Advanced Certificate in International Trade Syllabus Unit 1

THE BUSINESS ENVIRONMENT

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Introduction
This module has been designed to provide a broad knowledge and understanding of the conditions under which international traders must operate their business and how business is affected by changes in the political, economic, social, and technological environment both nationally and internationally. Students will also be provided with a basic knowledge of the law relating to international trade with a focus on the law of contract, sale of goods and agency law LEARNING OUTCOMES On completion of this module the successful student will be able to: Categorise different types of economy and the structure of industry in the UK Explain how the structure of UK industry has changed and the effects of this on the international trade of the UK; Identify how competitors and suppliers activities affect market structures Describe the workings of the business cycle, the operation of the multiplier and accelerator processes and the effects of inflation and deflation on the economy; List the reasons for international trade and be able to describe the conditions under which international trade occurs; Contrast developing and developed economies with particular reference to international trade; List the main trading blocs, the differences between types and the reasons for their formation Tabulate the advantages and disadvantages of trading blocs Identify the sources and types of law Describe the types of contract and outline the features of a valid simple contract and its terms; Distinguish between international, consumer and other sales and the relevant legislation and decisions dealing with the sale of goods. Describe the various forms of agency used in international trade and the contractual implications to both parties

The course comprises four modules, each of which are divided into mini-modules. By working conscientiously through these mini-modules you will cover the relevant syllabus topics and will gradually become familiar with current examination requirements. A template Study Planner for the course will be provided for you by the Institute. Agree a pace at which to work through the mini modules and attempt the assignments. Fill in your Study Planner bearing in mind the study hours recommended. Refer to the Professional Qualifications Education Handbook provided with the material. A guide of 68 hours per module is given as per Page 4 Studying the Professional Qualifications. Taking ownership of your time and filling in your Study Planner is designed to help you prepare yourself for target Assessment dates that suit your requirements and once planned you should do everything possible to keep to the programme.

Self-Assessment Questions At the end of most mini-modules there are a list of short, sharp questions that are designed to test your knowledge of the material contained within that mini-module. Although brief answers are provided, it is intended that you should answer the question without referral to the suggested answer given or the course content. Once you have written an answer then you can compare it with the answer supplied. This is good practice for when you have to do test papers. Should you find that your answer does not come close to the answer supplied, and then go through the whole mini-module again, before attempting the answer again. Homework Assignments From time to time as you progress through your course you will be required to attempt Assignments. It is advisable to revise the complete mini-modules leading to the Assignment and that you should attempt the questions under conditions which reflect the Assessment. It is important that you make a thorough effort in completing these questions. Homework Assignments are preparation for the Final Assessments. Homework is an opportunity to develop skills in structuring your answers. It may be advisable to attempt the further research suggested throughout the text, and in answering an assignment put together a Bibliography using the Harvard Referencing System. You should submit your completed Assignments to the relevant tutor for marking, comment and guidance. Your tutor will send your marked Assignment to the Institute where it will be recorded and returned to you with, where appropriate, a specimen answer. On receipt of this material read the Assignment questions again and then go through your answer to each question taking particular note of the comments made by your tutor. It is extremely important to take heed of your tutors comments regarding your performance and progress and any weaknesses you may have demonstrated. The aim of your tutor is to help to confidently prepare you for when you enter the Assessments. Where specimen answers are provided you should use this additional material and it would be a useful exercise to self-mark your answers against these and identify your strengths and weaknesses in order for you to develop your knowledge and understanding for the Assessment. Reading List There are a number of publications which the Institute has recommended and details of these are available on the Institute Website, under Education Advanced Certificate in International Trade - Recommended Reading List. In addition to this list, there may be occasions when your tutor may recommend other publications which they think could be beneficial to your studies.

Institute of Export
ADVANCED CERTIFICATE IN INTERNATIONAL TRADE SYLLABUS UNIT 1

T H E B U S I N E S S E N V I R O N ME N T

Module A : The UK Economy and the Organisation

Module B: Economic Environment of the Organisation

Module C: The International Trade Environment

Module D: The Legal Environment

Key Supplementary Learning is also available to support student knowledge and refer to key pieces of current practice in the particular area of Trade

Module A - The UK Economy & the Organisation

Module A contains 7 mini-modules on:

A1 - TYPES OF ECONOMIES ......................................................................................... 7 A2 - PRIMARY, SECONDARY, TERTIARY AND QUARTANERY INDUSTRIES ........................ 22 A3 - STRUCTURAL CHANGE IN THE UK ....................................................................... 28 A4 - THE BROAD AIMS OF BUSINESS ORGANISATIONS ............................................... 300 Homework assignment one. A5 - BUSINESS GROWTH, ORGANIC OR BY MERGERS AND ACQUISITIONS ..................... 33 A6 - THE DEVELOPMENT OF LARGE-SCALE ENTERPRISES & MNCS.. .... . Homework assignment two. ...42

A1 - Types of economies
Introduction In order to live, human beings participate in activities designed to provide for their everyday needs. We do this by producing, distributing and then exchanging things - we are all involved in economics, even if our contribution is in the work or services that we provide for others. This activity enables us to earn the means by which we can take a full part in the economy by exchanging our earnings for other goods. No economy can avoid being affected by the political world in which it operates. A countrys history, as well as the political system, to a great extent determines the type of national economy: in democratic countries the likelihood is that free enterprise exists and hence free or market economies. Individuals and private firms make their own decisions regarding production and consumption. Firms produce the commodities that yield the greatest profits, and use the most efficient means of production. It is the consumer who has the choice about what to spend their money on. In a pure" market economy there is no Government intervention at all. It has certain features: private enterprise, freedom of choice and competition. True market economies are rare as the Government takes some part in the economic process in most countries. The closest to a free market economy in the world today is the USA. Other names for market economies, are free enterprise, Laissez-faire or capitalist economies. at the other end of the spectrum there is the command or planned economy which is when the use of the resources ( land, labour, capital and enterprise - the four main factors of production) are planned by the Government or state. The two central features of a planned economy are that the resources are owned by the state, and the production of goods and services is determined by the state. Alternative names for such an economy are controlled or command economy. True planned economies are becoming fewer. Many of the older, so called, Iron Curtain countries now have mixed or free economies, and indeed are members of the European Union (EU).

