Economy

The American economy is a free enterprise system that has emerged from the labors of millions of American workers; from the wants that tens of millions of consumers have expressed in the marketplace; from the efforts of thousands of private business people; and from the activities of government officials at all levels who have undertaken the tasks that individual Americans cannot do. The nation's income and productivity have risen enormously over the past 70 years. In this period, the money for personal consumption tripled in real purchasing power. The gross national product per capita quadrupled, reflecting growth in worker productivity.

Together, all sectors of the American economy produce almost $4,000 million dollars worth of goods and services annually, and each year they turn out almost $ 190,000 million more. The consumption of these goods and services is spread widely. Most Americans consider themselves members of the middle economic class, and relatively few are extremely wealthy or extremely poor. According to U.S. Census Bureau figures, 9.6 percent of all American families make more than $50,000 a year, and 7.7 percent of all American families have incomes less than $10,000; the median annual income for all American families is about $28,906.Americans live in a variety of housing that includes single detached homes (62 percent) with a median cost of $112,500. They also live in apartments, town-houses and mobile homes. Three-fourths of all married couples own their own homes. The size of all dwelling units has increased in living space. The median number of rooms occupied in each dwelling unit has increased from 4.9 rooms per unit in 1960 to 5.2 rooms today, despite the shrinking family size. About 3.6 percent of all Americans live in public (government-supplied or subsidized) housing.

The government plays an important role in the economy, as is the case in all countries. From the founding of the Republic, the U.S. federal government has strongly supported the development of transportation. It financed the first major canal system and later subsidized the railroads and the airlines. It has developed river valleys and built dams and power stations. It has extended electricity and scientific advice to farmers, and assures them a minimum price for their basic crops. It checks the purity of food and drugs, insures bank deposits and guarantees loans. America's individual 50 

states have been most active in building roads and in the field of education. Each year the states spend some $33.31 million on schools and provide a free public education for 29.1 million primary-school pupils and 11.4 million youth in secondary schools. (In addition, 8.3 million youths attend private primary and secondary schools.) Approximately 60 percent of the students who graduate from secondary schools attend colleges and universities, 77.2 percent of which are supported by public funds. The U.S. leads the world in the percentage of the population that receives a higher education. Total enrollment in schools of higher learning is 13.4 million. Despite the fact that the United States government supports many segments of the nation's economy, economists estimate that the public sector accounts for only one-fifth of American economic activity, with the remainder in private hands. In agriculture, for example, farmers benefit from public education, roads, rural electrification and support prices, but their land is private property to work pretty much as they desire. More than 86.7 percent of America's 208.8 million farms are owned by the people who operate them; the rest are owned by business corporations. With increasingly improved farm machinery, seed and fertilizers, more food is produced each year, although the number of farmers decrease annually. There were 15,669,000 people living on farms in 1960; by 1989 that total had decreased to 4,801,000. Farm output has increased dramatically: just 50 years ago a farmer fed 10 persons; today the average farmer feeds 75. America exports some 440.9 thousand million worth of farm products each year.

The United States produces as much as half the world's soybeans and corn for grain, and from 10 to 25 percent of its cotton wheat, tobacco and vegetable oil. The bulk of America's wealth is produced by private industries and businesses—ranging from giants like General Motors, which sells $96,371 million worth of cars and trucks each year—to thousands of small, independent entrepreneurs. In 1987, nearly 233,710 small businesses were started in the U.S. Yet by one count, some 75 percent of American products currently face foreign competition within markets in the United States. America has traditionally supported free trade. In 1989, the U.S. exported $360,465 thousand million in goods and imported $475,329 thousand million. In 1990, 119.55 million Americans were in the labor force, representing 63.0 percent of the population over the age of 16. The labor force has grown especially rapidly since 1955 as a result of the increased number of working women. Women now constitute more than half of America's total work force. The entry of the "baby boom" generation into the job market has also increased the work force. Part-time employment has increased as well—

only about 55 percent of all workers have full-rime, full-year jobs—the rest either work part-time, part-year or both. The average American work week was 41 hours in 1989.American industries have become increasingly more service-oriented. Of 12.6 million new jobs created since 1982, almost 85 percent have been in service industries. Careers in technical, business and health-related fields have particularly experienced employee growth in recent years. Approximately 27 million Americans are employed in selling. Another 19.2 million work in manufacturing and 17.5 million work for federal, state and local governments.

