Industries: It includes all those activities, which are concerned with the extraction and production of natural resources and reproduction and development of living organisms, plants etc. these industries may be further sub-divided as follow:

            a. Extractive industries.
            b. Genetic industries.

    2. Secondary Industries: They are concerned with using the materials which have already been extracted at the primary industry but manufacture of steel is secondary industry. Secondary industries may be further divided as follows:

    • Manufacturing Industries: They are further divided into:

      a. Analytical industry,
      b. Synthetical industry,
      c. Processing industry
      d. Assembling industry.

    • Construction Industries.                

    3. Tertiary Industries: They are concerned with providing support services to primary and secondary industries as well as activities relating to trade.

    Q11 Explain any two business activities which are auxiliaries to trade.

    Activities which are meant for assisting trade are known as auxiliaries to trade. Two business activities which are auxiliaries to trade are:

    1. Transport and communication: Production of goods generally takes place in particular locations but these goods are required for consumption in different parts of the country. Transportation helps in movement of raw material to the place of production and the finished goods from factories to the place of consumption. In order to facilitate information exchange among producers, traders and consumers, communication is required.
    2. Insurance: The other name of business is risk. Business involves various types of risks like natural risk, environmental risk, etc. insurance provides protection against such types or risk.

    Q12 What is the role of profit in business?

    The roles of profit in business are:

    • Means of livelihood for businessmen.
    • Sources of funds for business growth.
    • Index of performance.
    • Reward for risk taking.
    • Provides better employee remuneration and amenities.
    • Better working conditions.

    Q13 What is business risk? What is its nature?

    Risk implies uncertainty of profits or danger of loss due to the chance of loss due to some unforeseen events in future. It refers to the chance of loss on account of unfavourable or unpredictable happenings. Risk is the possibility of loss arising out of future uncertainties. Risk occurs when there is an adverse deviation from desired or expected outcome. According to wheeler, risk is the chance of loss. It is the possibility of some unfavourable occurrence.

    In every risk, there exists a possibility of loss which may or may not be measurable. The person or organisation exposed to the risk may or may not be aware of the possibility of loss. Every risk arises from a ‘peril’ or contingency and it is magnified by a ‘hazard’. A peril creates the risk while a hazard influences the degree of risk. For instance, fire is a peril which creates a chance of loss. For example, the petrol stored in a building is the hazard which increases the possibility of loss.

    Nature of business risk:

    a. Business risks arise due to uncertainties.
    b. Risk is an essential part of every business.
    c. Degree of risk depends upon the nature and size of business. d. Profit is the reward of risk taking.

Exercise 2 ( Page No. : 26 )

  • Q1 Discuss the development of indigenous banking system in Indian subcontinent.

    Following are the points which highlight the development of indigenous banking system in Indian Subcontinent:

    1. Metal as money: As economic life progressed, metals began to supplement other commodities as money because of its durability and divisibility. As money served as a medium of exchange, the introduction of metallic money and its use accelerated economic activities.

    2. Use of Hundi and Chitti: 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, which was prominent in the subcontinent. It involved a contract which-
    (i)  Warrant the payment of money, the promise or order which is unconditional.
    (ii)  Capable of change through transfer by valid negotiation.

    3. Development of banks: 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 banker or Seths, and money became an instrument for supplying with a means of producing more goods.

    4. Agriculture and livelihood opportunities: Agriculture and the domestication of animals were important components of the economic life of ancient people. Due to the favourable climatic conditions they were able to raise two or sometimes three crops in a year. In addition to this, by resorting to weaving cotton, dyeing fabrics, making clay pots, utensils, and handicrafts, sculpting, cottage industries, masonry, manufacturing, transports etc, they were able to generate surpluses and saving for further investment.

    5. Role of intermediaries: Intermediaries played a prominent role in the promotion of trade. They provided considerable financial security to the manufacturers by assuming responsibility for the risks involved, especially in foreign trade. It comprised commission agents, brokers and distributors both for wholesale and retail goods. An expanding trade brought in huge amounts of silver bullion into Asia and a large share of that bullion gravitated towards India.

