Professional Documents
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There are several important economic factors that influence management decisions:
1. Economic growth
Economic growth represents the expansion of a countrys potential GDP or GNP. It is a measure
of the rate at which the real output of an economy is growing over time.
GDP: Gross Domestic Product is often used to measure output. This refers to the output
produced by individuals and businesses within a countrys borders without regard to whether the
production is done by domestic or foreign factors of production.
GNP: Gross National Product is the broadest measure of economic activity. It is the total
value of final goods and services newly produced by domestic factors of production. The
production by domestic factors could take place at home or abroad.
Economic growth is calculated as a rate, namely the percentage change in real GDP (inflation
eliminated).
a.) Benefits of growth: why is the economic growth necessary?
If the growth of output exceeds the growth of population, the income per capita will rise, so
the standards of living will rise.
The economic growth makes investment in scientific research possible. This is particularly
important in medicine, where new vaccines (oltanyag) prevent the spread of disease and new
treatments make it possible to cure people of certain illness which a few years ago claimed
many lives.
1. Capital stock: The first factor is the quantity of capital per worker. The greater the capital-
labour ratio, the higher the productivity of labour.
2. Technological process: It is the quality of capital employed that affects economic growth, and
this depends on technological progress.
3. The quantity and quality of the labour force:
- The quality of labour is determined by the population but the countries with the highest
populations dont have the highest economic growth. The optimum population is that level of
population which maximises average product. The quality of labour depends on e ducation and
training. The development of human skills will increase the capacity of an economy to growth.
2. Inflation
Inflation: is a persistent rise in the general level of prices over time. Economists attribute inflation
to 2 causes:
- demand-pull influences: the rise in price level is caused by increases in consumer demand,
especially when governments try to stimulate the economy by easing credits and to maintain full
employment. The demand for goods and services exceeds the supply available.
- cost push influences: some factors on the supply side of the economy which lead to increases
in the cost of production which is passed on to customers in higher prices. Such pressure may be
caused by strong bargaining power of large labour unions or by increases in the cost of basic raw
materials which force up the cost of industrial production.
The rate of unemployment and the rate of inflation are inversely related.: inflation can be reduced
by allowing more unemployment, but in some cases it is possible for both inflation and
unemployment rate ti rise at the same time.
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Effect of inflation:
1. Inflation is regarded as undesirable, because the value of money tends to decline, and some
groups in society gain (debtor), while others lose (savers, creditors, those on fixed incomes)
2. It makes planning for the future difficult
3. It rises the tax burden since some taxes are directly related to income and the value of
spending.
4. It may discourage savings since their real value falls through time.
5. It affects interest rates, exchange rates, and general confidence in a country political and
economic system. High inflation rate creates problems for companies that deal in imports and
exports. If the exchange rate depreciates at the same pace as the inflation rises, the prices
foreigners pay for export of the inflationary country will not change.
6. It causes political destabilisation: If the government tries to control inflation by controlling
wages, the real income of the population declines and frustration sets in. If the government
decides to do nothing, the economy may deteriorate to the point that real incomes fall anyway.
2. The monetarist solution is to control the growth of money supply To introduce monetary
restriction by raising interest rates and thereby reducing spending. I.e. it reduces the demand for
credit. Investment is discouraged, and thus the demand for capital goods and the demand for
labour falls.
3. Incomes policy is the most common form of policy to cope with cost push: The aim is to
secure agreement with both side of industry to moderate pay and price rises. The ideal is that
wages should rise by no more than productivity, which means wage increases are self-financing.
3. Employment:
The maintenance of full employment was a cen tral policy aim of governments, but it has been
accepted that there is some level of unemployment, below which it is not possible to go without
the return of inflationary pressures.
Causes of Unemployment:
1. Frictional unemployment: Persons who are made redundant will need time to search for and
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Another measure of a co untrys foreign trade activities is the balance of payment: records all
the financial transactions between the home country and the other countries, including payments
for visible goods. Thus the trade balance is only part of the balance of payment, which records 2
broad groups of transaction: the capital and the current account.
A country balance of payments is a s tatistical record of all the economic transactions between
domestic residents of this country and foreign residents of the rest of the world during a given
time period (usually a year). This is one of the most important statistical statements for any
county. It reveals how many goods and services the country has been importing and exporting
and whether the country has been borrowing from or lending money to the rest of the world.
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5. Public Finance:
1.) The main items of government spending:
- defence and law and order: The existence of state requires that its boundaries be defended from
incursions and that its citizens be protected.
- social security: State should support, wholly or partially, some citizens who are unwaged, or
low paid. Some benefits are paid directly. In time of recession it may be the largest item of
expenditure.
- local government spending
- national health service
- other expenditure, including support for industry, contributions to infrastructure expenditures
and education spending.
2.) Taxation:
Government spending has to financed either by taxation or by borrowing. Taxation is essential
and unavoidable. It may be imposed on income, expenditure, capital gains or wealth.
- direct taxes are levied on income and wealth
- indirect taxes are levied on spending
a.) Income tax: charged on all incomes from work or self employed above an amount dictated by
a personal allowance plus allowances for certain other items
b.) Corporation tax: charged on profits earned by a company. Small firms currently pay a lower
rate than larger ones.
c.) Capital Gains Tax: levied on the increase in the value of capital when it is sold.
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d.) Value Added Tax (VAT): is a charge on t he value added at each stage of the production
process. VAT paid by firms on the cost of inputs is reclaimable.
e.) Excise Duties: chargeable on certain products such as tobacco, wines and spirits.
f.) Inheritance Tax: There is no wealth tax as such in the UK, but tax is charged on assets above
a given amount which are inherited.
Economic Systems
Economic systems are usually classified as capitalist, socialist or mixed. However, it is also
possible to classify them according to 2 other criteria:
- Type of property ownership: - private (individuals own the resources)
- public ( the government owns the resources)
- Method of resource allocation and control: a centrally planned (command) economy, a market
economy
Characteristics of MEs:
a.) It is characterised by an almost total lack of government intervention. There is a limited role
for the state. b.) The right of individuals to own private property, and in particular to own a
dispose of land and capital
c.) In making decision about production, entrepreneurs are guided by the profit motive.
d.) reliance on the price mechanism: to allocate resources.
supported by taxes.
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Types of market:
1.) Commodity markets
These markets provide facilities where large numbers of buyers and sellers of raw materials can
get together and prices are fixed.
On commodity exchange mass-goods can be sold and bought, which can be substitute for the
same quality. There is no individual product and industrial finish products. Goods arent present
physically on the Commodity exchange.
Methods of sale:
a.) Private treaty: where a commodity can be graded (wheat) the seller and the buyer come to a
private agreement on purchase price by negotiation.
b.) Auctions: where goods vary in quality or grade (tea, tobacco, wool) a representative sample
is offered and the buyers or their agents will bid. Purchase goes to the highest bidder.
c.) Spot and futures:
- spot markets: markets which deal in goods for immediately delivery, because goods and
payment are available immediately (on the spot)
- future markets: where goods are being sold for delivery and payment at some time in the future.
- Hire-purchase companies: allow individuals and businesses to borrow and pay back later in
instalments while the goods purchased with the money are used as security against the loan.
- Finance companies: offers loans repayable by instalments, but in this case it is not necessarily
the purchased goods that are used as security.
b.)Capital market: isnt a physical market either, but a number of institutions providing long-
term loans almost entirely to business and industry. This market includes:
- Insurance companies: loan out some of the money they collected as premiums in the form of
long-term loans.
- Building societies: apart from loaning out money for house purchase, they invest some of the
money deposited with them by providing loans for the capital market.
- Investment trusts: buy shares of other companies using the money they get from the sale of
shares in their own company
- Unit trusts: invite the public to buy units. The money received from selling the units is then
used to buy shares in many different companies.
- Pension fund: collect regular contributions from members and provide them with pensions
when they retire. The contributions are made to work by investing them in low-risk securities.
- Issuing houses: arrange long-term capital for businesses by selling shares of the company
concerned to the public.
- The Stock Exchange: provides a market place for the buyers and sellers of second-hand
securities (the stock market)
Membership
Only Member Firms of the Stock Exchange are allowed to take part in dealing on the Exchange
floor and outsiders must carry out their buying and selling through them. The Member Firms are
called:
a.) Brokers/dealers: buy or sell shares as agents for public investors, or as principals for their
own account with other Member Firms or outside investors, or they can act in a dual capacity as
both agent and principal. Some of them specialise as Market Makers:
b.) Market Makers: can operate on the Stock Exchange floor, off-floor, or both on and off floor.
They make a market in shares by being prepared to buy or sell shares at all times to and from
Broker/Dealers. They may deal direct with the Brokers on t he Exchange floors, or indirect
through the SEAQ (Stock Exchange Quotation System.)
Types of security
Security is the collective name given to the wide range of investments with which the Stock
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Exchange is concerned.
1. Government stocks or bonds: are used to raise money to finance government projects. They
represent a very safe form of investment because they are backed by government resources. They
are issues for a fixed period of time and receive a fixed rate of interest.
2. Local authority bonds: are issued by local authorities and money invested represents loan to
the authority. They are secure form of investment paying a fixed rate of interest
3. Debentures: are in effect a loan to a company and are often referred to as stocks. They
receive a fixed rate of interest which must be paid even if the company doesnt make a profit.
4. Preference shares: pay a fixed rate of dividend, but only if sufficient profits are available to
make a payment. Usually they carry no voting rights. The preference shareholders is entitled to a
fixed percentage of the profits, but after the debenture holders and before the ordinary
shareholders.
5. Ordinary shares (equities): represent a share in the ownership of a company. Each share is
entitled to an equal proportion (dividend) of the companys profits. The amount of dividend to be
paid is decided by the directors of the company and is dependent upon t he profitability of the
firm. It runs the risk that the shareholder may receive only little return in bad years, though in
good years he could receive twice as much as preference shareholders. The shareholder may gain
not only through his share of the companys profits, but also from an improvement in the current
market price of the shares. In addition, the ordinary shareholder has some power (through voting
rights) in the running of the company.
One can buy options giving the right to buy and sell securities at a fixed price in the future.
- A call option gives its holder the right but not the obligation to buy securities or a commodity or
a currency at a certain price during a certain period of time.
- A put option gives its holder the right to sell securities etc. At a certain price during a certain
period of time.
The buyer of a share option pays a premium per share to the seller, and only risks this amount.
The seller of an option (known as writer) risks losing an unlimited amount of money, depending
on the performance of the underlying share, especially if he doesnt actually possess it.
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Globalization:
Means the standardization of all the world markets to a dominant unique model in which the
circulation of the financial, commercial and productive resources.