Recently, unemployment in the United States was calculated at about seven percent. The government provides short-term unemployment compensation (from 20 to 39 weeks depending upon economic conditions) to replace wages lost between jobs. About 80 per cent of all wage and salary earners are covered by unemployment insurance. In addition, both the government and private industry provide job training to help unemployed and disadvantaged Americans.

Economics in China

The official support of a market-based economy that came from Deng Xiao Ping in 1992 has resulted in a more open system of trade for China, and subsequently a huge growth spurt in China's economy. The economic reforms which Deng instigated culminated in a "socialist market economy", a term which was actually incorporated into the Chinese constitution during the National People's Congress in March 1993. Since that time, China's economy has experienced a substantial boost in regards to living standards, quality of food and spendable income. While these elements expand opportunities for U.S. exporters, factors such as inflationary pressure, irrational foreign exchange controls, and restrictive trade practices have created numerous barriers. In fact, China's official Gross National Product (GNP) posted a 12.8 percent real growth rate in 1992 to about US$435 billion, or about US$371 for each of China's 1.172 billion people- urban incomes grew at a real rate of 8.8 percent. Rural incomes also grew, but at a slower rate of 5.9 percent. These figures, however, may be tainted by the disproportionate distribution of income and wealth that permeates China.

The Chinese, after all, have lower human rights standards than the United States and the poor definitely suffer the consequences. Add to that the immense size of the Chinese population, and suddenly any estimates of wealth, buying power, or economic conditions appear to be quite diminished in their reliability. In the end, these figures are based on national averages, which creates a fictional middle class majority that simply does not exist. Realistically, a very large proportion of China's economic growth comes from the collective and private sector, and not the subsidized state sector. In addition, China continues to maintain an illogical foreign exchange mechanism, utilizing both an official exchange rate and a "swap center" rate, which is influenced even further by the black market rate - none of which can be properly measured. Other barriers include the fact that it can sometimes be hard to decipher the rules regarding license requirements, as well as what type of inspections are required. For those commodities which are still restricted at the central government level, there is also confusion as to which agency has the ultimate authority. These difficulties can be 

managed, but necessitate perseverance and diligence on the part of U.S. exporters. The market and price reforms made by the China Communist Party in 1993 also fueled dynamic changes in China's economic environment, especially in regards to agriculture.

With the population of China increasing by approximately 17 million people every year, it is easy to see why China can only meet demands by increasing the number of agricultural and food product imports it receives. Today, there are over 80,000 grain and edible oil markets as well as numerous fruit and vegetable markets in China importing products for the domestic market. China has signed agreements which force them to loosen the restrictions on foreign trade, which has had a very positive impact on U.S. trade relations with China, especially in regards to food products. In China, as in many countries throughout the world, the rise in incomes and living standards has perpetuated a notable increase in the per capita consumption of meat, fruits and vegetables, and most especially, processed and convenience foods is increasing. In major urban markets, and most noticeably in Beijing, Shanghai, and Guangzhou, consumers are literally "eating up" fast foods, convenience foods, and packaged food products.