The former countries in the Russian Federation are moving towards a market economy as is China. Even Cuba, which once had a very rigid form of planning, is now moving towards the mixed form. In the current world economy only North Korea could be considered to be truly a full command economy. In a true command economy, the government makes all the decisions about what to produce. It owns most of the means of production, it is the employer of most workers, and determines their wages. in most countries there is a mixture of market and command economies with some centrally controlled industries existing alongside other free enterprise industries. This is usually called a mixed economy, for example the type found in the UK, France, Italy, and Germany. Whilst most decisions are taken by the market, the government plays an important monitoring and controlling function. It sets laws that regulate economic procedures; it supplies many public goods such as education, health and police, and owns or regulates many aspects of life such as communications, monopoly commerce, and the environment. As with most things in life neither of the first two categories exists very often in anything close to a perfect form. A mixed economy is the dominant form of economic organisation. The mixed economy relies on the price system as the primary form of economic organisation, but uses a variety of government interventions such as taxes, spending to handle any macro-economic instability and market failures, and direct regulation. In most mixed economies there will be found examples of Government ownership. This is usually of major public goods and, depending on how these are defined in the country concerned this can include such things as transport, communication, health services, education, police, and even important production industries such as oil, coal, gas, motor vehicles, aircraft, and electricity.

In the UK some of these industries such as transport, gas, telecoms and electricity were privatised in the later part of the 20th century. In other countries they remain nationalised owned by the government

Public & Private Goods There is considerable controversy on the subject of what, exactly, constitutes a "public good". Economic theory in the late 1920s and 1930s argued that there were certain goods which could be supplied more efficiently if they were supplied under monopoly conditions by the State itself. The argument is that "goods" such as health and education can be provided with the most efficient use of resources if provided by the State. The State is also able to price such goods so as to combine economic efficiency with social redistribution (i.e. poorer members of society can be provided with the good at a highly subsidised price - or completely "free of charge"). It was this thinking which was also used to justify the extensive rounds of nationalisation in the UK which followed the Second World War. It was argued that goods such as electricity, gas, steel, coal, transport, and so on could be more efficiently provided by State-owned monopolies. Economists who believe that they are able to identify "public goods" also believe that they are able to demonstrate "inefficiencies" in the supply of these goods if left in private hands. These inefficiencies include duplication of plant and facilities, "wasteful" competition, and prices which are higher than they need to be due to the need to provide shareholders with a "profit". In the UK in the 1980s the suppliers of most so-called "public goods" were sold back into private ownership for precisely the same reason that they were originally taken into public ownership efficiency. Goods such as telecommunications, coal, electricity, water and transport were sold off because economists argued that their supply by State monopolies created significant inefficiencies and that private companies would, because they are in a competitive situation, supply them more efficiently and at a lower cost to the consumer. It is worth remembering that "cost to the consumer" for a private good (one provided by a privately owned organisation) is almost always equivalent to the price on the label or bill. The "cost to the consumer" for public goods is much more difficult to establish. At its simplest, however, it takes in both the price on the label or bill AND any Government subsidy which has been necessary. The cost of a medical prescription, for example, consists of the fee (if any) paid to the chemist who makes it up PLUS the relevant part of the tax-payer's subsidy for the National Health Service. The objectives of individuals generally are to be able to live and work in an economic framework which provides stability of prices, employment and a rising standard of living. Politicians realise the importance of delivering these aspirations, and hence their economic targets at the macro-economic level have been: full employment (defined in terms of a given percentage of unemployment)

price stability (defined in terms of a given percentage of price inflation) rapid economic growth - usually defined by a given percentage growth of Gross Domestic Product (GDP) long-term equilibrium in the balance of payments (over the longer term achieving a broad balance between owing the rest of the world money and being owed money)

Definition of Macro-Economics: Study of the behaviour of whole economies or economic systems, instead of the behaviour of individuals, individual firms, or markets(which is the domain of Microeconomics) The mixed economy and the UK The UK has is a mixed economy - making use of elements of both free capitalism and command. Generally the main emphasis has been on the capitalist approach. The Government is now directly responsible through the civil service, local government and the remnants of nationalised industries for less than 15% of total production. The rest of the economy works to the capitalist system (note, however, that, even here, the Government can regulate the activities of the market), for example in the financial services sector where regulation is in place to avoid anti-competitive practices and support the consumer. The Conservative Party has traditionally been the defender of a non-interventionist approach in the economy, and Thatcher Governments of the 1979-90 period experimented with a radical free market approach. The New Labour Government of Blair, followed by Gordon Brown did not return to the more collectivist (i.e. command with State ownership) view of the role of the Government in the economy held by the traditional Labour Party. Today the coalition government of the Conservatives and Liberal Democrats follows a free market approach, but with regulation to support businesses, and the consumer. Generally the economic policy followed by recent British Governments has pursued the following objectives: to ensure production of goods and services that are not sufficiently provided for by private enterprise to offer consumers and workers protection from the operations of powerful interests to address the issue of inequalities in the distribution of wealth thus ensuring both a minimum standard of life and equality of opportunity

to take over the production of certain goods and services because they can be run more efficiently by the resources of the state e.g. roads and health to modify the full operation of the price system so as to avoid or address shortages such as in housing to overcome frictions that hinder the efficient operation of the economy such as mobility of labour to regulate the economy so as to encourage employment, for example through job creation schemes, apprenticeships and Regional developments to oversee the development of the regions and to use regional policy to try to overcome regional inequalities (i.e. different levels of unemployment) to maintain a stable level of prices and thus avoid inflation - stable prices have always been seen as an ideal, and one of the primary Government economic policies. Factors such as high commodity prices such as Oil and the cost of food has increased UK inflation (to over 3%), and inflation in a lot of countries around the world to ensure steady economic growth - generally the UK has seen rising standards of living until 2007 onwards when the impacts of the economic crisis have resulted in periods of slow economic growth, and even recession, impacting living standards to improve the balance of payments so as to strengthen foreign reserves and enable the repayment of foreign debts to take place. In the UK and the United States, for example, this policy has proved very difficult to achieve as foreign imports continually exceed exports, with high imports in the likes of textiles, food and drink. The relative decline in UK manufacturing has also impacted the volume of exported goods