Capital has a m uch better position than labour (mobility, flexibility, level of freedom) and
financecapital has a much better position than industrial capital and that international portfolio
investments function much more favourably than do m ultinational companies. The world
economy has a strong hierarchy. There is strong competition among companies on the same level
with the same levels of strength, but among those standing on different levels of the hierarchy the
final result of competition is obvious. One of the most important symptoms of globalization is
that finance and the real economy become apart from each other and the second one becomes
dominant in the relationship. A mutual fund represents much stronger capital than a range of
countries. Just one third of world trade is not influenced by multinational companies. Trade
between multinational companies comprises onethird of world trade.
The base of the success of these companies is the flessibility, they can:
reduce the labour cost by delocalizing of labour where it is cheaper
reduce the transport cost by settling the company near the production place of raw materials or
near the selling place
get tax allowances from the state mainly in the first period
influence the policy of the government because of their financial power
The different prices and the wages become more balanced in the different part of the world
2. Environmental effects
The homogenization of cultures
Modifications on the Earth: the deforestation, the desertification
The increase of the human population and their mobility
The loss of cultural traditions
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Money is anything that permits indirect exchange as distinct from direct exchange (barter), and to
do this it must fulfil the following functions:
1. Medium of exchange (acceptability): We use money to exchange goods/services which we
provide for goods provided by others. Without money we have to barter
2. Unit of account (measure of value): A price is given to a product in order to measure its
value in money terms. This enables a person to compare one commodity with another in terms of
money by giving them common unit of measurement.
3. Store of value: These days this function doesnt operate successfully, as money kept in a bank
current account for a year will not have the same purchasing power as it did originally.
4. Standard for deferred payments: Contracts between 2 pe ople will be made showing the
amount to be paid or received. These deferred payments will be stated in monetary terms.
Commercial banks
are businesses that trade in money. They receive and hold deposits in current and savings
account, pay money according to customers instructions, lend money and offer investment
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2. Discount houses:
Functions:
- accepting short-term deposits from businesses, particularly banks, in return for a low rate of
interest
- using fund raised in this way to purchase a variety of assets (Treasury bills, B/E, gilt-edged
securities)
- providing immediate finance for companies by discounting reliable B/E, i.e. buying them for
less than their face value and holding them until they mature to obtain the full value, or reselling
them and charging a higher rate of discount to achieve a profit.
3. Clearing banks:
handle the exchange and settlement of cheques through the clearing house system. Functions:
- acceptance of deposits of money
- providing a system of payment mechanism
- supply of finance
- provision of a wide range of services
5. State banks:
- the National Savings Bank (~OTP) is operated through the Post Office
- the National Girobank is a state-run bank and is a part of the business of the Post Office, but it
is financially
independent from it.
6. Merchant banks (acceptance house): are not banks in the commonly understood sense, but
private firms that offer highly specialised services almost exclusively for business customers.
Main activities:
a.) Acceptance house activities: lending their name to a B/E issued by less well-known traders,
so that it becomes more acceptable because of the good reputation of the bank in the financial
world.
b.) Issuing house activities: It assists in raising company finance by sponsoring first issues of
company shares on behalf of their clients, or it acts as an intermediary between companies
seeking capital and those willing to provide it.
c.) Capital market activities: It involves in a wide range of other capital market operations: for
ex.
- operate some current account services for customers
- accept larger deposits, generally for one year or more
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7. Foreign banks: give service and credit to companies from their own countries operating in
Britain. A number of these banks have expanded their activities and they now make substantial
sterling loans to British borrowers.
8. There are also supranational banks such as the World Bank or the European Bank for
Reconstruction and Development, which are generally concerned with economic development.
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a.) CWO: cash with order: avoids any risks on small orders with new buyers and may even be
asked for before production begins. However, this form of payment is extremely rare in foreign
trade, since it means that the buyer is extending credit to an exporter. It is used in special
circumstances, for ex. when the buyer urgently needs the goods and he is compelled to effect
payment in advance
b.) advanced payment: the buyer pays a certain percentages of the counter-value of the goods
before delivery or production. It is used when the subject of the contract represents high value or
when manufacturing takes longer.
The most common methods of payment for open account trading are:
a.) payment by a c heque: might seem to be the simplest method, but there are some
disadvantages for the exporter: exchange control, postal delays, delays in clearing the cheque,
currency exchange risks
b.) in a bankers draft payment: the bank draws a draft on an overseas bank, which is sent
directly to the supplier:
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c.) express telegraphic money transfer: is the fastest method of sending money abroad. It costs
more than the other methods as the bank has to instruct an overseas bank (by cable or telex) to
pay a stated amount of money to the suppliers account.
Within EU the open account method of payment is increasingly popular, because it is simple and
straightforward. It saves money and procedural difficulties, but it is risky for the exporter. It is
only used when an exporter trusts the business integrity and ability of overseas buyer.
Types:
a.) sight draft: if it is made out payable at sight (on demand)
b.) term draft: it is payable at a fixed or determinable future time. In this case the buyer receives
a period of credit, known as the tenor of the bill. The buyer signifies an agreement to pay on the
due date by writing an acceptance across the face of the bill.
The buyer buys on credit and he has payment obligations. The buyer issues a promissory note, so
he makes an unconditional promise to pay a certain amount of money to an exporter at a fixed
date.
The B/E can be transferred by endorsement.
4.)Documentary credits
a.) clean bill collection: an exporter can pass a B/L to a bank, who forwards the bill to its
overseas branch or to a correspondent bank in the overseas buyers country. This bank, known as
the collecting bank, presents the bill to the drawee,
- for immediate payment if it is sight draft
- for acceptance, if it is a term draft.
In this procedure no shipping documents are required.
b.) documentary collection method of payment. The seller sends the bill to the buyer through
the banking system with the shipping documents, including the document of title to the goods.
The bank then releases the documents on payment or acceptance of the bill by the buyer. If the
bill is payable at a future time, and the seller would like to get the money, he has 2 possibilities:
- he could wait till the date of maturity and presents the bill to the buyer.
- he could go to the bank for discounting it. But in this case the seller wont get the total value of
the bill.
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c.) cash against documents (CAD) collection: In this case only the shipping documents are sent.
There are:
- documentary sight bill (documents against payment, D/P): The seller hands over the
documents to a bank and instructs it to release them only after payments made by the buyer. It is
used when there is a great distance between the partners.
- documentary term bill (documents against acceptance, D/A): Buyers buy on credit and he
requests that the supplier draws a term B/E, which calls for the payment after a certain number of
days usually 31, 60, 90 or 180 days.
d.) Documentary Letter of Credit: It is the common and safe method of payment, and it is an
undertaking by an issuing bank to an exporter through an advising bank in the exporters country,
that the issuing bank will pay for the goods, provided the beneficiary/exporter complies precisely
with all the conditions of the credit.
It is the most suitable method of payment between buyers and sellers, who have not done
business with each other before.
Types:
1.) revocable: is not legally binding, is seldom used because the credit terms can be amended or
cancelled by the issuing bank at any time without any prior notice to the beneficiary.
2.) irrevocable: most commonly used type of credit. It cant be amended or revoked without the
agreement of all parties concerned, and gives the beneficiary the assurance that he will be paid
for his goods
3.) confirmed: the advising bank adds its confirmation to the L/C and undertakes that the
exporter will be paid if he meets the term of the L/C. This types provides the seller with
maximum security.
4.) unconfirmed: the confirming bank doesnt add its undertaking to pay under credit. It only
informs the exporter of the terms and conditions of the credit.
5.) transferable: the exporter can ask the advising bank to transfer the credit opened in his
favour to a third party. In this case the amount of the L/C will be paid to that third party.
6.) revolving L/C: automatically reinstated back to the full amount after each drawing. Seller
effects delivery in partshipment. Buyer has not deposit the total value with the bank, just for
the value of the partshipment.
7.) acceptance credit: the payment of the full amount is due at maturity. The contract specifies
payment at a future date. After pr esentation of the documents the issuing bank accepts the
bill.
8.) deferred payment: it doesnt call for presentation of B/E, but the issuing bank undertakes to
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honour drawings on a fixed future date, provided the correct documents are presented.
Types of cheque:
1. open cheque: it doesnt have 2 pa rallel lines drawn across it. It can be paid out to whoever
presents it at a bank; isnt very safe.
2. crossed cheque: has 2 parallel lines across the face of the cheque from bottom to top. It serves
safety purposes, their amount may be paid only into the payees banking account and cant be
exchanged for cash except by the drawer at his own bank, or at another bank with the use of
credit card.
3. dishonoured cheques: this isnt passed for payment by the drawers bank. When a cheque is
refused for payment the drawers bank will write: refer to drawer the cheque and return it the
payee who must find out from the drawer why the cheque has not been honoured. Reasons for
ex.:
- cheque contains an error or is unsigned
- signature differs from specimen held at the bank
- cheque has been altered/post-dated
- cheque is stale more than 6 month old
- drawer doesnt have sufficient funds in account
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6. Business organisations
Advantages:
- The size of my business means that I need less capital (money) to start the business
- Freedom and flexibility: I have independence and need not consult anyone when making
decisions
- He neednt share his profit with anyone else
- Personal contact with all of the business and customers.
- secrecy: there is no need to disclose business affairs, except to tax authorities and to creditors
Disadvantages
- Limited sources of finance:
- Limited scope for economies of scale
- Unlimited liability. This means that if the business goes bankrupt and hes unable to pay his
creditors, they can take his personal possessions
- Lack of continuity. This means that if he is unable to run the business, even temporarily, then
often there will be no one to run it
- It is particularly open to pressure from the larger business units.
- Restricted growth.
2.) Partnership
Two or more persons in partnership can combine their resources and expertise to form business
unit.
- The maximum number of people who can form a partnership is limited by legislation to 20 in
the UK, although certain professional firms are allowed to have more than 20 people
- Partnerships are generally formed by contract between the parties. A Partnership Agreement
sets out the rights of each people, division of profits etc. If such a deed doesnt exist then it is
assumed that the profits or debts of the partnership are shared equally.
- A partner may be willing to introduce capital into a business but not wish to take an active part
in the running of the business. In such case he becomes a sleeping partner.
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- It doesnt have its own legal personality, so the partner bear unlimited personal liability for the
debts of the business.
- The withdrawal of any one partner (either voluntary or upon de ath or bankruptcy) causes the
automatic termination of the partnership. A new partnership will come into being, if an additional
partner was admitted to the partnership.
Advantages over the sole trader:
- Additional sources of finance
- Specialisation
- Sharing of responsibilities
- Sharing of losses
- Because there are more people in a partnership, there is more experience and knowledge
available when making decision, and sometimes one or more partners have specialist knowledge
Disadvantages:
- The partnership generally has unlimited liability and each partner is fully liable for the debts of
the business.
-Disagreements between partners and more partners there are, the greater is the likelihood of
disagreements occurring, and also, decisions by one partner are binding on all of the others.