The elimination of price subsidies for grain, pork, milk, eggs and other products has caused some increase in price, however this increase has caused little, if any, dissension. This means that not only can Chinese consumers better afford to pay higher prices, but are willing to, in order to increase the number of alternatives that are available to them. Consumers in China today are demanding quality and variety in the food they buy and the U.S. market is more than happy to fulfill their needs. Unfortunately, there are still about 300 million people in China's urban population who have not yet caught up with the rapid growth of the Chinese economy. The good news for U.S. exporters however is that as long as the economic trends in China continue to improve, more and more markets will continue to open up. The bad news is that the high tariffs, technical barriers and general lack of clarity that products of major interest to U.S. exporters, such as beef, nuts, and fruit, have received only minimal reductions in tariffs despite the many promises from China that international trade will be made more cost-efficient. Quarantine barriers also officially prohibit U.S. fruit and most fresh vegetables from entering China, due to fear of fruit fly contamination. However efforts are being made to permanently remove all restrictions that cannot be scientifically justified. China also maintains quotas on many products, but the quotas seem to be somewhat flexible. In 

truth, figuring out exact quota amounts is often very difficult. Therefore, when evaluating the U.S. market position for consumer ready products, China Customs data is the only source that provides comparable China Import data for the United States and other countries. There is still however a lot of discrepancies in figures, and it is assumed that the China market is larger than indicated by U.S. and Chinese statistics.

While market research is not exactly a prevalent practice in China, some evidence has shown that an American label does significantly help boost product sales. Subsequently, dishonest importers have been known to put U.S. labels on other countries' products because it makes the item sell better. This not only skews statistical data, but could have a strong negative impact on the U.S. economy if the matter were to get out completely out of hand. Labeling requirements are not very restrictive at the moment, but the U.S. and China are working to eradicate this fraudulent behavior being perpetrated.

The China market for American products is swiftly freeing itself from strict government control. The amalgamation of rapid economic growth and market reforms is has fueled the interest in American products on the part of the Chinese consumer. It is predicted that the hotel and restaurant industry will continue to be the major market opportunity for U.S. meats, wines, frozen potatoes, condiments and a plethora of other related products. In addition, the telecommunications, financial and other service markets also offer great potential for U.S. exporters. In spite of the plethora of trade restrictions which still limit the overall import market in China, the latest trends are pointing toward simplifying admission into the Chinese market. The number of trade corporations, and factories, for example, has gone sky high in the recent past. Because of its struggling economy, most emphasis in past China trade relations was based on exporting. There is currently is a continually increasing interest in importing products for the domestic market. Foreign trade corporations that were at one time part of a strict government structure are now able to expand their scope of business and deal in more products and distribute to more outlets than ever before.

While still associated with some level of the Chinese government, these corporations must now turn a profit and are subsequently becoming more active in importing U.S. products. In virtually all cases, these importers are also distributors. This has introduced an element of competition in the import sector that did not exist just a few years ago. It also means that at least some of these potential importers/distributors are not familiar with U.S. products or international trading practices. In addition, the 

elimination of price controls and the establishment of wholesale markets has allowed China to achieve a better balance between supply and demand. One of the most recent notable developments in regards to China's trade regulations is that, China and the U.S. finally signed a deal which allowed China to enter the World Trade Organization. This agreement will benefit the U.S. in a number of ways, including the new freedom of foreign investors to partake in China’s internet market, and manufacturers are now allowed to import and export their products without overt governmental interference. Economic reform and the establishment of a "socialist market economy" have virtually revolutionized trade between our two countries. Therefore it is vital that good relations with China are maintained so that both economies can experience the benefits of higher quality living.

WHAT IS BUSINESS?

Business is a word which is commonly used in many different languages. But exactly what does it mean? The concepts and activities of business have increased in modern times. Traditionally, business simply meant exchange or trade for things people wanted or needed. Today it has a more technical definition. One definition of business is the production, distribution, and sale of goods and services

for profit. To examine this definition, we will look at its various parts. First, production is the creation of services or the changing of materials into products. One example is the conversion of iron ore into metal car parts. Next these products need to be moved from the factory to the marketplace. This is known as distribution. A car might be moved from factory in Detroit to a car dealership in Miami. Third is the sale of goods and services. Sale is the exchange of a product or service for money. A car is sold to someone in exchange for money. Goods are products which people either need or want, for example, cars can be classified as goods. Services, on the other hand, are activities which a person or group performs for another person or organization. For instance, an auto mechanic performs a service when he repairs a car. A doctor also performs a service by taking care of people when they are sick. Business, then, is a combination of all these activities: production, distribution, and sale. However, there is one other important factor. This factor is the creation of profit or economic surplus. A major goal in the functioning of an American business company is making a profit. 