Of these objectives the three receiving most attention have been: targets for employment targets for inflation targets for economic growth

Most governments have failed to achieve targets at the same time for these three elements of the mixed economy at the same time. Whatever government there has been they have intervened in the economy to some degree, for example when investigating monopolies and mergers, or less directly when a redistribution of wealth is attempted through fiscal measures such as taxation policy with higher earners paying higher taxes, with

higher thresholds before paying tax for lower earners. Several forms of government intervention exist. The policy instruments available to UK governments are: fiscal policy (e.g. taxation) monetary policy (e.g. raising or reducing interest rates, with the latter a more recent feature of government policy, holding UK interest rates at historic levels of 0.50% in order to try to stimulate growth in the economy) prices and incomes policy instruments designed to tackle the balance of payments such as exchange controls or import controls. In developed countries of the world it would not be appropriate to introduce such policies. The UK is also part of the European Union prohibiting such policies within members countries

Fiscal Policy The government can vary the level of taxation and deficits (in the budget) financed by long and short term borrowing. Successive governments have had to face the problems associated with such measures. Taxes can be set but the exact amounts they raise are difficult to accurately forecast. This is partly because the taxes can, themselves, affect the revenue raised. Putting up income tax may be predicted to raise a certain amount. However, by putting the tax up the Government may discourage certain people to work at all thereby not only reducing the numbers of people who pay income tax but also raising the amount they have to spend on unemployment benefit. There are time lags between policy and consequences. A government that aims to raise spending during a recession cannot be sure that the full effects of the decision will be seen for a long period of time (by which time different conditions may prevail). Monetary Policy This aims to influence monetary variables such as the rate of interest and the money supply (i.e. the amount of money flowing in the economy). The rate of interest determines the cost of borrowing, which influences long-term investment decisions for business, and short-term borrowing to deal with cash-flow problems. Such rates influence consumer behaviour if they have mortgages or are purchasing goods on credit. Similarly the

decision to save or spend money will be influenced by the rate of interest paid on spending and saving. Recent economic policy Pre-1979 The immediate post-war period saw a commitment to high and stable levels of employment. A Keynesian approach was adopted with fiscal policies increased government spending, and taxation controls, accompanied by relaxed credit. These had the desired effect on employment but led to balance of payment problems as imports rose. Given the reluctance to use tariffs the government had to deflate aggregate demand which then resulted in higher unemployment. A prices and incomes policy was also used. This led to a stop-go economic cycle which adversely affected long-term economic growth. There was a move away from this adoption of a finetuning approach, where policy instruments were adjusted in order to achieve policy objectives. By the late 1970s the relative decline of the UK compared with our European competitors was becoming very clear. While countries such as France, Italy and Germany had achieved consistent growth and considerable stability the UK economy had swung wildly between short periods of very rapid growth and longer periods of stagnant or poor growth. Post-1979 The last years of the 1970s saw a Labour Government grappling with severe economic difficulties exacerbated by full-scale union action to protect members. For the first time since 1945 a UK Government saw BOTH unemployment and inflation getting out of control. Wages policies did not seem to help and the interaction of a multitude of macro-economic approaches was only producing severe confusion as to what policy was working and what was not. The first Thatcher Government in 1979 began the process of recovery. Mrs Thatcher firmly believed that macro-economic policies had been shown to be ineffective and that a new direction was needed. This placed less emphasis on the demand side of the economy and more emphasis on money and the supply side. These new approaches generally agreed that any economy is basically stable and does not need fine-tuning through government intervention. The monetarists believed that a set of rules for taxation, for money growth etc., should be established and followed. The fundamental tenet was that if the money supply is increased then it is prices (inflation) that are affected. Output

and employment will respond more to micro-economic factors which are influenced by measures designed to improve market efficiency or increase the supply of factors of production. The rate of monetary expansion is crucial and becomes the proxy for the target value of inflation. The target is now set in terms of the value of the instrumental variable (the money supply) rather than in terms of the objective (inflation). Finetuning interventions are not required and are usually seen as detrimental. Other rules that monetarists are committed to are: budget should be balanced - which allows for more freedom regarding the rate of money supply growth government expenditure should be as low as possible to keep taxation revenues low so as not to distort market prices public enterprise such as nationalisation should be privatised, so that government intervention should be minimised and market prices prevail a freely fluctuating exchange rate to ensure competition while protecting the balance of payments

Monetarists believe that output and employment are supply determined rather than the Keynesian belief that they are demand determined. 2000-2012 From Boom To Bust On the 5 May 2005 the Labour government achieved a first in its history: a third consecutive term in government following its first victory in 1997. Over that period UK had benefited from balanced economy with low inflation, relatively low unemployment and acceptable growth rates. Much of this has been attributed to the prudence of Chancellor Brown and the fact the Bank of England were given total control over interest rates with a remit to meet target inflation rates of no more than 2.5%, at which they had been successful. The success of the UK, and other economies, was to an extent built on a growing level of credit provided by banks to consumers, businesses and even governments and government organisations. These were supported by loose lending terms, with governments at the same time taking on higher level of debt to fund increased government spending on infrastructure and its people. This led to the start of the global economic crisis which is described in more detail in the Key Supplementary Learning Material.

What is "money?