    6. Credit transactions: The emergence of credit transactions and availability of loans and advances enhanced commercial operations. The Indian subcontinent enjoyed the fruits of favourable balance of trade, where exports exceeded imports with large margins and the indigenous banking system benefitted the manufacturers, traders and merchants with additional capital funds for expansion and development. Commercial and Industrial banks to provide both short and long-term loans to finance agriculturists.

    Q2 Define business. Describe its important characteristics.

    Business refers to those economic activities which are connected with the production or purchase and sale of goods or supply of services with the main object of earning profit.

    Important characteristics of business are as under:

    1. An economic activity: Business is considered to be an economic activity because it is undertaken with the object of earning money or livelihood and not because of love, affection, sympathy or any other sentimental reasons.

    2. Production or procurement of goods and services: Before goods are offered to the people for consumption or use, they must be either produced or procured by the business enterprise. Thus every business enterprise either manufactures the goods it deals in or it acquires them from producers, to be further sold to consumers or users.

    3. Sale or exchange of goods and services for the satisfaction of human needs: Directly or indirectly, business involves transfer or exchange of goods and services for value. If goods are produced not for the purpose of sale but say for internal consumption, it cannot be called a business activity.

    4. Dealing in goods and services on a regular basis: Business involves dealings in goods or services on a regular basis. One single transaction of sale or purchase, therefore, does not constitute business.

    5. Profit earning: One of the main purpose of business is to earn income by way of profit. No business can survive for long without earning profit. That is why businessmen make all possible efforts to maximize profits, by increasing the volume of sales or reducing costs.

    6. Uncertainty of return: Uncertainty of return refers to the lack of knowledge relating to the amount of money that the business is going to earn in a given period. Every business invests money to run its activities with the objective of earning profit. But is not certain as to what amount of profit will be earned. Also, there is always a possibility of losses being incurred, in spite of the best efforts put into the business.

    7. Element of risk: Risk is the uncertainty associated with an exposure to loss. It is caused by some unfavourable or undesirable event. The risk are related with certain factors like changes in consumer tastes and fashions, changes in methods of production, strike or lockout in the work place, increased competition in the market, fire, theft accidents, natural calamities etc.

    Q3 Compare business with profession and employment.

    Business: It implies business or the state of being buys. Business means an enterprise engaged in the production and distribution of goods for sale in the market or rendering of services for a price.

    Profession: Profession is an occupation involving the provision of personal services of a specialized and expert nature.

    Employment: It involves working under contract of employment for or under someone known as the employer in return for wages or salary.

    Basis Business Profession Employment
    Mode of Establishment Promotes take decision, registration and other formalities as prescribed by law. Membership of a professional body or certificate. Service contact or letter of appointment.
    Nature of Work Goods and services provided to the public. Personalized. Performing work assigned by employer.
    Qualification No minimum qualification is essential. Specialized knowledge. As per service requirement.
    Basic Motive Earning profits by satisfying needs of society. Rendering services. Earning salary or wage by serving the employer.
    Capital Capital investment required as per size of the firm. United capital required. No capital required.
    Reward Profits. Professional fee. Salary or wages.
    Risk Profits are uncertain and irregular. Fees are regular and were negative. No risk.
    Transfer of Interest Transfer of interest is possible with some formalities. Not possible. Not transferable.

    Q4 Define Industry. Explain various types of industries giving examples.

    Industry refers to economic activities, which are connected with conversion of resources into useful goods. The term industry is used for activities in which mechanical appliances and technical skills are involved. These include activities relating to producing or processing of goods as well as breeding and raising animals.

    Different types of industries are as follows:

    1. Primary industry: Primary industry includes all those activities, which are connected with the extraction and production of natural resources and reproduction and development of living organisms, plants. These industries may be further sub-dived as follows:

      a. Extraction Industries: These industries extract or draw out products from natural sources. Extractive industries supply some basic raw materials that are mostly the products of the soil. Products of these industries are usually transformed into many other useful goods by manufacturing industries.

      b. Genetic Industries: The industries remain engaged in breeding plants and animals for their use in further reproduction. For the breeding of plants, the seeds and nursery companies are typical example of genetic industries.