Profit is the money that remains after all the expenses are paid. Creating an economic surplus or profit is, therefore, a primary goal of business activity.

The Market

Previously we defined markets in a very general way as arrangements through which prices guide resource allocation. We now adopt a narrower definition. A market is a set of arrangements by which buyers and sellers are in contact to exchange goods or services. Some markets (shops and fruit stalls) physically bring together the buyer and the seller. Other markets (The London Stock Exchange) operate chiefly through intermediaries (stockbrokers) who transact business on behalf of clients. In supermarkets, sellers choose the price, stock the shelves, and leave customers to choose whether or not to make a purchase. Antique auction force buyers to bid against each other with the seller taking a passive role.

Although superficially different, these markets perform the same economic function. They determine prices that ensure that the quantity people wish to buy equals the quantity people wish to sell. Price and quantity cannot be considered separately. In establishing that the price of a Rolls Royce is ten times the price of a small Ford, the market for motor cars simultaneoused ensures that production and sales of small Fords will greatly exceed the production and sales of Rolls Royces. These price guide society in choosing what, how, and for whom to purchase. To understand this process more fully, we require a model of a typical market. The essential features on which such a model must concentrate are demand, the behaviour of buyers, and supply, the behaviour of sellers. It will then be possible to study the interaction of these forces to see how a market works in practice.

Money and Its Functions

Although the crucial feature of money is its acceptance as the means of payment or medium of exchange, money has three other functions. It serves as a unit of account, as a store of value, and as a standard of deferred payment. We discuss each of the four functions of money in turn.



The Medium of Exchange

Money, the medium of exchange, is used in one-half of almost all exchange. Workers exchange labour services for money. People buy or sell goods in exchange for money. We accept money not to consume it directly but because it can subsequently be used to buy things we do wish to consume. Money is the medium through which people exchange goods and services. To see that society benefits from a medium of exchange, imagine a barter economy. A barter economy has no medium of exchange. Goods are traded directly or swapped for other goods. In a barter economy, the seller and the buyer each must want something the other has to offer. Each person is simultaneously a seller and a buyer. In order to see a film, you must hand over in exchange a good or service that the cinema manager wants. There has to be a double coincidence of wants. You have to find a cinema where the manager wants what you have to offer in exchange. Trading is very expensive in a banter economy. People must spend a lot of time and effort finding others with whom they can make mutually satisfactory swaps. Since time and effort are scarce resources, a barter economy is wasteful. The use of money — any commodity generally accepted in payment for goods, services, and debts — makes the trading process simpler and more efficient.

Other Functions of Money

The unit of account is the unit in which prices are quoted and accounts are kept. In Britain prices are quoted in pounds sterling; in France, in French francs. It is usually convenient to use the units in of account as well. However there are exceptions. During the rapid German inflation of 1922-23 when prices in marks were changing very quickly, German shopkeepers found it more convenient to use dollars as the unit of account. Prices were quoted in dollars even though payment was made in marks, the German medium of exchange. Money is a store of value because it can be used to make purchases in the future. To be accepted in exchange, money has to be a store of value. Nobody would accept money as payment for goods supplied today if the money was going to be worthless when they tried to buy goods with it tomorrow. But money is neither the only nor necessarily the best store of value. Houses, stamp collection, and interest-bearing bank accounts all serve as stores of value. Since money pays no interest and its real purchasing power is eroded by inflation, there are almost certainly better ways to store value. Finally, money serves as a standard of deferred payment or a unit of account over time. When you borrow, the amount to be repaid next year is measured in pounds sterling. Although convenient, this is not an essential function of money. UK citizens can get bank loans specifying in dollars the amount that must be repaid next year. Thus the key feature of money is its use as a medium of exchange. For this, it must act as a store of value as well. And it is usually, though not invariably, convenient to make money the unit of account and standard of deferred payment as well.