Money can be more or less "liquid". At its simplest - as cash - money can be spent very easily. It is extremely "liquid" because a coin or note can be exchanged for goods or services without any other transfers taking place. There are many other forms of money, however, many of which are a lot less "liquid". They are still "money" - it is just that they can take several intervening steps before they can be spent on real goods and services. If a person owns property - a house or some land - that asset represents money. It is very "illiquid" because it may take a long time for it to be sold and translated into cash but it still represents spending power. The price of property can also go up, and down, resulting in a moving asset in terms of monetary value (see chart below). Between cash and very illiquid money there are a whole range of types of money which have varying degrees of liquidity (see chart). Governments are very interested in how much money is travelling round any given economy and how much is in relatively liquid forms and, therefore, able to be injected into spending at relatively short notice. For this reason economists have invented a variety of measures of "money supply"

The Liquidity of Money: Examples very liquid: cash, credit cards, cheques, deposit accounts, building society current (on demand) accounts moderately liquid: time deposits at bank for example a deposit maturing in 90 days, Bills of Exchange, shares (equities) illiquid: bonds, land, buildings, physical property. Measurement of Money

Governments now have several different measures of money supply ranging from cash and credit which can be applied to spending immediately, to measures of longer term money and the amounts which might be sucked in from abroad following any change of policy

From any Government's point of view, the state of the economy depends a great deal on the amount of "money" that is in circulation. -Too much money chasing too few goods and services can lead very quickly to rapid inflation, as the seller in a stronger position increases their prices. -Similarly, but equally problematic, too little money and a rapid expansion in the production of goods and services can lead to deflation, as the seller reduces prices in order to sell their goods and services. Good economic management attempts to avoid even moderate rates of inflation or deflation. In order to achieve this, of course, the Government needs to know how much money is around (in circulation) at any one time.

The measures it uses are known as "monetary aggregates". A very technical term for a relatively simple concept - each measure simply adds up a different definition of what constitutes "money". In this way the Government can have a very good idea not only of the very liquid money in circulation but also the level of "potential" spending which might be available from the conversion of relatively illiquid money. There are many measures but some of the most important are: M0 - this consists of just all the notes and coins in circulation plus the banks' deposits with the Bank of England. It is called a "narrow" definition of money. M1 Bank reserves are not included in M1 M2 represents money and close substitutes for money - all notes and coins held outside the banks plus Sterling retail deposits (ie bank accounts on short term deposit).

Prices and Income Policies Controlling (or attempting to control) prices and incomes is an attempt to control inflation. Many attempts by the UK Government to do this have produced at best partial success. Part of the difficulty in such policies lies in the virtual impossibility of achieving control. While wage policies can, in theory, control many forms of inflation, it is impossible in practice, to achieve full control. Wage restraint tends to fall mainly on the public sector and is notoriously difficult to achieve in the private sector. Price policies, also, can work quite well where Governments directly control large sections of the economy through public ownership of railways, airlines, telephone companies, and such like. In modern Britain, where public ownership is not as common as in other countries, the policy is harder to maintain however.

Instruments Designed to tackle the balance of payments The Exchange Rate This is used, in theory, to control the balance of payments (i.e. the difference between what we sell to the rest of the world and what we buy from it). Stability of the exchange rate was a Government objective

until the early seventies, as the UK was committed to maintaining a fixed exchange rate, like a lot of the larger economic countries. Since the 1970s the UK and most countries of the developed world have by and large maintained a floating exchange rate policy, allowing their currencies to float freely against other currencies. In this instances it is economic factors which influence the value of a currency, such as; o The level of interest rates o The level of government borrowing o The balance of payments surplus or deficit Any change in the exchange rate will affect the relative prices of domestic and foreign produced goods and services. A weakening in the value of a currency will make UK goods cheaper abroad and encourages exports. However, imported raw materials and foodstuffs will be more expensive and will adversely affect the domestic cost of goods and production costs for UK businesses who import.

(This subject is covered in more detail in Module B of "Finance of International Trade", referring to the relative weaknesses of the Pound against the Euro and certain other mainstream currencies).

Import Controls Another instrument that can be used to affect the balance of payments, but little used in the UK since the Second World War. The General Agreement on Tariffs and Trade (GATT) began a reduction in import tariffs generally throughout the world. GATT was replaced by the "World Trade Organisation (WTO) in 1992.

SUMMARY: POTENTIAL IMPACTS ON A BUSINESS The Theory

Impact on Business (Good o High Inflation -higher wages to employees -higher prices to customers -higher supply costs o High Business Taxation -more tax paid on profits -less money to invest in the business o Weak Exchange Rate Exports more competitive with a higher value of sterling received on overseas sales Bad )

- Imports more expensive as imports goods cost more Please Refer To The Supplementary Learning Material for more information in this respect

Low Interest Rates Good for businesses who borrow, with lower repayment costs

- Bad for businesses who have excess funds (in credit) those that have savings in the bank will earn low rates of deposit interest

The Practice (Recent UK Economic Position

To an extent a similar position in Europe and the United States

UK has an historic low level of interest rates The Pound has been weak against the Euro and other currencies such as the Australian Dollar Inflation has increased to over 3%, due to an increase in commodity prices including Oil Growth in the economy is modest with periods of recession, reducing demand for goods and services. The car industry and luxury goods are two example of items particularly affected

Self Assessment Questions 1. Distinguish between and outline the major features of the three different types of economies

2. What are the four objectives of politicians at the macro-economic level in mixed economies?

3. What policy instruments are available to governments in a mixed economy?

Self Assessment Answers

1. Distinguish between and outline the major features of the three different types of economies Free or market economies allow maximum freedom for individuals and companies to operate in the market-place. They are characterised by minimal Government ownership and regulation. Command economies are almost fully controlled by the State which owns all of the means of production and which regulates virtually all aspects of life. Individual ownership in such economies is extremely limited (usually confined to small amounts of personal property and small amounts of land). Mixed economies are in the majority throughout the world. They vary tremendously but are so-named because they mix the characteristics of free and command economies. 2. What are the four objectives of politicians at the macro-economic level in mixed economies? Governments are normally interested in achieving: A degree of optimum employment. This is usually referred to as full employment but never approaches zero unemployment. In the UK different governments have had different interpretations of what the term means. Stability in prices which is usually stated in terms of a certain, acceptable level of price inflation. Steady economic growth. It is this which, in effect, measures the nations overall level of prosperity. If growth rates exceed inflation then, all other things being equal, the country is becoming richer. Equilibrium in the balance of payments. This means that, over the medium to long term, we end up not owing the rest of the world money on what we import and export. Although short-term surpluses are more than useful they can lead to significant appreciation of the currency and, thereby, to a loss of competitiveness for exporters.

3. What policy instruments are available to governments in a mixed economy? Such Governments have a wide variety of instruments available including fiscal, monetary, exchange rate, price, and incomes policies. Fiscal policy is generally concerned with taxation and spending, using levels of the various types of taxes and types and levels of government spending to either stimulate or dampdown the economy.