Advantages:
- It can have more people contributing capital than the sole trader or partnership
- It has greater continuity than the sole trader or partnership
- They enjoy limited liability
Disadvantages:
- They arent allowed to sell shares to the public on the Stock Exchange and this may limit the
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Directors have the authority to act on behalf of members. Action taken by directors are legally
binding on the company provided they are acting within their authority. To balance the authority
granted to directors, they have duties imposed on them by law:
- fiduciary duty (bizalmon alapul ktelezettsg): to use their power for the benefit of the
company and its
members
- not to allow a conflict of interest to arise
- not to take secret profit from the company.
- duty of care (gondossg ktelessge) not to act negligently.
They can be removed by normal rotation, at the retirement age or by ordinary resolution in a
general meeting.
c.) Secretary: on them law has placed a number of duties and responsibilities. It is responsible
for legal matters that concern the business. It is the chief administrative officer of the company,
usually chosen by the directors.
d.) There are some departments, each has own structure and duties:
- the administration department will co-ordinate and supervise the activities of other sections
of the firm whose function is to realise policies determined by the Board of Directors.
- the finance and accounts department has a dual role to play. It will monitor the debts owed to
the firm by customers and by the firm to its suppliers, at the same time closely watching the
overall financial status of the company.
- purchasing department: will buy raw materials to be converted into manufactured goods
through production.
- sales and marketing department is responsible for the selling of finished goods, it may be
divided into separate sections to deal with home sales and export sales.
In line organisation: staff in a department is responsible or accountable to one superior, the head
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of the department. Its purpose is to ensure that staff have clean ideas about their duties, and there
is one source of instructions and little confusion.
In functional organisation: the horizontal communication is possible, but one employee may
get instructions from more director, which can create confusion.
product it supplies, perhaps because its competitors have been forced out of business, a
government may feel justified in nationalisation if the business exploits or abuses the power it
holds.
2. Unprofitable: There are some services which are essential to our welfare but by their very
nature are unlikely to be profitable enough for private enterprise to be interested in exploiting
them, e.g. sanitation, hospitals
3. To avoid unemployment: Where a business is likely to cease trading and thus cause a
considerable unemployment, the government may nationalise to save the jobs at risk.
Advantages of nationalisation:
1. government has the resource to undertake vast capital equipment costs which may be beyond
private enterprise, e.g. Atomic Energy. In addition it can provide resources for research into
important but perhaps commercially unworthwhile areas, e.g. medical research
2. It provides essential but uneconomical services e.g. unprofitable railway lines
3. It eliminates duplication of equipment and services e.g. water pipes, railway lines.
4. It enables large sections of the economy to be planned as a whole
5. Profits are to the benefit of the whole country as opposed to private individuals.
Disadvantages of nationalisation:
1. Ultimate bosses are politicians who may not have the expertise that a businessman has. In
addition, there is a danger that political objectives may overrule business sense.
2. State enterprise often enjoys a monopoly, and the lack of competition can lead to self
satisfaction and inefficiency.
Now governments have chosen a number of methods to transfer state-owned industries to the
private sector:
a.) Sales of shares to the public privatisation: Before shares in a s tate owned organisation
can be sold to the public, a private sector limited company must be formed. Initially all of the
new companys shares are owned by the government, and privatisation subsequently involves
selling these shares to the public.
b.) Trade sale: smaller state-owned industries can often be easily sold to private sector
companies as a complete entity. (while large nationalised industries have been broken away for
sale to private buyers)
c.) Management/employee buy-out: In case of people-intensive business, which financial
institutions may have difficulty in deciding on a value, especially in industries with a history of
poor industrial relations.
- They provide services that are considered politically inappropriate for private companies to
dominate
- Their assets are vested in a body, whose constitution is determined by government, and cant be
changed without its approval.
- They have structures and process that resemble private sector organisations in terms of their
speed and flexibility.
E.g. National Health Service Trusts; Higher Education Corporations
a.) Consumer co-operatives: societies that buy goods from a co-operative wholesale society and
sell them in a retail store.
b.) Producer co-operatives: are formed, where suppliers feel they can produce and sell their
output more effectively by pooling their resources. Popular among farmers (by sharing
manufacturing equipment and jointly selling out)
2.) External growth: involves the acquisition of other firms by merger or take-over
a.) Merger: implies:
- measure of voluntary agreement
- fusing of the organisation rather than just a change in ownership
b.) Take-over (acquisition): implies that a predator organisation swallows up a nother firm by
buying its shares. Usually the company which is taken over remains distinct, but the controlling
interest is enjoyed by the predator firm.
3. Lateral: the merger or take-over of firms which produce related goods using similar
techniques of production but which dont compete directly with one another. Aim: to diversify or
to achieve economies of scale
Holding companies
In many cases merger or take-over is not followed by the integration of the business. The separate
elements owned by a conglomerate remain as separate companies. Legally the companies are
independent (retain their separate legal identity) but are wholly or partially owned by a parent or
holding company.
It is a combination of a number of businesses in this way might be used to bring together several
separate process into one unit.
Holding company: acts as an investment company and although strategy will be decided at the
centre, it is likely that the subsidiary companies will enjoy a considerable amount of autonomy. It
allows for decentralisation if necessary easy divestment or demerger.
Trade is the process of changing ownership. Traders are the businesses directly involved in the
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Services to trade are the commercial activities that assist trade in the job of selling goods and
services. The activities that provide these services are:
1. Banking: providing short-term finance and providing facilities for easy payment transfer.
2. Finance: various institutions providing long-term finance for industry, commerce and
consumer credit.
3. Insurance: spread the risks faced by industrial and commercial businesses
4. Transport: engaged in the movement of commodities from one place to another
5. Communications:
- postal: transfer of written communication through mail services
- telecommunications: immediate distance transfer of written, verbal or data communications by
electronic devices
- advertising: provides potential customers with information about goods and services available.
Retail trade:
The part of commerce, where goods are sold to the final consumer. The retailer performs a
number of important functions:
- He buys in large quantities and cut up into small quantities.
- Outlet: provide the producer with an outlet for his products, thus saving the producer from the
need to market his own goods.
- Stocks: hold stocks which the consumer can purchase locally in small, convenient quantity.
- Choice: the consumer is able to choose from the variety of products of different producers
offered by retailer.
- Information and advice: the retailers expert knowledge enables them to advise and inform
customers on quality and suitability of products.
- Feedback: he provides a feedback of consumer responses to wholesalers and producers. This
helps the producer to become aware of what the consumer market wants, and also help to ensure
that consumers requirements are satisfied.
Types of retailer:
1.)Door to door: traders involved in this form of selling generally deal in sales of minor items of
goods and services.
- Pedlars: carry goods from door to door on foot.
- Hawkers: use some method of transport
- Mobile shops: a vehicle adapted to serve as a travelling shop.
2.) Market traders: are operate from stalls in open or covered areas, sometimes in street or areas
specially kept for markets. They are often able to keep prices low, because they avoid overheads
e.g. heating, high rent, shop fitting.
3.) Independent shops (sole traders): is owned by a sole trader or small partnership, and is
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typically sited away from town centres. It often specialises in offering a single commodity or
service. (barker, butcher)
Its advantages are:
- gives personal attention to customers
- saves customers for need to travel into town
- sometimes allows customers credit
Disadvantages:
- Cant buy in very large quantities
- p rices often higher than in larger shops
- carries a limited range of goods
- difficulties in running shop if the owner is sick
4.) Multiples: (Chain sores): are chains of shops trading under a single name of common
ownership. They are generally controlled from central headquarters and often be sited in town
centres and shopping precincts.
It enjoys many advantages over smaller retailers:
- their large size enables them to by-pass wholesalers and buy in large quantities from the
producer.
- a single national advertisement can cover all branches nation-wide.
- they have the resources to rent or buy stores in prime central sites with large car parking
space.
- They can afford to attract customers with loss leaders (goods sold at below cost price)
5.) Self-service stores and supermarkets: It is considered to be a supermarket when it has more
than 2000 square feet of shopping area and 3 or more check-out points.
Advantages:
- These shops deal particularly in pre-packed, price-labelled products.
- Loss-leaders are frequently used to attract customers
- Customers serve themselves, so they save in staff because the customers do m uch of the
work.
- Shopping trolleys reduces the customers awareness of the weight of their purchases and
encourages
impulse buying (unplanned purchase)
- They benefit from economies of scale (able to employ specialist staff e.g. butchers, bakers)
Disadvantages:
- large premises in prime areas are expensive
- pilferage (stealing) levels are high
- customers receive little personal contact
- shopping trolleys are stolen
Loss leaders: Usually the supermarkets pursue this policy, which means: cutting the price of
some popular article very much below the market price in order to attract customers to the shop.
7) Hypermarkets:
They are a very large form of supermarket with a shopping area in excess of 50000 square feet.
They offer a very wide range of goods in many specialist department similar to the divisions in a
department store.
- Parts of the hypermarket complex may be rented out to other traders.
- They are usually one of many in a chain.
- they are frequently sited on the outskirts of towns, where sites are cheaper.
- good parking facilities are provided and some late night trading
8.) Mail-order:
products are sold in a variety of ways through the mail order method:
- advertising in the press, TV, radio, inviting potential customers to buy by post.
- direct selling to customers choosing articles from a catalogue at home
- part-time agents selling to friends from catalogues in return for a commission.
Advantages
- interest free credit often given
- buying in comfort of home
- goods chosen at leisure
Disadvantage:
- prices often more expensive than shops
- difficult to assess quality from a catalogue
- can be inconvenient to return unsuitable goods.
3.) Use of technology: a feature of retail trade has been the increasing use of electronic
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equipment:
Electronic check-outs: Many items have bar codes on their label. At the check out these labels
can be passed through a laser beam, which reads the information and transmits it to the
electronic cash register. The register then produces for each customer a detailed list of the
items bought.
Light pens: can be used to scan the bar codes of products on t he shelves of a store. This
allows the firm to know precisely what goods are in stock. Bar codes convey information
about an item, e.g. the manufacturers name or the brand name of the product.
Wholesale trade
Wholesalers are businessmen who handle goods in the intermediate position between the
producer and the retailer, buying in large quantities and selling in smaller, more convenient lots
to the retailer. Traditionally they have always dealt in large quantities. Their premises are usually
a large warehouse divided into sections. Retailers may visit the wholesaler to choose their
purchased, or orders may be telephoned in or passed to the wholesalers representative.
Elimination of wholesaler:
Sometimes the producer will by-pass the wholesaler and sell directly to the retailer (in these
cases)
- if the retailer is part of a large multiple chain, it can buy in large quantities and deal direct with
the producer
- where after-sales service is particularly important: durable consumer goods
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The production oriented firm concentrates on e fficient, low cost production, in the
expectation that the goods will find market provided the price is low enough. Hence, the firm
strives for productive efficiency rather than responding to customer need. The product oriented
firm produces high quality goods and expect customers to buy them.
The sales oriented firm focuses on the skills of selling rather than on the needs of the buyer. It
produces a product and then considers how customers can be persuaded to buy it.