    2. Secondary industries: Secondary industries are concerned with using the materials, which have already been extracted the primary stage. These industries process such materials to produce goods for final consumption or for further processing by other industrial units. Secondary industries may be further divided as follows:

      a. Manufacturing Industries: These industries are engaged in producing goods through process of raw materials and thus creating for utilities. Manufacturing industries may be further divided into four categories on the basis of method of operation for production: 
      i. Analytical industry: Analytical industry which analyses and separates different elements from the same materials, as in the case of oil refinery.
      ii. Synthetic industry: It combines various ingredients into a new product, as in the case of cement.
      iii. Processing industry: It involves successive stage for manufacturing finished products, as in the case of sugar and paper.
      iv. Assembling industry: It assembles different component parts to make a new product, as in the case of television, car, computer, etc.

      b. Construction Industries: These industries are involved in the construction of buildings, dams, bridges, cock, roads as well as tunnels and canals. Engineering and architectural skills are important part in the construction industries.

    3. Tertiary Industries: Tertiary industries are concerned with providing support services to primary and secondary industries as well as activities relating to trade. These industries provide service facilities. As business activities these may be considered as a part of commerce because as auxiliaries to trade they assist trade.

    Q5 Describe the activities relating to commerce.

    Activities relating to trade are summarized below :

    1. Transport and communication: Production of goods generally takes place in particular locations. For instance, tea is mainly produced is Assam; cotton in Gujarat and Maharashtra; jute in West Bengal and Orissa and so on. But these goods are required for consumption in different parts of the country. The obstacle of place is removed by transport- road, rail or coastal shipping. Transport facilitates movement of raw material to the place of production and the finished products from factories to the place of consumption. Along with the transport facility, there is also need for communication facilities so that producers, traders and consumers may exchange information with one another. Thus, postal services and telephone facilities may also be regarded as auxiliaries to business activities.

    2. Banking and Finance: Business activities cannot be undertaken unless funds are available for acquiring assets and meeting the day-to-day expenses. Necessary funds can be obtained by businessmen from bank. Thus, banking helps business activities to overcome the problem of finance. Commercial banks generally lend money by providing overdraft and cash credit facilities, loans and advances. Banks also undertake collection of cheques, remittance of funds to different place, and discounting of bills on behalf of traders.

    3. Insurance: Business involves various types of risks. Factory building, machinery, furniture etc. must be protected against fire, theft and other risks. Materials and goods held in stock or in transit are subject to the risk of loss or damage. Employees are also required to be protected against the risks of accident and occupational hazards. Insurance provides protection in all cases. On payment of a nominal premium, the amount of loss or damage and compensation for injury, if any, be recovered from the insurance company.

    4. Warehousing: Usually, goods are not sold or consumed immediately after production. They are held in stock to be available as and when required. Special arrangement must be made for storage of goods to prevent loss or damage. Warehousing helps business firms to overcome the problem of storage and facilities the availability of goods when needed.

    5. Advertising: Advertising is one of the most important methods of promoting the sale of products, particularly, the consumer’s goods like electric goods, automobiles, soaps etc. Most of these goods are manufactured and supplied in the market by numerous firms- big or small. It is practically impossible for producer and trader to contact each and every customer. Thus, for sales promotions, information must reach the potential buyers about the goods available it favours price etc. advertising helps in providing information about available goods and including customers to buy particular item.

    Q6 Explain any five objectives of business.

    Five objectives of business are:

    1. Market Standing: It refers to the position of business enterprise in the market with regard to its competitors. The business enterprises should work hard to maintain its position in the market.

    2. Innovation: If the business enterprise wants to win the confidence of customers and goodwill in the market, it has to adopt the concept of innovation. Innovation is the introduction of new ideas or methods in the way something is done or made. In business there are 2 kinds of innovations.

    • Innovation in product or service.
    • Innovation in the various skills and activities needed to supply them.