Monetary policy focuses on controlling the amount of money (defined very widely) available in the economy. By this means the Government controls interest rates and, through these, levels of spending and saving, corporate investment, and ultimately the rate of exchange. Direct control of the exchange rate is usually accomplished by fixing the currency to another, for example as occurs in South American countries who may endeavour to fix (peg) their currencies to the US Dollar.

Price controls are used by Governments to achieve almost immediate control over prices in a severe inflationary situation. This has not to an extent been used in the UK since the 1970s. Wage policies are designed to limit inflation by directly controlling the level of wage increases. The theory behind them is that wage inflation drives price inflation.

A2 - Primary, secondary, tertiary and quaternary industries

An economy may be analysed in terms of its different parts or sectors. Sectors usually include groups of industries, such as the car industry which involves manufacturing, the retail dealerships, parts distribution, etc. Structural change in a country is more usually based on changes in the development of its industries, developed around the following stages of economic development Primary Sector - the use of natural resources producing basic raw materials e.g. farming, mining and oil extraction Secondary Sector - goods which have undergone a process of manufacture including the processing of materials produced by the primary sector Tertiary Sector - the provision of services, which can be further divided into private sector services such as distribution, finance, insurance, and all public sector services such as public health and defence Quaternary Sector also involves providing services, but only services that have to do with information. This includes consultancy, research, development, technology and information technology.. This is the more recent sector incorporating many IT and .Com companies; the likes of Apple, Google, Microsoft and Yahoo come into this category.

Structural change means change in the relative size of these sectors. Like many other developed countries the UK has experienced this quite significantly in the last twenty or thirty years. The shape of the economy has changed in a variety of ways. The primary sector has benefited from the development of North Sea oil and gas (although recent outputs have declined), while agriculture has become relatively less important. The manufacturing base has declined as more goods have been imported. The service (tertiary and quaternary) sectors have seen the most expansion, now outstripping all other sectors in terms of value.

Such structural change has important implications for the economy as a whole. Over the last 50 years the working population has left the primary industries in large numbers. There has been a smaller decrease in the percentage employed in the secondary sector, and a large increase in those employed in service industries. Changes in the UK primary sector Since the 1980s agricultural production has been largely stagnant in real terms with a continuing decline in employment. Output from mining and quarrying, including natural gas and oil boomed in the late 1970s and early 80s. Between 1973 and 1979 output experienced an average annual growth rate of 17.9%.

Changes in the UK secondary sector Manufacturing in 2011 contributes around 12% of UK GDP as compared to 30% in 1970, although it has remain broadly unchanged over the last few years, with the UK employing some very good mainstream and niche manufacturing industries. Inward investment during the 1980s brought increases in production during the 1990s of items as computers, motor cars and domestic white goods (with a lot produced by foreign firms using UK facilities, such as Toyota).

Changes in the UK tertiary sector (service sector) Output has grown in every sub sector of the tertiary sector since the 1960s and the sector continues to grow; notwithstanding some periods of decline following low economic activity. This is not just a UK phenomenon. The shift from primary and secondary to tertiary is a feature of most advanced economies. The UK has, however, experienced a larger decline in its manufacturing base over time, certainly in comparison with the likes of Germany and Italy who have retained more of their manufacturing base. The UK is a successful exporter of services ranging from the financial services of the City of London (banking, insurance, stockbroking) to high-tech services - which stretch from film and video production to computer software and business consultancy.

Changes in the quaternary sector

The quaternary sector is sometimes included with the tertiary sector, as they are both service sectors. Between them, the tertiary and quaternary sectors are the largest part of the UK economy, employing over 75% of the workforce.

Some of these changes arise from: the increase in disposable income has led to more demand for services, leisure activities and educational services increasing imports of foodstuffs and raw materials as reduced tariffs make other countries' production more competitive changes in exports which have seen a reduction in the export of items such as coal, steel and shipbuilding products improved use of micro-electronics, machinery and mass production techniques increases in services such as insurance, banking, and other financial activities international competition has contributed to structural change with some goods produced more cost effectively overseas

Rapid technological developments have changed how we communicate, interact and how we purchase goods and services, with use of the Internet to buy shopping, and for example Amazon to purchase books and records.

Self Assessment Questions

1. What is meant by the following sector headings: primary secondary tertiary quaternary

2. Give four of your own examples for each sector of the economy.

3. In what ways has the UK experienced structural change in the last 50 years?

4. Why did the UK experience such structural change?

Self Assessment Answers

1. What is meant by the following sector headings: primary secondary tertiary quaternary

The primary sector is that which produces primary products such as agriculture and oil/gas extraction. The secondary sector manufactures products, the tertiary sector provides services. the quaternary sector provide information primarily through information technology and e-commerce 2. Give four of your own examples for each sector of the economy. primary farms (arable, livestock, mixed), coal mining, gas extraction, oil extraction, mineral extraction. secondary - cars, computers, white goods, furniture, house building, food processing, chemicals, etc tertiary communications, banking, retail, insurance, pensions, computer software development, consultancy quaternary research, software, search engines, game networks, design consultancy.

3. In what ways has the UK experienced structural change in the last 50 years? Significant change in employment patterns mirrored largely by GDP proportions away from primary production and towards tertiary. The shift has been profound during the 20th Century. From a largely agricultural and manufacturing base in 1900 to a largely service with some manufacturing base in the new millennium. The change has also affected the structure within each sector. The manufacturing sector has, for example, lost much of its heavy character (steel, locos and machinery) and become both lighter and less concentrated (electrical equipment, machine tools, etc). Similarly, the service sector has expanded away from its mostly retail and domestic service base and become more professional, and international. Higher skilled services now include software development, video production, engineering design, consultancy, etc. and the development of a new sector of virtual businesses.

4. Why did the UK experience such structural change? Structural change has occurred due to many reasons. Some of the most important have included overall technological change towards high tech equipment, the changes in world trading towards cheaper production of industrial goods in other countries, cheaper transport which has made the transportation of large volumes of agricultural produce cheaper and easier, and similar trends in raw materials. Today for example it can be cheaper to mine and transport coal from Australia to UK (depending on exchange rate fluctuations). Further research From the information above and your own research trace the growth of the UK communications industry and the decline of the UK shipbuilding since the early 1900s. Explain what broad economic trends have contributed to the changes.