Different Kinds of Money

In prisoner-of-war camps, cigarettes served as money. In the nineteenth century money was mainly gold and silver coins. These are examples of commodity money, ordinary goods with industrial uses (gold) and consumption uses (cigarettes) which also serve as a medium of exchange. To use a commodity money, society must either cut back on other uses of that commodity or devote scarce resources to producing additional quaranties of the commodity. But there are less expensive ways for society to produce money. A token money is a means of payment whose value or purchasing power as money greatly exceeds its cost of production or value in uses other than as money. A £10 note is worth far more as money than as a Зх6-inch piece of high-quality paper.

Similarly, the monetary value of most coins exceeds the amount you would get by melting them down and selling off the metals they contain. By collectively agreeing to use token money, society economizes on the scarce resources required to produce money as a medium of exchange. Since the manufacturing costs are tiny, why doesn't everyone make £ 10 notes? The essential condition for the survival of token money is the restriction of the right to supply it. Private production is illegal. Society enforces the use of money by making it legal tender. The law says it must be accepted as a means of payment. In modern economics, token money is supplemented by IOU money An IOU money is a medium of exchange based on the debt of a private firm at individual . A bank deposit is IOU money because it is a debt of the bank. When you have a bank deposit the bank owes you money. You can write a cheque to yourself or a third party and the bank is obliged to pay whenever the cheque is presented. Bank deposits are a medium of exchange became they are generally accepted as payment.

Basic Ingredients of the U.S. Economy

The first ingredient of a nation's economic system is its natural resources. The United States is rich in mineral resources and fertile farm soil, and it is blessed with a moderate climate. It also has extensive coastlines on both the Atlantic and Pacific Oceans, as well as on the Gulf of Mexico. Rivers flow from far within the continent, and the Great Lakes -- five large, inland lakes along the U.S. border with Canada -- provide additional shipping access. These extensive waterways have helped shape the country's economic growth over the years and helped bind America's 50 individual 

states together in a single economic unit. The second ingredient is labor, which converts natural resources into goods.

The number of available workers and, more importantly, their productivity help determine the health of an economy. Throughout its history, the United States has experienced steady growth in the labor force, and that, in turn, has helped fuel almost constant economic expansion. Until shortly after World War I, most workers were immigrants from Europe, their immediate descendants, or African-Americans whose ancestors were brought to the Americas as slaves. In the early years of the 20th century, large numbers of Asians immigrated to the United States, while many Latin American immigrants came in later years. Although the United States has experienced some periods of high unemployment and other times when labor was in short supply, immigrants tended to come when jobs were plentiful. Often willing to work for somewhat lower wages than acculturated workers, they generally prospered, earning far more than they would have in their native lands. The nation prospered as well, so that the economy grew fast enough to absorb even more newcomers. The quality of available labor -- how hard people are willing to work and how skilled they are -- is at least as important to a country's economic success as the number of workers. In the early days of the United States, frontier life required hard work, and what is known as the Protestant work ethic reinforced that trait. A strong emphasis on education, including technical and vocational training, also contributed to America's economic success, as did a willingness to experiment and to change. Labor mobility has likewise been important to the capacity of the American economy to adapt to changing conditions. When immigrants flooded labor markets on the East Coast, many workers moved inland, often to farmland waiting to be tilled. Similarly, economic opportunities in industrial, northern cities attracted black Americans from southern farms in the first half of the 20th century. Labor-force quality continues to be an important issue.