    3. Profitability: It refers to profit in relation to capital investment. Every business must maintain minimum level of profitability in order to survive in the business.

    4. Manager performance and development and worker performance and attitude: Manager Performance is an important parameter in the success of business. However, this is not possible without the efficient and positive performance of workers. Workers’ performance and attitudes determine their contributions towards productivity and profitability of any enterprise.

    5. 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.

    Q7 Explain the concept of business risk and its causes.

    Business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events. Causes of business risks are as given:

    1. Natural causes: Human beings have little control over natural calamities like flood, earthquake, lightning, heavy rains, famine, etc. they result in heavy loss of life, property and income of business.

    2. Human causes: Human causes include such unexpected events like dishonesty, carelessness or negligence of employees; stoppage of work due to power failure; strikes, riots; management inefficiency, etc.

    3. Economic causes: These includes uncertainties relating to demand for goods, competition, price, collection of dues from customers, change to technology or method of production, etc. Financial problems like rise in interest rate for borrowing, levy of higher taxes, etc. also come under this type of causes as they result in higher unexpected cost of operation of business.

    4. Other causes: These are unforeseen events like political disturbances, mechanical failures, such as the busting of boiler, fluctuations in exchange rates, etc. which lead to the possibility of business risks.

    Q8 What factors are to be considered while starting a business? Explain.

    The factors are to be considered while starting a business:

    1. Selection of line business: The first thing to be decided by any entrepreneur of a new business is the nature and type of to be undertaken. He will obviously like to enter that branch of industry and commerce, which has the possibility of greater amount of profit. The decision will be influenced by the customers’ requirement in the market and also the kind of technical knowledge and interest the entrepreneur has for producing a particular product.

    2. Size of the firm: Size of the firm or scale of its operation is another important decision to be taken at the start of the business. Some factors favour the large size whereas others tend to restrict the scale of operation. If the entrepreneur is confident that the demand of the proposed product is likely to be good over time and he can arrange the necessary capital for business, he will start the operation at a large scale. If the market conditions are uncertain and risks are high, a small size business would be better choice.

    3. Choice of form of ownership: In relation of ownership, the business origination may take the form of a sole proprietorship, partnership, or a joint stock company. Each form has its own merits and demerits. The choice of the suitable form of ownership will depend on such factors as the line of business, capital requirements, liability of ownership, division of profit, legal formalities, continuity of business, transferability of interest and so on.

    4. Location of business enterprise: An important factor to be considered at the start of the business the place where the enterprise will be located. Availability for raw materials and labour; power supply and services like banking, transportation, communication, warehousing etc. are important factors while making a location choice.

    5. Financing the proposition: Financing is concerned with providing the necessary capital for starting as well as continuing the proposed business. Capital is required for investment in fixed asset like land, building, machinery and equipments and in current assets like raw materials, book debts, stock of finished goods, etc. capital is also required for meeting day-to-day expenses. Proper financial planning must be done to determine (a) the requirements of capital, (b) source from which capital will be raised and (c) the best ways of utilizing the capital in the firm.

    6. Plant layout: Once the requirement of physical facilities has been determined, the entrepreneur should draw a layout plan showing the arrangement of these facilities. Layout mean the physical arrangement of everything needed to manufacture a product including machines, person, raw materials and finished goods.

    7. Competent and committed work force: Every enterprise needs competent and committed work force to perform various activities so that physical and financial resources are converted into desired outputs. Since no individual entrepreneur can do everything himself, he must identify the requirement of skilled and unskilled workers and managerial staff. Plans should also be made about how the employees will be trained and motivated to give their best performance.

    8. Tax planning: Tax planning has become necessary these days because a number tax laws in the country influence almost every aspect of the functioning of modern business. The founder the business has to consider in advance the tax liability under various tax laws and its impact on business decisions.

    9. Launching the enterprise: After the decisions relating the above mentioned factors been taken, the entrepreneur can go ahead with actual launching of the enterprise which would mean mobilizing various resources, fulfilling necessary legal formalities, starting the production process and initiating the sale promotion campaign.