A3 - STRUCTURAL CHANGE IN THE UK

The UK experience - the reasons behind structural change The economy of the UK has changed significantly in recent years particularly with the decline of industrial output and employment as compared with the service sector. As we have noted manufacturing today represents around 12% of GDP. For a wide range of current information on the UKs output (and input) go to: http://www.statistics.gov.uk

Availability of natural resources If a country starts to use up its supply of natural resources this will affect the primary sector, and encourage a move towards employment in other sectors. In the UK this has been particularly noticeable, although contrast this with Australia where there is a greater level of natural resources. Low-wage competitors Displacement Industrial sectors were displaced by the growth of the nonmarket public sector such as education and health which uses resources, generates income but does not supply to the market. In the UK to fund the rapid growth of the public sector since 1945 there has had to be an increased tax burden. This has tended to reduce investment in the industrial sector, while workers have asked for higher wages in order to fund these taxes and maintain their standard of living, all of which led to inflation, and resulted in some UK industries becoming uncompetitive in the world market. With industrial output unable to meet demand there is an increase in imports and this leads to a balance of payment problem. The creation of a negative economic environment caused originally by an increase in the non-market public sector thereby led to industrial decline. The lack of industrial investment in capital was also a contributory factor.

Productivity

UK productivity has on occasions in recent decades fell behind that of other industrialised nations, developing nations. Countries like China have grown due to factors such as high productivity outputs

Capital productivity reflects the amount invested in the economy, with productivity impacted by availability of the latest machinery and technology which reduces labour costs and overall improved production processes

The consequences of low productivity growth. employment increased productivity can result in a loss of jobs, although in some cases it can also protect the long time future of the industry, and the business which is able to adapt low productivity leaves a countrys business in a weak position - with little option other than accepting lower profit margins or raising prices and losing orders. Low profits will eventually mean less investment. larger companies located in the UK may avoid price rises by switching production to other overseas plants, a trend which has been seen in the Textiles industry

Further research Select one service industry and one production industry in the UK and show how it has developed in productivity terms. Use research to investigate how similar industries in at least one other country in Europe compare.

A4 - THE BROAD AIMS OF BUSINESS ORGANISATIONS

Business Aims Businesses work towards a number of objectives and these are normally set by the Board of Directors in the Business Plan. The objectives are the targets that a company aims to achieve. There may be several factors but usually making a given level of profit is a key factor, as well as shareholder value especially for larger businesses. A business may set out to maximise profits, which will more than please the owners/shareholders of the business. However, it is also possible for profit levels to be set at a level below maximum and, even, for profits to be foregone for a specific period of time in return for market share or investment namely to position the business favourably for the future. Control of the determination of the business objectives and the strategy employed to meet those objectives is in the hands of top management, who depending on the size and structure of the business may also be answerable to shareholders. . Generally the aims of large scale business includes efficiency and this involves the organisation in aiming for factors which might include the following: exploit economies of mass production - efficient production demands specialised machinery, and sizeable factories, assembly lines, and division of labour. Business organisations exist to co-ordinate this production process. raise resources - the resources needed to fund largescale production today are very large and often out of the range of new businesses seeking to enter a particular market or business segment. For most companies the funds come from profits, borrowing or making shares available in order to bring money into the company. employ skilled management to oversee the organisation of production, to plan strategy and take decisions

Some individuals have their own aims - some wish to own their own business and be their own boss. Small businesses may have objectives to set an optimum profit level as the main goal namely sticking to what they are good at, and making a living out of it.

Some businesses may not set aims or objectives at all; they simply aim to do the best they can - which would be seen as a satisfying objective rather than a maximising objective. Some businesses like charities are primarily in existence to deliver a public service rather than to necessarily make a profit or surplus. To achieve these broad aims the organisation of the business can be: private enterprise public enterprise non-profit making organisations (for example Charities)

Private enterprises These are owned and controlled by individuals, and exist to make a profit for the owners. These can be: sole traders partnerships private and public limited companies

(The different types of organisations are discussed in detail in Module A, Finance of International Trade.)

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A5 - BUSINESS GROWTH, ORGANIC OR BY MERGERS AND ACQUISITIONS

Organic (internal) growth - by acquisition - mergers and take-overs Scale or size is important can be for business organisations. A business that is operating at the lowest unit cost possible (optimum output) is operating at its most efficient size. In some cases it may have to grow, in order to obtain the necessary scale in order to survive in a competitive market. There can also be advantages to be gained from an increase in size. Larger firms can be seen as being more efficient in that they can produce more goods at a cheaper rate. Such reduced costs are due to the large scale of the firm and are known as economies of scale. The savings are at their greatest when optimum output is reached - the point of lowest average cost. Economies of scale can be divided into those economies resulting from: internal factors - arising from the growth of the business organisation itself external factors - arising from the nature of the industry as a whole

Internal economies of scale management economies larger firms employ specialist managers, and as the firm increases in size there is not a corresponding increase in management numbers technical economies - large firms are able to ensure that their workers specialise more on one process rather than the whole job. This division of labour is not possible with smaller numbers of workers the use of machinery, including large scale machines can add to the numbers of goods produced. The use of particular storage and transport systems can add to efficiency. This may not be possible in small firms. research and development leading to better quality products and reductions in costs through better production methods and use of materials.

trading economies - the larger firm trading in bulk can buy materials more cheaply and secure good discounts. When

selling it can use specialist sales staff and spread its advertising and other costs across large orders. finance - larger firms, subject to a good financial history, and good financial accounts, can usually borrow more readily from banks and at a lower interest rate. They can usually offer more assets to cover loans. risk-bearing economies large firms can obtain their raw materials from different sources and safeguard against shortages. They can diversify their product range so that losses in one area can be offset by profits from the sales in other areas. External economies of scale economies of disintegration - as a business grows, so a process may be done better by a specialist firm. The larger organisation can usually buy cheaper and the specialist firm may produce better quality components. economies of concentration a specific type of industry may develop in a particular area bringing with it other advantages which can be of benefit to others. The large industry may help create, through training, a skilled labour force that other firms can use. The infrastructure may improve with better rail and road networks benefiting all. economies of information - a free flow of information between firms may result from the need to obtain up-todate information about supplies, and government regulations. Firms may also benefit from sharing research costs.