The market oriented firms starts with the customer and his need. This firm seek to produce
what the customer wants rather than sell what the firm has produced. It places the customer at the
centre and devises an integrated strategy to satisfy the customer to the mutual advantage of buyer
and seller.
3 important elements:
a.) customer orientation: organisation has a sufficient understanding of its target buyers that allow
it to create superior value.
b.) competitor orientation: the firm is aware of the short-term strength and weakness and long-
term capabilities and strategies of current and potential competitors
c.) interfunctional co-ordination: firm uses its resources in creating superior value for target
customers. It requires that the firm integrates effectively its resources and to adapts them to meet
customers needs.
2. Exchange: goods and services can be acquired on t he basis of exchange. Exchange implies
that each party gives sg of value to the other party.
3. Value: In exchange between a firm and its customers, one party generally expects to receive sg
that has value from the other party, in return he gives sg that the other party values.
- for the supplier, value may be represented by a payment received
- for customers value is represented by the ratio of perceived benefits to price paid.
4. Customer: is a person who makes the decision to purchase a product and pays for it. In fact,
products are often bought by one person for consumption by another; therefore the customer and
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5. Market: in an international context, may perhaps be a country, but it also be a region within a
country, or a group of several countries. Equally, it may be a defined segment of consumers or
industrial users within one particular country or several similar segments across a number of
countries.
6. Segmentation, targeting and positioning: Different customers within a market have different
needs. So a company would have to adapts its offering to meet the needs of each individual. It
targets its product at a clearly defined group in a society and positions its product so that it meet
the needs of that group.
It has 3 steps:
- segmentation: A segment represents a subsection of a market where people share similar needs.
A segmentation is the dividing the market into distinct groups of buyers who might call for
separate products. People or firms within a market can be segmented according to a number of
criteria, including socio-economic(income, occupation, education), demographic (dividing the
market into groups based on va riables like age, sex, family size, religion)geographic (dividing
market into different geographical unit), life-style and behavioural factors(buyers are divided into
groups based on their knowledge, attitudes).
- Targeting: a target market is the segment towards which a business directs its strategies. The
choice of a target segment will involve the company looking inwardly at its strength and
weaknesses and outwardly at the opportunities and threats in its environment. The company will
examine whether each segment is growing or declining. (examine the demographic and the
economic environment)
- Positioning: it is necessary to define the location of a product relative to other products in the
same marketplace and then to promote it in such a way as to reinforce or change its position.
- A company could simply copy the other competitors in the market by imitating their
marketing
programme.
- It could seek to differentiate itself from the competition slightly.
7. Marketing Mix: the combination of factors that influence sales and be controlled by a
company.
a.) Product: planning and development of products or services that customers require (quality,
colour, size, packaging, features, guarantees and after sales services, name)
b.) Price: stands for the amount of money customers have to pay to obtain the product (level,
discount, payment terms, credit facilities, allowances)
c.) Place: stands for the companys activities that make the product available to target consumers.
The distribution of product through appropriate channels (location, coverage, logistics)
d.) Promotion: stands for activities that communicate the merits (rdem) of the product and
persuade target customer to buy it. It includes: advertising, personal selling, sales promotion,
direct mailing, public relations
Marketing research
It involves the systematic and objective collection, analysis and evaluation of information relating
to markets and marketing. Marketing research can be divided into the following elements:
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1. Market research: Gathering information of the market for the particular product (size,
geography of the market, future potential market, customer behaviour, market segments)
2. Product research: data about aspects of and desires for the products
- evaluation of strength and weakness of existing products
- investigation of new users for existing products
- product development
3. Sales research:
- evaluation of sales methods
- measurement of effectiveness
- analysis of distribution systems
4. Promotion research: analysis of effectiveness of promotional activities; media research
5. Business economics: research into macro- and microeconomic environment
6. Export marketing research: application of domestic marketing research to foreign markets
7. Motivation research: analysis of motives of the consumer
8. Competitor research: activity of competitors, market share, trends
The research process:
1.) Definition of the problem: it is necessary to clarify the type of information required, why is
it required, and what questions has to be answered
2.) Investigation of secondary sources of data: Secondary research refers to the use of further
analysis of data collected for another purpose. The main source: government publications,
research organisations, trade associations and professional bodies. It is cheaper than primary
research but the data may suffer from 2 defects: it could be dated and it was collected for another
purpose, so it should be handled with care.
3.) Selection of primary data collection methods: There are 3 basic techniques to collect
primary data. In making this choice we should take into consideration the relative costs, the time
available, the type of information required, the type of people to be investigated, and the degree
of accuracy needed.
a.) Observation: market researchers observe how people behave. Observation takes the form
of audits (e.g. stock checks), recording devices (e.g. record viewing figures for television
channels) and watching. It is an expensive technique and provides only limited information.
b.) Experiments is used to test and assess the response of customers to changes. This might
involve changes in the product, or in packing, advertising, price and distribution arrangements.
Test Marketing is in essence an experience. It involves a limited launch of a product to test
reaction both to the product and to the way in which it is marketed. Its advantage: reducing
marketing costs and targeting a particular area before the national launch. Problems: relate to
the choice of the participants and the difficulties of controlling random variables.
c.) Survey: (of customer opinions).
- The advantage: flexible, yields a wide range of data and generated information on customer
opinions.
- It can be delivered in a number of ways: personal interviewing, postal survey, telephone
survey, panel survey (the opinions and behaviour of a regular group of people is obtained)
4.) Decide o details of research techniques: include the formulation of questionnaires and
deciding on sampling methods
a.) Questionnaires:
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- closed questions: highly structured questions designed to attract a limited range of responses
- opened questions: unstructured ones to which people are invited to answer more freely
Questions should be precise and clear, follow a logical sequence in questions
b.) Sampling: sample survey
It involves less than the whole population and it has advantages in that it reduces costs; saves
time; requires fewer resources. It is expected that a sample survey will provide information
which valid for the population as a whole but this depends on the size of the sample and how it
is selected. The larger the sample the more reliable it will be. After deciding the size of the
sample we should choose the method of selecting the sample:
Random and quasi-random methods
Non-random methods include:
5.) Analysis, interpretation and evaluation of the data: After collecting data it is necessary to
draw conclusions from it which can be of value in designing marketing strategy.
Promotion
Promotion: is series of techniques for informing, influencing and persuading customers. Aim:
increasing sales of specific goods and services.
Forms:
1.) Advertising: is one-way communication to promote the sale of goods via paid-for
advertisements in the media.
2.) Publicity: is a promotion via press releases to the news media. Press releases are issued in the
expectation that they will be given editorial mention at no charge.
3.) Direct mailing: involves direct communication with customers, either in the form of a letter
addressed to the recipient (= mail shot) or an unaddressed communication (=mail drop)
4.) Packaging: is promotion through design and display. The intention is to create an impact at
the point of sale.
5.) Sales promotion: includes a range of activities such as competition, gifts, point of sale
display, leaflets, sponsorship
6.) Personal selling: is a promotional presentation made on a person-to person basis. The
significant feature of this activity is the two-way discussion between salesperson and potential
buyer.
Firms will seek the promotional mix which is most effective in terms of achieving its objectives,
subject to the usual financial constraints.
Promotional objectives:
The main objectives are to increase sales and profits, beside them there are some particular
objectives:
- to increase awareness of the product: task is to make potential customers aware of the existence
of product.
The next step is to develop a preference of the product.
- to target particular market segments
- to position the product in relation to its main competitors.
Advertising
involves the use of various media to relay promotional messages. It is a part of the marketing
mix, being used to make a product or service known to the customers and to persuade them to
taste and buy the goods. Advertising will only be successful if the chosen message and the media
are appropriate. An inappropriate message will seriously harm the product.
Choice of media
- newspapers - high coverage, relatively low cast, local newspaper are selective geographically
- short life, no movement or sound, problem of gaining and retaining attention
- television - high coverage; visual impact; sight, sound an motion all in one; demonstration is
possible
- high cost; conveys only limited information;
- radio:- geographically selectively; low cost,
- low attention non visual
- cinema- locally; high selectivity
- low cinema attendance
- outdoor posters: - high in coverage; high readership; low cost; comparatively long life
- only conveys small amount of information
- magazines - target selected audience; relatively long life
- but: high cost; low in flexibility, no sound or movement
- direct mail: - selectively, flexible, conveys large amount of information
- high cost, low acceptance
Sales promotions
a form of one-way communication, but unlike advertisement it doesnt involve a paid medium.
Types:
1. Consumer promotions: SP is designed to stimulate consumer purchasing, including samples,
coupons, rebates, Its aim to draw attention to product; to encourage sales, to increase use rate, to
expand off-season sales
2. Trade promotions: SP is designed to gain reseller support and to improve resellers selling
efforts, including discounts, allowances, free goods, co-operative advertising. Its aim is to
encourage the dealer to push the product; to gain shelf space, to expand distribution.
Public Relations: practice is the deliberate, planned and sustained effort to establish and
maintain understanding between an organisation and its public. The relationship between PR and
advertising is that unless people understand an organisation or its products there can be no
goodwill, and advertising may be a waste of money and so fail to sell. Thus, PR can have the
effect of making advertising work. This is because customers are more likely to be persuaded to
buy something they know about and trust.
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Enquiries
A great number of business transactions start with an enquiry, which often opens a new and
perhaps very valuable connection. Firms who are in the market for certain goods try to secure
sufficient quantities of them at the right time and on the most favourable terms. Therefore they
try to obtain as many information as they can about the goods needed.
If you have to look for your source of supply, or if you do not know exactly at what price or on
what terms you can obtain the goods, you send out an enquiry to one or more possible or likely
suppliers. It can be addressed either to a firm with whom the writer has had business connection
or to new ones, which should be more explicit and complete. You might want to see what a
material or item looks like before placing an order. Most suppliers are willing to provide samples
or patterns so that you can make a selection.
Most letters of enquiry are short and simple, but it should say clearly what is wanted. send
printed enquiry forms, eliminating the need for a letter
- the letter contains briefly and clearly what the firm is interested in, and this is all the receiver of
the letter needs to know.
- In many cases it is advisable to be a little more explicit especially when the object of the
enquiry is to obtain a special discount or advantageous terms for regular orders. Your letter must
be attractive to the supplier
Types of enquiry:
a.) General enquiry: asking for the latest catalogues, price lists, samples; written on postcards or
special printed forms.
b.) Special enquiry: requesting more detailed information.
Offers
The reply to an inquiry may be either a simple one, e.g. a short letter accompanying catalogues,
price-list etc. or it may be a detailed offer. There are two kind of offers: the unsolicited offer and
the offer in reply to an enquiry.