Today, Americans consider "human capital" a key to success in numerous modern, high-technology industries. As a result, government leaders and business officials increasingly stress the importance of education and training to develop workers with the kind of nimble minds and adaptable skills needed in new industries such as computers and telecommunications. But natural resources and labor account for only part of an economic system. These resources must be organized and directed as efficiently as possible. In the American economy, managers, responding to signals from markets, perform this function. The traditional managerial structure in America is based on a top-down chain of command; authority flows from the chief executive in the boardroom, who makes sure that the entire business runs smoothly and efficiently, through various lower levels of management responsible for coordinating different parts of the enterprise, down to the foreman on the shop floor.

Numerous tasks are divided among different divisions and workers. In early 20th-century America, this specialization, or division of labor, was said to reflect "scientific management" based on systematic analysis. Many enterprises continue to operate with this traditional structure, but others have taken changing views on management. Facing heightened global competition, American 

businesses are seeking more flexible organization structures, especially in high-technology industries that employ skilled workers and must develop, modify, and even customize products rapidly. Excessive hierarchy and division of labor increasingly are thought to inhibit creativity. As a result, many companies have "flattened" their organizational structures, reduced the number of managers, and delegated more authority to interdisciplinary teams of workers.
From U.S. Department of State

THE MARKETING MIX. ТНЕ FOUR PS.

Buying, selling, market research, transportation, storage, advertising — these are all part of the complex area of business known as marketing. In simple terms, marketing means the movement of goods and services from manufacturer to customer in order to satisfy the customer and to achieve the company's objectives. Marketing can be divided into four main elements that are popularly known as the four P's: product, price, placement, and promotion. Each one plays a vital role in the success or failure of the marketing operation. The product element of marketing refers to the good or service that a company wants to sell. This often involves research and development (R&D) of a new product, research of the potential market, testing of the product to insure quality, and then intro

duction to the market.

A company next considers the price to charge for its product. There are three pricing options the company may take: above, with, or below the prices that its competitors are charging. For example, if the average price of a pair of women's leather shoes is $27, a company that charges S23 has priced below the market; a company that charges $27 has priced with the market; and a company that charges $33 has priced above the market. Most companies price with the market and sell their goods or services for average prices established by major producers in the industry. The producers who establish these prices are known as price leaders.



The third element of the marketing process — placement — involves getting the product to the customer. This takes place through the channels of distribution. A common channel of distribution is:

manufacturer —> wholesaler —> retailer —> customer

Wholesalers generally sell large quantities of a product to retailers, and retailers usually sell smaller quantities to customers.

Finally, communication about the product takes place be

tween buyer and seller. This communication between buyer and seller is known as promotion. There are two major ways promo

tion occurs: through personal selling, as in a department store; and through advertising, as in a newspaper or magazine.

The four elements of marketing — product, price, placement, and promotion — work together to develop a successful marketing operation that satisfies customers and achieves the company's objectives.

Exporting.

When a company exports goods abroad there are many problems it must consider, e.g. packaging, transportation, insurance and payment. First the goods must be packed to containers to protect them from damage. The containers or crates must be labeled clearly to show where they are going. The label may also show what the crates (containers) contain. Goods can be transported by sea or by air, by a shipping company or by an airline. If the goods are shipped then transportation must be arranged from the factory to the docks or quay. This can either be by road in tracks (or lorries) or by rail. The shipment must be insured (covered) against loss or damage in transit, i.e. while it is being transported. Sometimes the exporter takes out insurance and sometimes the importer insures the shipment. It depends on the terms of their agreement. If the goods are damaged in transit the company is covered by the insurance. Of course, someone has to pay for all these things. While goods are in transit they are called freight or cargo, so the company pays freight rates or shipping cost to the shipping company. If the goods are being transported by air, the company pays to the airline. The cargo is loaded at the docks or 

at the airport, and for this the company pays handling charges. Also the company must pay packaging charges or costs. Exporting brings foreign currency into the country, so governments encourage export trade by giving assistance to the exporters. Often companies borrow money (finance) from banks to finance exporting. This money is called export credit. A government department called the E.C.G.D. (Export Credit Guarantee Department) gives a guarantee to the bank. This guarantee means that the government carries the loss, if the foreign buyer does not pay. It is a kind of insurance cover for the bank and the exporting company. Another form of government assistance or incentive is tax relief or tax advantages. Every company must pay a proportion of its earnings to the government in the form of tax. Tax relief means that exporters pay less tax on money earned abroad.
Forms of Business Organization