It is noticeable that increasing size is also a disadvantage at times: communication within the business can become difficult to maintain, as chains of command grow decision making can be delayed as more people are involved and the chain of command becomes extended problems of storage and transportation grow as business expands other costs can mount such as advertising large scale companies have to take special care to remain flexible and sure-footed. Change takes longer to accomplish in large organisations and rapid change can often leave them behind (a recent example would

be Kodak) when mass production techniques are used inappropriately they can result in over-production and expensive over-stocking workers may feel remote from customers and the management, causing low morale

Large scale business can dominate the economic scene in most advanced economies. However under certain circumstances small scale business may be more appropriate: where there is insufficient demand to make large scale production profitable where specialism is inappropriate e.g. a village shop where the business offers personal service where the work of particular crafts-people or specialists is valued for their skills

Note that small scale business suits not only traditional craftspeople but also possibly many of the newer, high-tech sectors such as computer software development, high level business consultancy, engineering design consultancy, specialist electronics firms and so on. In addition to potentially providing a more personalised customer service there are other advantages to small-scale operations: the owner can directly oversee the work - seeing that the work is efficiently carried out, is completed to desired standards good relationships between employer and employees are possible (even necessary) demand for variety - a small firm can produce in small batches before moving onto another. Mass production cannot easily switch to meet changing demands and fashions. certain services need personal attention like hairdressing small firms may be able to fill the gaps left by the larger firms - the production of small numbers of high quality items

...and disadvantages: the division of labour will be small and resources may be used uneconomically

the business is heavily dependent on the skills and knowledge of the owner or partners the owner is personally responsible for liabilities of the business where they are operating as a sole trader or general partnership (note, however, that many small firms do operate as limited companies) there may be limited finance for expansion to take place

How do Firms Grow? The growth of a firm can take place through: developing new products and new ideas thereby increasing revenue the growth of demand over time for a firm's products brings an increase in size for the firm integration - it takes time for new products or demand to grow. Firms have increased their size through mergers or acquisitions

Mergers and acquisitions have become two of the more popular methods of achieving growth. This growing trend towards larger size businesses occurs as the successful small business is absorbed by the bigger business. An alternative is for organisations to amalgamate or merge to form larger firms, in order that greater economies of scale can take place. The growth of the large scale firm has been one of the most significant developments in the industrial structure of the global economy. A merger takes place with the mutual agreement of the management of both companies, and their owners/ shareholders, usually through an exchange of shares. An acquisition or take-over occurs when the management of one company buys sufficient shares for them to have a controlling interest. Often the identity of the acquired company is subsumed within that of the purchaser. When one business becomes so large that it dominates its industry or market then a monopoly is formed. In the UK as well as in other countries, there are laws controlling such activity.

Self Assessment Questions

1. What are the advantages and disadvantages for a firm of increasing its size?

2. What do economies and diseconomies of scale mean?

3. What are the advantages and disadvantages of small-scale production?

4. What is the difference between mergers, acquisitions and cartels

Self Assessment Answers 1. What are the advantages and disadvantages for a firm of increasing its size? The main advantages are those of increasing scale greater efficiency in the use of resources (capital and human), more specialisation in staff (better use of skills), and efficient use of support (advertising, warehousing, vehicles, etc). The main disadvantage can be the lack of flexibility and slower response of larger companies. 2. What do economies and diseconomies of scale mean? Economies of scale are the benefits which accrue to a larger organisation There are two main types: Internal - consisting of such things as: management economies - larger firms employ specialist managers technical economies consisting of worker specialisation, better use of equipment, and more effective research and development trading economies buying and selling in bulk and achieving discounts and cost savings. finance - larger firms can usually borrow more easily from banks and at a lower interest rate. risk-bearing economies spreading the risks of business across more suppliers and markets

External economies of scale, mainly consisting of: economies of disintegration - larger organisations can usually buy cheaper from specialist firms economies of concentration the benefits from a concentration of the same type of business in one area benefits from better trained people, good suppliers and even from better transport facilities economies of information - firms may benefit from sharing research costs and having other forms of information easily available.

3. What are the advantages and disadvantages of small-scale production? Small scale production suits specialist suppliers (i.e. those whose products do not have large markets or which can be difficult to market effectively); it also suits products which rely on skilled people or which require finishing by hand. Due to the sheer cost of modern labour, small scale production can be used by larger

companies to outsource key components from firms which produce just a single item but are run like owner-run enterprises (production and unit costs are kept low by good machinery and the larger firm also benefits by not having to employ (and therefore pay the social insurance and pension costs for) the individual. The disadvantages lie in the lack of flexibility. The small enterprise relies on, at best, just a few people. It can find it difficult to adjust to changes in demand and, because of its size, also finds it difficult to acquire new finance for expansion. 4. What is the difference between: mergers acquisitions cartels A merger is usually a joining of two roughly equal companies by mutual agreement. There will usually be benefits inherent in the merger for both parties. An acquisition is the purchase of one company by another. This is often called a take-over and can be either agreed or disputed. So called hostile take-overs" occur when the acquisition is disputed by the Directors of the target firm. A cartel is an agreement usually secret between a number of firms in the same market to fix prices or other conditions of sale (such as warranty periods, delivery arrangements, and after-sales service). Cartels are illegal in most developed countries but it should be noted that, even in the absence of a formal cartel, unofficial price fixing is often still illegal. Further research Research the background to, and development of a recent merger or acquisition. Start with the newspaper archives in the local library or the Internet. Develop an understanding of why the merger/acquisition was thought to be beneficial, what the main issues were for both sides, and how the price or agreements were decided upon.