1.) Unsolicited offers (Sales Letters) are written on the sellers own initiative: he maybe wants to
introduce anew article, to promote sales, reduce his stock or offer his customer a line in which he
thinks that the buyer might be interested. It requires great skill to interest a customer in an article
for which he has not asked. (Advertising aimed at a carefully selected group) You must:
- Attract the readers attention: excite his curiosity and so induce him to read further
- Make him desire to have the product or service that you are offering:
- Convince him that goods/offer has special features, and that is in his interest to accept it
- Make him take action. It is good idea to enclose a s tamped and addressed envelopes,
business reply letters so that it doesnt cost him anything.
2.) Offer in a r eply to an enquiry: seller sends in reply to his customers inquiry. He should
encourage or persuade his prospective customer to do business with him.
- A simple answer, that you have the goods is not enough, because he might have made other
inquiries.
- Mention one or two selling points of your product, including perhaps any guarantees you offer
- If you dont have the goods required, but have an alternative (substitute), offer it to him
- If you dont have what the enquirer asked for, tell him, and if possible refer him elsewhere
- Make sure that you enclose current catalogues and price-lists and if prices are subject to change,
then let him know.
Certain product (machinery) may need demonstrating. In this case the company might send a
representative. They could, however, suggest that the customer visits their agent in his own
country.
Offers are usually made without engagement (ktelezetts), when the seller reserves the right to
change the conditions of the offer.
If the company makes a firm offer, it means he binds himself to deliver the offered goods in
compliance with the condition stated in the offer, provided that the order is given within a fixed
time. So he will hold the goods for a certain time until the buyer orders.
If a buyer doesnt accept the prices and terms offered by the seller, he can make a counter-
proposal with the object of obtaining better prices or terms, or a shorter time of delivery. As a
result, the seller may make concession, particularly for an introductory sale, of if the customer
places a large order.
Manufacturers and wholesalers sometimes allow discounts to be deducted from the price. They
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 42
may allow a
- Trade discount to sellers in similar trades
- Quantity discount for orders over a certain amount
- Cash discount if payment is made within a certain time
Quotation
Sometimes they send a quotation with the offer. It must be the most explicit. All details should be
clearly set forth so that the customer knows exactly what he will get for his money. This makes a
good impression too.
- quality: a full description of the goods: as precise and complete as possible according to their
nature
- quantity of the goods in customary units.
- price: what does the quoted price cover (transport cost, packing, services); refer to Incoterms
- method of transport : sometimes a choice of methods and routes can be offered
- Terms of delivery
- time of delivery:
- prompt (offered goods are sent from stock);
- future (goods are not in stock, must be manufactured);
- partial (goods are delivered in part-shipments);
- deliveries on call (goods are placed at the buyers disposal when he needs them)
- place of delivery: point at which the goods are to be placed at the buyers disposal.
-Terms of payment: state clearly the currency you want to be paid in, and the mode of payment
(L/C, CAD, grant credit)
- Insurance: who is to take out insurance
- Validity of the offer
- Arbitration clause: it is advisable to suggest arbitration.
Tender
A firm offer to a governmental department or to a local (municipal) authority to execute exactly
specified work or to supply goods required, at a fix price.
- Invitations for Tenders are often issued by advertisement
- To enable tenderers to estimate the cost and to quote a p rice, a s pecification may be sent to
them, giving a detailed account of the work to be done and the goods to be supplied. If the
volume of the product needs, a tender-documentation is made. It contains the general rules, the
terms of technical and terms of trade as well as the date of submission. It is a deadline, so if you
submit the tender after that date, it wont be accepted.
Orders
If the sellers offer is right, and his sales letters have caught the buyers eye, an order may be
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expected:
- Accuracy is essential in the placing of an order: An error in quoting a catalogue number, or
mistyped figure in a quantity column can cause trouble
- Clarity is needed: The buyer must make clear to the seller exactly what he wants. The
description of the goods precisely is not enough, there is a need for the method of transport,
packing, delivery etc. He may require some special documents for his own use to satisfy import
regulations.
- Orders are usually written on a companys official order form, which has a date and a reference
number. In most cases an accompanying letter or covering letter is also sent. Even if the order
made by telephone, it must be confirmed in writing.
Sometimes wholesalers and retailers want to see how a line will sell before placing a firm order
with the supplier. They may be able to do t his by getting goods on approval or on a s ale or
return basis. In these cases the supplier would have to know the customer well, or would want
trade references. He will specify a time limit before which the goods be returned or paid for.
Types of order:
1. trial order: when the buyer wishes to introduce a new line of goods into his local market, and
he wants to know for himself the quality of goods, he gives a trial order.
2. Repeat order: when the buyer orders the same goods on the same conditions as in the past, he
need not stipulate all the particulars in detail again, merely refers to his previous order.
1. Act of God: When a superior force causes the damage, which cant be controlled and
unforeseeable (war, strike, riot, civil commotion, shipwreck, flood.), for which neither party can
be held responsible. When an unforeseeable circumstance arises the other party must be informed
and an official certificate of competent chamber of commerce is sent to him. When they cant
resolve the problem, they terminate the contract.
2. The seller is at fault: the most usual causes for lodging a complaint (reklamcit bejelent)
1.) Defect in quality: wrong goods were sent or goods may be of inferior quality
2.) Quantity of goods received: not enough goods or too many goods were sent. If less goods
have been delivered, the buyer may refuse to accept them altogether or may accept them as a
partial delivery and ask the delivery of the rest of the consignment. He may pay for what has been
delivered and cancel the rest of the order.
3.) Delay in delivery:
- buyer may buy the goods elsewhere at the sellers cost and claim compensation for the loss
caused by the delay (covering purchase)
- in case of non-observe of delivery date the seller has to pay penalty. Contract usually include a
penalty clause to protect parties against loss of damage.
4.) Unsuitable or faulty packing: can cause damage to the goods in transit; broken cases may be
pilfered. In this case the insurance companies wont accept responsibility. The buyer may accept
damaged goods if the supplier offers a discount, but if the goods are badly damaged they may be
unsaleable, and in this case the buyer will demand replacements.
5.) Other defects: documents arent in order, there is a mistake in the invoice, discrepancy
between the documents and L/C.
6.) damage: this is usually a matter for the insurance agent , who must investigate what
happened.
Adjustment (intzkeds)
The response to a complaint should always be polite. If you write an adjustment you should
1. express regret for any inconvenience caused by your mistake
2. assure the buyer that you will correct the mistake
3. offer any other remedy
4. explain the reasons for the delay, damage, wrong consignment, bad packing or inferior quality
- if the customer is at fault: write a tactful letter explaining why you think so
- if the error, damage or delay is not your companys fault, then you should say that it is due to
circumstances beyond your control
Offer the services of your representative, who can visit the buyer and help to arrange
replacements.
- if the order was short-shipped, you should despatch the goods which were not sent as soon as
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you can. It is good to arrange payment franco domicile, which means that all costs are paid to the
consignees warehouse. This can be a sign of goodwill and may prevent customer from changing
his supplier.
Arbitration: (brsgi eljrs)
The endeavour of every foreign trading companies is to prevent any complaints or disputes
arising out of the contracts or commercial transactions. If a dispute arises, parties to the contract
should always settle it in a friendly, satisfactory way. It may happened that disputes cant be
settled in a friendly way, then the parties are obliged to resort to law or to refer the matter to an
arbitration court or arbitration tribunal.
Factors to consider when setting prices: (before a company quotes a price for goods)
1. Calculate in advance the overall costs: total costs of production cost, shipping, insurance etc.
From these figures you can work out the unit cost. Profit margin, at least 10%. So when a
company gives a quotation for a model, a they have built into the price their overall costs and
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 46
profit margin.
2. Law of supply and demand also affects the price of goods: if a product is in demand and not
many firms can supply the product, then the company can charge a higher unit price. Making
goods in large quantities is comparatively cheaper than producing goods in small quantities. If
there is a big demand for a model, a company can produce it in large quantities and they should
be able to quote a lower unit price.
Two departments in a company deal with pricing and selling goods:
- Accounts Department: handle the forms involved in charging for goods (invoice and
statement)
- Sales Department: handle the basic forms involved in selling goods (order, delivery or advice
note)
The term of the contract will vary by circumstances but it can also include agency involvement,
after-sales activities e.g. availability/supply of spares, product servicing, training,
advertising/promotion cost
A copy of the contract should be retained by each party. The export invoice contains the
contractual terms.
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Insurance
Importance of insurance
All individual and organisation face a wide variety of risks, but only some of them actually suffer
a loss during the course of a year. To offset the possible effect of loss, all those at risk can
contribute a small sum of money (premium) to a fund operated by an insurer company. Managed
efficiently, the fund will be sufficient to compensate (indemnify) those who suffer a loss. The
result of this, the risks are spread/shared between the many people and organisation that ha ve
contributed to the insurance pool.
Many businesses wouldnt be formed if they had to face all the risks of the enterprise. So the
insurance relieves business people from some of the risks they face. Much of the money collected
by insurance companies in premium is invested in industry, thus giving resources and
encouragement to economic activity.
Uninsurable risks
The success of insurance is based on a statistical analysis. From statistical records of claims
underwriters can calculate the probability of a loss occurring and fix the appropriate premium.
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They have to judge correctly how much they should charge to cover a particular risk, if they are
to have sufficient money in the pool to pay compensations
Examles of uninsurable risks:.
- when the probability of loss is inevitable (loss/damage caused by inherent vice or delay)
- where there is insufficient past experience to assess the premium
- if the proposer doesnt have insurable interest
- against fair wear and tear such as rust and corrosion
- loss, damage or expense attributable to wilful misconduct
- inadequate packing
Policy: is the evidence of the contract of insurance between the insurers and the insured. The
insured pays the insurer a certain premium and the insurer undertakes to compensate him if a
loss or damage should occur.
Proposal form: the form on which you apply for insurance cover. The question on which must
be answered truthfully. All information that may assist the insurers in judging the risk
correctly must be given.
Premium: is a regular payment that has to be made by the insured under the terms of a policy. If
the premium isnt pay when due, the policy lapses, so it becomes void and the insured loses
all rights in connection with it.
Insurable risks: include such items as fire, burglary, storm, collision, explosion, breakage, theft,
pilferage and marine disaster.
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Claim: a sum of money demanded under an insurance agreement for loss or damage. If an
insured person suffers a loss as a result of the peril against which he has insured, he is
entitled to be indemnified for the loss. The correct procedure is to make a claim on t he
appropriate claim form, which will then be considered by the insurance company.
Reinsurance: is the sharing of a large risk among two or more insurers, each of whom takes
responsibility for a fixed part of any loss, and receives a like proportion of the premium.
Insured sum is usually not equal to the sum given in the invoice, but is increased by the
expenses and charges the seller has to pay according to the terms of sale. It includes the
imaginary profit: the profit the buyer expect to make if the goods reach him safely and in
good condition.
Certificate of insurance: a document issued in place of a policy. It shows the value and details
of the shipment and the risk covered. It is required when the exporter takes out open cover
with an insurer for the whole of its trade.
Types of insurance
1.) Liability insurance: It protects the insured person against his liability to pay compensation
for losses caused to others by his own actions or negligence, or the actions of these (e.g. his
employees) for whom he is responsible.
Product liability: the manufacturers are liable for their products and should compensate their
customers for any injuries their products cause.
3.) Export credit insurance: offers protection to exporters of goods/services who sell their
products on credit terms. The exporter is insured against losses arising from a wide range of risks,
which may be categorised into commercial risks or political risks. Many private export credit
insurers offer cover for commercial risks only; these would generally include:
- insolvency of the purchaser
- default on payment by a private purchaser at the end of the credit period
- non-acceptance of goods delivered to the purchaser, where such goods comply with any
contracts in
existence.
4.) Marine insurance: covers loss or damage to the goods during sea transport.
The main sections of marine insurance are hull, freight, shipowners liability and cargo insurance.
5.) Cargo insurance: Goods in transit are exposed to various risks, which may result in a total or
partial loss of or damage to the goods. So for the owner of the goods it could cause a great
financial consequences. To avoid that, he can protect himself against the risk by taking out an
insurance on the goods.
- F.P.A. (Free of Particular Average). means that the insurer will not indemnify for any partial
loss or damage due to minor perils (seawater damage). The cargo is only covered against a total
loss and partial loss due to major perils (sinking, collision, fire).
- W.P.A. (With Particular Average): means that the cargo is covered against total and partial loss
due to minor or major perils. (fabrics, carpets)
- A.A.R. (Against all risks): gives the fullest possible cover, but only against those risks actually
stated in the policy.
But:
- if protection of domestic industries is carried too far, it will restrict the level of specialisation
and will therefore limit the amount of total world output
- trade barriers increase the prices of imports and consumers may have to pay more for the goods
produced by their own domestic industries
- many domestic industries, which operate behind tariff walls are protected from foreign
competition and this may lead to inefficiency, reduced output, higher prices
Fore these and other reasons, the GATT aims to reduce or abolish tariffs, quotas and non-tariff
barriers, and to promote and develop freer world trade.
Types:
a.) Export tariff: when it is collected by the exporting country
b.) transit tariff: if it is collected by a country through which the goods have passed.
c.) import tariff: is collected by the importing country. It is the most common type. It increases
the price of imported goods and the domestic goods will gain a relative price advantage. It is a
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2.) special fees: excessive charges for import related documents (for consular and customs
clearance and documentation)
3.) Customs deposits: are required to be placed in advance of shipment, and the minimum price
levels at which goods can be sold after they have customs clearance.
2.) Embargo: a specific type of quota that prohibits all trade. They are generally imposed for
political purposes and the effect may be economic. They may be placed on e ither imports or
exports, on w hole categories of products regardless of destination, or on specified products to
specific countries or on all products to given countries.
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3.) Boycott: prohibition of all trade with certain selected companies, usually those have traded
with political enemies.
4.) Voluntary export restrictions: agreement between two countries. One country agrees to
limit exports of particular goods to another country for a specific period of time.
5.) Buy Local legislation: Most governments give preference to domestic producers in their
purchase of goods, sometimes in the form of content restrictions (a certain percentage of the
product must be of local origin).
Transport
Transport is a form of communication; a means of making contact between two distant points. It
provides services that enable workers to go to and from work, raw materials to reach the producer
and finished products to be distributed. An efficient transport system reduces the amount of
capital needed to be tied up i n stocks, because new supplies can be obtained quickly. It also
makes international trade possible.
Modes of transport
Each type of transport has its special uses. Transport users will take the following factors into
account when choosing the form of transport to use:
1. the nature of the goods
2. how urgently the consignment is needed
3. the value of each item
4. cost of the transport
5. distance the consignment must be transported
6. the size and weight of the load
7. convenient position of terminals, e.g. station, docks and airport
8. possibility of combining loads to reduce costs
9. the reputation of the carrier
1.)Road transport
Advantages:
- door-to-door service provides maximum flexibility: goods are loaded at one point and neednt
be touched until they reach their final destination. So delivery is made direct to the consignees
premises.
- fast over short distances of less than 200 miles i.e. directness of the journey
- the risk of damage reduced by lack of need for transhipment
- can reach places inaccessible to other forms of transport.
- less tied to a rigid timetable than railways
- suitable for speedy direct delivery of perishable goods
- Other forms of transport rely on road transport to connect with terminals such as dock, airport,
station.
Disadvantage:
- expensive to operate in large congested cities
- subject to mechanical breakdown
- affected by adverse weather conditions
- loads are limited in size and weight
- some roads unsuitable for very large vehicles (mainly in Europe)
- slower than railways over long distances.
- wastes resources if lorry returns empty (res visszfuvar)
- Problem of congestion (torlds).
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2.)Rail transport:
For a c entury the railways were supreme in inland carriage, but today in most countries the
railways lose market. Since the mid 1950s, considerable sums of money have been spent on
railway modernisation all over the world in order to became profitable sector.
Advantages:
- fast when actually moving, because it has private ways, which is kept clear.
- for long distance, more than 200 miles, it is more economical.
- less labour-intensive than road transport: (1 driver, 2 guards)
- more economical in fuel use
- especially suited for container transport
Disadvantages:
- terminal problem: goods must be loaded and unloaded at terminals to complete their journey to
the buyers
by road vehicle
- routes determined by railway lines and stations
- traffic density: railways operate ideally when the train is full.
- equipment costs are very high
- less economical than road transport for journey less than 200 miles
- there is more handling, and therefore greater risk of damage
- The risk of pilferage is greater.
2. Chartered vessels: are used to carry such bulk cargoes as coal, grain, timber. They do not
follow fixed routes but go wherever they are needed, so they can be at the port when cargo is
required to be moved. A company wanting to charter a ship will apply to one of the world freight
markets such as the Baltic Exchange in London. This market provides a market place for the sale
of ships and the chartering of vessels or space on them. The rates are not pre-determined, but are
based on economic forces of supply and demand.
A charter party: is a contract by which the shipowner agrees to place the entire ship or a part of
it at the disposal of the charterer for the carriage of goods.
Disadvantages:
- high operational costs result in high freight rates
- weight and size of cargo is limited
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6.) Pipelines
It is possible to transport without using a vehicle by transfer via pipelines. They are used to
transport liquids such as oil, water as well as gas, electricity, telephone and data-lines. In case of
oil, the pipelines link the oil refinery (finomt) with various distribution depots.
Advantage:
- low cost of distribution with virtually no labour content in the distribution network
- a 24-hour availability of the pipeline and its low maintenance
- from an environmental point of view: no noise or fumes, but: during installation it cause little
disruption.
Disadventages:
- high costs of installing the pipeline system.
Transport documents
A transport document is a document that indicates loading on bo ard or dispatch or taking in
charge. Its functions are to provide evidence of a contract of carriage, evidence of receipt of the
goods (by the carrier) and, in some cases, they are also documents of title, giving the holder of
the documents title to the possession of the goods. They are necessary to prove the executing of
an order.
Types:
a.) Shipped on Board B/L: acknowledges that the goods have been actually received on board
b.) Received for Shipment B/L: acknowledges that the goods are in the care of the shipowner
for carriage on a ship, but doesnt say that the goods on board.
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c.) Through B/L, Combined transport B/L: it is used in containerised transport, the goods are
carried by 2 or more modes of transport
The packing must be appropriate to the type of goods to be carried. The customer can also add
packing instructions. T here are various factors influencing the nature of packaging for an
international consignment:
1. value of the goods: the high-value consignment usually attracts more extensive packing
2. method of transport: The more handling the goods must endure, the stronger the packaging
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required.
3. nature of the cargo: Cargo shipped in bulk requires little or no pa cking (grain, ores, coal),
while general merchandise needs adequate packing. (apples can be consigned in cases, boxes,
cartons)
4. customs regulations in the foreign country: it should compliance with Customs or statutory
requirements
5. climatic condition: variation in temperature during the course of the transit.
6. insurance acceptance conditions: Some cargoes (fragile) may be subject to a p rescribed
packing specification.
7. the size of the cargo and its weight: reduction of overall measurements in order to save
freight cost.
8. marketing considerations: the package should fit into the overall marketing concept.
9. facilities available at the terminal: lifting equipment; not all airports have Customs clearance
facilities
10. type and size of container, cargo wagon, pallet, Ro/Ro vehicle or aircraft
11. marking of cargo packaging: each package must bear a marking code and use a symbol to
ease handling.
12. cost of packaging
Marking of cargo
All exports have to be marked in order to identify the goods, the customer to whom they are
being sent, and its destination, and to give instructions for handling. Sometimes customers
stipulated how the goods are to be marked. These usually consists of:
- initials of the firm to whom the goods are being sent
- name of destination
- customers ordering number is advisable to be included in a mark.
- number of consignments
In the package there are sometimes additional remarks, special directions or warming regarding
manner of handling, loading, which are accepted internationally. These are used to facilitate
handling and overcome language problems. For ex. fragile, this side up, ha ndle with care.
Poisonous or dangerous goods is sometimes marked with a skull and crossbones.
Brand:
It is a makers name, a trade or sign, usually officially registered and protected. It is put on goods
to make it easy for buyers to recognise the make or quality. Branded goods are marked with the
name of the producer or some other brand name chosen by him, and usually put in special
packaging before leaving the factory. The object is to make particular brand of goods easily
recognisable and distinguishable from other brands in the shops.
A trade mark is a special mark that is placed on a particular brand of article or commodity to
distinguish it from similar goods sold by other producers. A registered trade mark becomes the
property of the person or organisation in whose name it is registered, and no other producer may
us it without the owners permission. The well-known trade makes: Coca Cola, Adidas, Puma.
Containerisation:
it is a method of distributing merchandise in a unitised form thereby permitting an inter-modal
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transport system to be evolved providing a possible combination of rail, road, sea transport.
A container is a large pressed steel box capable of carrying 20 t o 30 tonnes of cargoes. It is
packed at the factory warehouse and delivered to the container terminal by rail or road and
deposited in the container parking area in the docks or airport.
Advantage:
- door-to-door service from the factory production site to the retail distributors store.
- no intermediate handling at terminal transhipment points (road/rail terminals, seaport)
- reduce the risk of cargo to be damaged or lost.
- less packing needs for containerised consignment. This produces considerable cost savings
of the
international transit and raises service quality.
- provision of through documentation or combined transport B/L.
2. Companies can defend themselves with different types of insurances, throwing the
responsability upon an insurance company or a bank, in exchange for a premium:
1.) Export credit insurance: offers protection to exporters of goods/services who sell their
products on credit terms. The exporter is insured against losses arising from a wide range of risks,
which may be categorised into commercial risks or political risks. Many private export credit
insurers offer cover for commercial risks only; these would generally include:
- insolvency of the purchaser
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2.) Marine insurance: covers loss or damage to the goods during sea transport. The main
sections of marine insurance are hull, freight, shipowners liability and cargo insurance.