Diversification and integration - horizontal, lateral and vertical

Self Assessment Questions

1. What are the advantages to be gained from the following forms of integration: horizontal vertical lateral conglomerate

Self Assessment Answers 1. What are the advantages to be gained from the following forms of integration: horizontal vertical lateral conglomerate

A horizontal merger creates a larger firm in the same market and at the same stage of production. The benefits are those of scale. A vertical merger joins together firms at different stages of production either upstream or downstream. They give the new company greater control over its supplies or the next stage down usually direct contact with the final customer. Lateral mergers join companies which may produce different products but which share key aspects of their production. They may use similar technologies or similar management skills or make use of the same retail networks. Conglomerate mergers join companies in totally different sectors. The advantages are generally those of spreading market risk while achieving some economies of scale. Thus the UK approach has changed from being case-based to being almost entirely legislative. Further research Research the development, in the 1980s and 1990s of the world semi-conductor and computer industries. There are many examples of almost every type of merger and acquisition. What rules or legislation is available on the world stage to control global monopolies and cartels? To what extent is Microsoft now a global monopoly?

A6 - THE DEVELOPMENT OF LARGE-SCALE ENTERPRISES AND MULTINATIONAL COMPANIES (MNCS)

Such enterprises are defined as those that win or control production or service facilities in multiple countries outside the country in which it is based (usually defined as the country of registration and majority ownership). The ownership can be through wholly or partly owned subsidiaries, while the control can be through joint venture, or minority interest. The largest MNCs have annual turnovers in excess of the Gross National Product of many countries. The very largest companies such as Apple, Microsoft and Shell have turnovers greater than some countries. Several considerations are involved in measuring activity: size - using such factors as assets, employee numbers, annual turnover or annual sales data Investment can be either through portfolio (purchase of shares in foreign firms) or direct investment in equipment or buildings. The growth of MNCs has resulted in changes in the patterns of global investment: the rise of non-American MNCs has meant that more direct investment has originated from China, Japan and Europe Investment in South-East Asia has grown Companies invest abroad as part of a global strategy of specialisation of process and product. Process changes now allow companies to locate labour intensive processes in low-wage areas, and then assemble the goods nearer the developed markets. Standardisation of product allows goods to be made in one country but with local needs taken into account. there is more central control of overseas production usually maximising computer and telecommunications advances

MNCS AND INVESTMENT IN THE UK In the latter part of the 20th century the rate of inward investment in the UK from outside MNCs rose significantly. Traditionally overseas companies have invested more in UK manufacturing than UK firms have invested abroad. Since the mid-seventies there has been a shift from manufacturing to service investment. UK investment abroad includes the food, drink and tobacco sectors, while at home the investment has more been in pharmaceuticals, cars, computers, and electronic goods

For current statistics see: http://www.ukti.gov.uk Those firms wishing to pursue growth overseas may do so either laterally or vertically, expanding by acquisition, merger, or setting up of new activities abroad. The aim of expansion abroad is a complex one with problems of distance, culture, language, supply and communications and government regulations having to be considered. The decision also implies that: it is a more profitable move if the home market has already reached saturation point that the firm has an advantage over firms already operating in the overseas market - such as size (economies of scale), brand and purchasing power

The MNC potentially has a range of advantages over the domestic firm in an overseas market: advantage of size which may deliver economies of scale, research and development advantages possession of patents and/or trademarks a range of managerial experience and skills to call upon access to raw materials or markets outside the capacity of domestic firms to access or pursue

Firms may also see that it is easier or cheaper to produce abroad because of location: low labour costs incentives from domestic governments possibility of product specialisation for the local market ability to provide after-sales service

possible avoidance of taxation penalties possible avoidance of tariff barriers resources which can only be used in the country of origin

THE EFFECTS OF MNC INVESTMENT ON THE UK Employment although inward investment brings jobs, it is not to be relied upon in times of economic downturns to protect employment.

Technology MNCs transfer technological knowledge when they invest abroad. This would benefit those countries without such technical knowledge although this impact may depend on whether the research and development takes place within the host country, thus encouraging the spread of knowledge, skills and innovation.

Self Assessment Questions

1. How do we define MNCs and what explains their great influence and power?

2. What difficulties do we encounter when we attempt to measure the size of MNC businesses?

3. Outline the growth of MNCs in the UK

4. What has been the effects of MNC investment in the UK?

Self Assessment Answers 1. How do we define MNCs and what explains their great influence and power? They are defined in terms of having multiple subsidiaries abroad. There is no clear size definition but they must have a significant effect on the global economy in order to qualify as MNCs. Their influence and power is explained by their sheer size in turnover and employment terms. Companies such as BP, Unilever, Shell, Ford, and Diageo have very significant effects on the economies of the countries in which they invest. They bring jobs, production skills and even exports. Their turnover is often very large in comparison to the GDP of the host country and this also gives the MNC political power. 2. What difficulties do we encounter when we attempt to measure the size of MNC businesses? Difficulties of deciding what the basis of measurement will be and dealing with the numbers of countries in which they operate. Different accounting laws will produce different levels of profit and even turnover. Size can be measured in several ways by numbers of employees, by turnover, by profit, and so on. All are subject to difficulties. Even something which seems straightforward can be a problem: the way employees are counted in different countries can produce very different results. How, for example are part-time staff or sub-contractors to be counted? 3. Outline the growth of MNCs in the UK The East India Company was, in the 18th and 19th Centuries one of the original MNCs. Operating to a single Board in London it has branches and production facilities all over the middle and far east. During the early 20th Century new MNCs developed from the global demand for oil and foodstuffs. These were often jointly owned by two countries (Royal Dutch Shell and Unilever are two examples). BP also originated in that period. For a while, UK MNCs followed the global trend car manufacturers, aircraft manufacturers and electrical firms all became MNCs. However, for one reason or another UK MNCs in these sectors were not as successful and today some have disappeared. The UK now majors in MNCs such as in the food and drink categories (Unilever, Diageo, etc) and in oil companies (Shell and BP). With the increasing sophistication in global markets some UK companies are merging to create MNCs in high tech sectors. British Aerospace, for example, has merged internally to acquire electronics firms like Marconi while joining internationally to create space satellite, launcher and aircraft manufacturers (Airbus). 4. What has been the effects of MNC investment in the UK? The effects have been: - Jobs which may not have been created by domestic firms - Some transfer of technology and skills - Export earnings (from cars, food, etc)

Further research Take an example of a British based MNC, map out its countries of involvement and establish the size of business. What benefits accrue to the UK itself from the activities of this company?

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