3.) Cargo insurance: Goods in transit are exposed to various risks, which may result in a total or
partial loss of or damage to the goods. So for the owner of the goods it could cause a great
financial consequences. To avoid that, he can protect himself against the risk by taking out an
insurance on the goods.
Incoterms
The purpose of Incoterms is to provide a set of international rules for the interpretation of the
most commonly used trade terms in foreign trade. Thus the uncertainties of different
interpretations of such terms in different countries can be avoided or at least reduced to a
considerable degree.
The ICC International Chamber of Commerce first published a set of international rules for the
interpretation of trade terms in 1936. Last amendments were made in 2000. Incoterms describes
how the responsibilities and costs are shared by the seller and the buyer and who pays what, who
is responsible for arranging transport.
- Group E: the seller makes the goods available to the buyer at the sellers own premises: EXW
- Group F: the seller is called upon to deliver the goods to a carrier appointed by the buyer: FCA,
FAS, FOB
-Group C: the seller has to contract for carriage, but without assuming the risk of loss or damage
to the goods or additional costs due to events occurring after shipment despatch: CFR, CIF,
CPT, CIP
-Group D: the seller has to bear the costs and risks needed to bring the goods to the country of
destination: DAF, DES, DEQ, DDU, DDP
EXW: Ex Works (zembl): the seller makes the goods available to the buyer at the sales own
premises, the buyer must take delivery from the exporters factory and pay all the costs of freight,
insurance and other expense items to get the goods transported from the suppliers factory to their
destination.
FCA: Free Carrier: (Kltsgmentesen a f uvaroznak): Seller fulfils his obligation, when he
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delivered the goods to the first carrier. The goods are cleared for export.
FAS: Free Alongside Ship (Kltsgmentesen a haj oldalhoz): the seller delivers the goods
alongside the ship at the port of loading named in the contract, the buyer chooses the carrier to
transfer the goods to their destination, pays for the cost of freight from the point of shipment,
including the cost of loading the goods on bo ard the ship if loading costs are separate from
freight charges.
FOB: Free on board (Kltsgmentesen a haj fedlzetre): the seller delivers the goods on
board the ship that the buyer has specified, and pays freight to the named port of shipment on
board at the port of loading, the buyer nominates the carrier to transfer the goods, gives the seller
the details of ship and sailing time or the airline, flight number, flight date, pays freight cost from
this point, including costs of unloading at the place of destination
CFR: Cost and Freight (Kltsg s fuvardj): the seller delivers the goods on board, pays for
the cost of freight to the place of shipment, pays for the cost of loading the goods if the loading
charge is separate from the freight charge. The buyer pays for the insurance of the goods from the
time they are taken on board. He bears the risk of loss of or damage to the goods.
CIF: Cost, Insurance Freight: (Kltsg, biztosts s fuvardj): the seller arranges for
insurance of the goods from the port of shipment to the port of destination. He takes out an
insurance in favour of the buyer in the event of loss of damage to the goods during shipment. The
buyer doesnt have to pay for insurance of the goods between the port of shipment and the port of
destination.
CPT: Carriage paid to: (Fuvarozs fizetve) The seller pays the freight cost to a n amed
destination but not insurance costs.
CIP: Carriage and Insurance paid to: (Fuvarozs s biztosts fizetve): the seller pay all the
costs of freight, packing and insurance to a named destination (used for a multi-modal transport)
He has to take out an insurance in favour of the buyer for the minimum condition.
DDU: Delivered Duty Unpaid: (Vmfizets nlkl leszlltva) duty, tax arent paid
DDP: Delivered duty paid: (Vmfizetve leszlltva): The seller must pay the cost of delivering
the goods to the named destination, having paid import duties on t he goods. The seller must
therefore obtain the import licence, pay import duties or taxes, arrange and pay insurance and
provide document that will enable the buyer to take delivery. It is the sellers maximum
obligation. The buyers responsibility is to take delivery of the goods at the named destination.
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Drawing rights: to buy limited supplies of foreign currencies from a reserve collected and
managed by the Fund
Special Drawing Right (SDR): international reserve currency system. Each member is allocated
a specified annual ammount of SDRs in proportion to their quota. SDR drawings do not require
consultation with the Fund, do not have conditionality attached and are not subject to repaiment.
It is a new unit of account, a basket of 5 major currencies.
GATT principles:
1. Protection only through tariffs, and countries should work to lower trade barriers
2. Trade without discrimination, which is embodied in the most-favoured-nation clause, which
requires that if a country grants a trade reduction to one country, it must grant the same
concession to all other countries. All trade barriers should be applied on a non-discriminatory
basis, i.e. all nations should enjoy the most-favoured-nation status.
3. When a country increases its tariff above agreed-upon levels, it must compensate its trading
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GATT-Rounds
There were important rounds, which were named for the place in which begins. These have led to
a number of multinational reductions in tariffs and non-tariff barriers for its members.
1.) The Short-Term Arrangement (1961). This permitted the negotiation of quota restriction
affecting the exports of cotton-producing countries.
2.) The Kennedy Round was held in Genova between (1964-1967): The result of this round that
the average level of world tariffs on industrial products were reduced by 30%,the 50% target cut
in tariff levels was achieved in many areas.
3.) A New Chapter (1965) An additional chapter to the GATT on Trade and Development was
adopted, which required developed countries to give high priority to the reduction of trade
barriers to products of developing countries.
4.) The Tokyo Round (1973-1979): it resulted in overall reduction in tariffs.
5.) The Uruguay Round (1986-1994): There were negotiations on trade in goods, especially in
the following area: tariffs and non-tariff barriers, subsidies, tropical products, agriculture and
textiles.
Functions:
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1.) The WTO administers trade agreements (mainly the 28 agreements contained in the Final
Act of the Uruguay Round)
2.) Acting as a forum for trade negotiations, where countries continuously negotiate exchanges
of trade concessions to further lower trade barriers all over the world.
3.) It oversees the implementation of the significant tariff cuts and reduction of non-tariff
measures agreed to in the negotiations
4.) Reviewing national policies: Watchdog of international trade, regularly examining the trade
regimes of individual members. Members are require to notify in detail various trade measures
and statistics, which are maintained by the WTO in a large database.
5.) Setting trade disputes: When conflicts arise among members, the WTO provides several
conciliation mechanism for finding an amicable solution. Trade disputes that cant be solved
through bilateral talks are adjudicated under the WTO dispute settlement court.
6.) Management consultant for world trade. Its economists examine the global economy and
provide studies on the main trade issues of the day.
7.) Assisting developing countries in trade policy issues, through technical assistance and
trading programmes: (The Secretariat assists developing countries in the implementation of
the Uruguay Round.)
8.) Co-operating with other international organisations.
Latest results
In 1997 an agreement was reached on the liberalisation of global telecommunications trade from
1998. It is a vital contribution to preparing the world economy for the 21 st century. The Central-
East European countries start telecoms liberalisation between 2000 a nd 2005. In Hungary this
market will be liberalised from 2002.
Evolution to integration
1951: 6 countries signed the Treaty of Paris creating the European Coal and Steel
Community (ECSC) (Belgium, Luxembourg, the Netherlands, West Germany, France, Italy). It
was the first step to European integration and peace by pooling all their coal and steel production
under this single organisation.
1957: Treaty of Rome: The European Economic Community (EEC) was created by the 6
countries. The aim was to promote the continued and balanced expansion of the members
economies by their progressive harmonisation and integration. The preamble to the treaty
included among the basic objectives of the EC:
- growing unity among European members
- the improvement of their working and living conditions
- the progressive abolition of restrictions on trade
- the development of the prosperity of overseas countries
The initial steps towards the attainments of these objectives were
- the creation of a customs union
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- abolition of internal tariffs and other barriers to trade and establishment of a common
external tariff
- the adoption of common agricultural and transport policies
- free movement of labour, capital and services between the member states
- the elimination of distortions of competition within the internal market
- the creation of European Social Fund to improve employment opportunities for workers
- establishment of the European Investment Bank to facilitate economic expansion
- association of overseas developing countries which with the Community in order to increase
trade
1957 an other treaty was signed creating the European Atomic Energy Community
(EURATOM)
1967: The Merger Treaty: by which the ECSC, the EEC and the Euratom merged to form the
European Community
1979 European Monetary System was organised laying the ground work for a single currency
institutions
- It makes key political decisions on of the most important, most sensitive, most
controversial, and
most difficult matters
- It sets the broad guidelines for the future action
The Maastricht Treaty groups its activities into three separate areas:
- community activities: it ensures that the objectives laid down by the treaties are attained by co-
ordinating the general economic policies of the member states and by adopting proposals from
the Commission. The decision-making process relating to the common policies involve the
Parliament in varying degree.
- under common foreign and security policy it defines common positions and adopts joint
actions, and the Presidency of the Council is responsible for implementing such measures as
representative of the EU.
- justice and home affairs: it acts mainly through joint actions and by drawing up conventions,
which recommends the member state adopt. The Council plays a predominant part in the last 2
areas on intergovernmental co-operation.
co-operation, it h as the same rights as the individual member states with regard to making
proposals.
- Executive functions: it has a duty of supervision and implementation of EU policies. This
involves issuing rules for the implementation of certain treaty articles and administering budget
appropriations earmarked for Union operations and the financial funds.
- Guardian of the legal framework: it shares with the Court of Justice responsibility for
ensuring that EU law is respected. It is an impartial body which sees to it th at member states
adhere to treaties and laws, comply with EU rules and treaty provisions and decisions based on
Treaties are correctly applied. If any member state doesnt fulfil its obligation, the Commission
first asks this country to do it - but if necessary it may refer matters to the Court of Justice.
- External representative and negotiator: it represents the EU in many of its external relations.
It conducts the EUs external trade relations.
- Mediator and conciliator: The EU decision-making process are often characterised by
tensions and struggles between many different national, political interest.
European Parliament
is elected by direct universal suffrage (ltalnos vlasztjog). It sits in Strasbourg It comprises
626 members (MEPs), which are elected for 5 years. The last election was in 1999. T he
representatives are seated in Parliament by political party, not nationality and they adhere to
political and economic views rather than to wishes of the individual governments. Different
countries representatives who have similar political leanings often form coalitions.
Tasks:
- it is a political driving force, generating various initiatives for the development of Community
policy
- it is a supervisory body: it has supervisory power over the Commission and Council.
- it has veto power over the EUs budget. Together, Parliament and the Council form the
budgetary authority. It votes on t he adoption of the annual budget and oversees its
implementation.
- it consults on all EU legislation: Union legislation is formulated by a three-way process: the
Commission proposes legislative instruments, while Parliament and the Council share the power
to enact them
- 1986 Single European Act increased its powers with regard to legislation by introducing the co-
operation procedure
- 1992 The Maastricht Treaty took a further step towards giving greater legislative powers to the
Parliament. It introduces a new co-decision procedure in a number of important areas, which
gives it the power to adopt regulations and directives together with the Council.
states
- It arbitrates in disputes between the member states and EU constitutions, and also between the
institutions themselves. Only the most important cases are dealt with the Court (sitting in plenary
session)
2. Political union
involves a number of issues, e.g. a common European citizenship, joint foreign, defence,
immigration and policing policies; and the harmonisation of social policy concerning working
conditions and employees rights. Three pillars of the EU
1.) The first pillar: the three European communities: EEC, EURATOM, ECSC
2.) The second pillar: the common foreign and security policy
3.) The third pillar: co-operation in the field of justice and home affairs
The EU Budget
The budget of the EU is a reflection of the Unions policy. The general budget of EU is financed
by means of revenue which it receives as of right.
Spent on:
1. Agriculture roughly half of the budget is spent on CAP (48%).
2 Structural, social and regional operations. 30% of budget is devoted to improving economic and
social
cohesion.
4 Other internal policies (3%)research and technological development; administrative expenses
5 External actions (7%) e.g. economic restructuring of the countries of Central and Eastern
Europe
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 73
The Euro
The Euro is the single European currency from 1 January 1999. The introduction of the Euro is
the third stage of the European Economic and Monetary Union. Monetary policy in the euro zone
will be managed by the European Central Bank with the primary objective of price stability. Euro
bank notes and coins will come into circulation from 1 J anuary 2002. During the transitional
period, the use of the euro will not be obligatory, but will be possible for companies and
individuals. Financial institutions are already preparing to make euro-denominated services
(cheque accounts, credit cards) available from 1 January 1999.
The Eurozone: 11 states of 15 have joined the Eurozone, the Great Britain and Denmark did not
want to introduce it, Sweden and Greece could not introduce it because they were not adequate to
the requirements of the introduction.
The most important advantage of the Euro is that we do not change the different national
currencies, we can pay anywhere in Eurozone by the Euro.
The symbol for the euro devised by the European Commission and announced at the time of
European Council in Dublin in December 1996. The symbol has now been endorsed by the
European Monetary Institute and registered with international standards agencies.
Maastricht Treaty The Treaty on E uropean Union signed in Maastricht on 7 F ebruary 1992
(following political agreement at the Maastricht European Council in December 1991). This
Treaty, which came into force in November 1993, establishes the conditions and the timetable for
the introduction of the single European currency.
The banknotes have been designed to be easily distinguished from each other. They will be
issued in 7 de nominations. All will have a dominant colour and dedicated to one of the
architectural styles of the european history.
The coins will be issued in 8 denominations. Their face will be the saim in all the state which
have adopted the Euro, but on t heir back side there will be a picture different according to the
emission country.
Independently from the pictures on them, all the coins will have a liberal circulation within the 11
member state, so a french citizen for example can buy something in Berlin paying by an Euro
coin issued in Spain.
Common policies
1) Agriculture
For every country it is a strategic field due to economical, political and cultural reasons. Thats
why the common agriculture policy (CAP) became a unique, important part of the common
market. It accounts more than half of expenditure under the budget.
CAP was given legal force in 1960. Its main aims:
1. to encourage increased productivity through the use of technology and efficient use of
resources
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 74
2.)Regional Policy
The social, historical and cultural diversity of its regions is one of the strengths, but there is also
economic diversity. There are large differences in the levels of development in the various
regions of the Union. The most prosperous regions are 3 times as rich as the 10 poorest regions in
Greece and Portugal.
There is a danger that the gap between the Unions richer and poorer regions could grow with the
completion of the single market and abolition of national frontiers, which is a very controversial
issue. More prosperous regions tend to lie at the geographical centre, at the core of EU. The more
disadvantaged regions tend to be peripheral regions, particularly in the Mediterranean south
(Greece, Southern Italy, Spain, and Portugal), but also in Ireland.
The Unions structural policy, under which regional policy is subsumed, deals more generally
with those parts of the Union that are disadvantaged, because of their geographical position, the
age of type of their industry or because of the social composition of their population. The policy
attempts to change the economic structure of areas and industries and thereby regenerate them
The Single European Act laid out the objectives of the environmental policy:
- preservation, protection and improvement of the environment
- protection of human health
- prudent and rational utilisation of natural resources
European Environmental Agency (EEA) was set up, based in Copenhagen. Its function is
- to provide member states with comprehensive, reliable data
- to gather information on all environmental problems in Europe.
- Water quality: EU rules set out minimum water quality standards for bathing, drinking and
shellfish
water.
- Atmospheric pollution: To combat air pollution EU rules have been set to reduce level of
pollutants
coming out of vehicle emissions and industrial factories
- Wastes and recycling: It encourages the safe disposal and reuse of waste, especially nuclear
materials
and safety measures for transport of chemicals and other dangerous substances.
Development aid:
The Lom Conventions have formed the basis of co-operation between the EU and many African,
Caribbean and Pacific (ACP) countries.
Under the Lom Conventions, exports from these countries enjoy duty-free access to the EU
market and quantitative restrictions are prohibited; only in the case of a few agricultural products
there are special arrangements.
EU also provides subsidies, special loans, risk capital and low-interest loans for development
projects, particularly agriculture, infrastructure, energy and industry.
EU expansion
Association agreements establish special links with non-member countries, which includes not
only trade liberalisation, but also close economic co-operation and financial assistance.
Two categories:
1.) Agreements to maintain the special relationship that exist between some member states
and certain non-member countries. These links are considered as a legacy of their colonial ties
with Belgium, France, Italy and Netherlands.
2.) Agreements to prepare the way for possible accession: they form a kind of preliminary
stage to accession, designed to help a country that has applied for membership to bring its
economy into line with the rest of the EU, to fulfil the conditions for accession. In the European
Agreements concluded since 1989 w ith Poland, Hungary, the Czech and Slovak Republic,
Bulgaria and Romania. EU has in principle committed itself to the long-term goal of membership
for them.
EU expansion possibilities
There seems to be 3 expansion possibilities:
1. 5 little countries would be admitted around in 2004: Cyprus, Malta, Estonia, Slovenia,
Hungary. In this case the old EU institutional system could remain, and this way of expansion
does not cause too many problems to the EU.
2. The enlargement would be in 2007, with 10 new coutries: all the applicant CentralEast
European countries, with the exception of Romania and Bulgaria. By this year the reforms of the
institutional system will have been finished.
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 77
3. The enlargement would be postponed to 2010 or 2012, by the time the applicant countries
have closed up t o the member countries. Till that time there would be made a CentralEast
European customs union agreement. it would be the worse one for Hungary.
Present problems
1. About the results of the Treaty of Nice
It made EU possible to be expanded, even up to 27 members.
Redistribution of the votes in the Council: the 4 biggest countries would get 29 votes, the
smallest ones would get 4 of them.
They have decided about the number of members in the Comission: the big countries would
give up a seat for the new countries, but this number could not pass the 27, a bove 27 a
rotating system would be introduced.
The creation of new proportions in the European Parliament is considered unfair by Hungary,
because while we would get 20 seats in the EP, for ex. Belgium which has less citizens than
us, would get 22 seats.
Short History
In 1981 t he Hungarian government applied for membership in the International Monetary
Fund and the World Bank. The negotiations were completed unusually rapidly and Hungary
was admitted into both organisations in 1982. IMF membership provided a means for avoiding
the acute payment crisis, while the World Bank was expected by the Hungarian government to
provide additional funds for development investments.
In 1988, s till at the beginning of the large-scale changes, Hungary concluded a trade and
economic co-operation agreement with the European Community. In the non-preferential
agreement Hungary recognised the European Community, while the EC undertook to break down
the quantitative restrictions against Hungary. The situation was changing so fast that the
agreements were unable to move in pace with the times.
In the framework of the PHARE programme the European Community undertook to speed up
the translation of the trade agreements concluded with the Eastern-European countries into
practice. In Hungary's case, for example, the quantitative restrictions were cancelled as soon as in
1990, instead of 1995, the general customs preferences (GSP) were extended and the prospect of
loans with favourable conditions were held out.
The rapid transformation led the European Community to propose the idea of an association
agreement with Hungary, Czechoslovakia and Poland at the Dublin summit in April, 1990.
In barely one and a half years the Hungarian government reached an agreement with the EC. In
July, 1990 P rime Minister handed over the Hungarian scheme [ski:m] of association to Jaques
Delors, the president of the Brussels committee and already by late November, 1991, t he
agreement was signed. The association agreement itself entered into force on February 1, 1994,
following the ratification process. The association agreement stipulates not only industrial free
trade and the easing of trade of agricultural goods, but it also stipulates the liberalisation of
current payments, the observation of certain rules of competition law, law harmonisation, and
even the easing of certain regulations concerning employment.
The negotiations started in 1998 between the EU and Hungary in Bruxelles.
In December, 1993 the Hungarian government announced its intention to join the OECD and the
negotiations already began in half a year. In March, 1996, following the end of the OECD-
examination on t ax-policy and foreign exchange management, the OECD accepted Hungary's
membership application and the Hungarian government signed the accession document on March
29, 1996.
With Hungary's admittance into the club of the advanced countries, Hungary can take part in the
process of economic policy co-ordination of the advanced countries and it can use the advice of
OECD experts.
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 79
That was another positive point: The net inflow of operating capital in 1999 w as $1.4 bi llion,
$450 million more than in the previous year. After nine years of decline and a brief period of
stagnation, employment started to grow again in 1998 ( by 55,000, or 1.4 pe r cent). The
unemployment rate declined by a full percentage point to 7 per cent, as against the 8.9 per cent
average for the EU.
But there are also major risks associated with this good news. It will prove very difficult to repeat
last year's 4.5 per cent reduction in the rate of inflation. An acute difference between Hungary's
"off-shore" area and the country's customs area persists, which is manifest in differences between
GDP and national income.
Short history
Diplomatic relations between Hungary and the European Communities were established in
August 1988 f ollowed by the Europe Agreement signed in Brussels on December 16, 1991 ,
establishing an associated status for Hungary to EC. Hungary was one of the first target-countries
of the Communities PHARE program started in 1990 that has since provided more than 1 billion
Euro, as a non-repayable financial assistance, for economic development and restructuring,
environmental investments, public administration, human resources development and other tasks
serving the aim of preparation for membership.
Apart from Phare, the European Union provides assistance through the Instrument for Structural
Policies for Pre-Accession (ISPA) from year 2000. This programme helps the candidates to
prepare themselves for the absorption of the Unions structural funds with special regard to
environmental and infrastructure development. The Special Accession Programme for
Agriculture and Rural Development (SAPARD) is aimed at the efficient utilisation of the
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 80
European agricultural guarantee funds and the creation of a sustainable agricultural and rural
development strategy. In the period between 2000-2006, Hungary will receive an annual amount
of nearly 140M Euro from the two programmes.
Commissions Regular Reports, Hungary is determined to speed up and complete its preparation
for membership by the end of 2002 and expects to join the Union among the first new members.