There are three principal forms of business organization:

1. the sole proprietorship;

2. the partnership;

3. the corporation.

Sole proprietorship

The simplest form of business organization is the sole proprie

torship, which is owned by one person. Many small businesses start out as sole proprietorships. The owner has relatively unlimited con

trol over the business and keeps all the profits. These firms are usu

ally owned by one person who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also have complete responsibility for any of its liabilities or debts. In case of breach of contract the business property and personal assets of the owner may be taken to pay judgments for damages awarded by courts.



Sole proprietorships are the most numerous form of business organization. No charter and permit are needed and there are no particular, legal requirements for organizing or conducting a sole proprietorship. When started, many sole proprietorships are conducted out of the owner's home, garage, or van c-nd inventory may be limited and may often be purchased on credit.

Main Features of a Sole Proprietorship:

(+) Easy to organize

(+) Owner has complete control

(+) Owner receives all income

(-) Owner has unlimited liability

(-) Benefits are not business deductions

Partnership

In a Partnership, two or more people share ownership of a sin

gle business. Like proprietorships, the law does not distinguish be

tween the business and its owners. The partners should have a legal agreement that sets forth how decisions will be made, profits will be shared, disputes will be resolved, how future partners will be admitted to the partnership, how partners can be bought out, or what steps will be taken to dissolve the partnership when needed.

There exist different types of Partnerships:

1. General Partnership

Partners divide responsibility for management and liability, as well as the shares of profit or loss according to their internal agree

ment. Equal shares are assumed unless there is a written agreement that states differently.

2. Limited Partnership and Partnership with limited liability "Limited" means that most of the partners have limited liability (to the extent of their investment) as well as limited management decisions, which generally encourages investors for short term pro

jects, or for investing in capital 

assets. This form of ownership is not often used for operating retail or service businesses. Forming a limited partnership is more complex and formal than that of a gen

eral partnership.

3. Joint Venture

Joint Venture acts like a general partnership, but it is formed for a limited period of time or a single project.

Main Features of a Partnership:

(+) Easy to organize, but needs agreement

(+) Partners receive all income

(-) Partners have unlimited liability

ECONOMIC SYSTEMS

There are a number of ways in which a government can organize its economy and the type of system chosen is critical in shaping environment in which businesses operate.

An economic system is quite simply the way in which a country uses its available resources (land, workers, natural resources, machinery etc.) to satisfy the demands of its inhabitants for goods and services. The more goods and services that can be produced from these limited resources, the higher the standard of living enjoyed by the country's citizens. There are three main economic systems:

Planned economics (Плановая экономика)

Planned economies are sometimes called" "command economies" because the state commands the use of resources (such as labour and factories) that are used to produce goods and services as it owns factories, land and natural resources. Planned economies are economies with a large amount of central planning and direction, when the government takes all the decisions, the government decides production and consumption. Planning of this kind is 

obviously very difficult, very complicated to do, and the result is that there is no society, which is completely a command economy. The actual system employed varies from state to state, but command or planned economies have a number of common features.

Firstly, the state decides precisely what the nation is to produce. It usually plans five years ahead. It is the intention of the planners that there should be enough goods and services for all.

Secondly, industries are asked to comply with these plans and each industry and factory is set a production target to meet. If each factory and farm meets its target, then the state will meet its targets as set out in the five-year plans. You could think of the factory and farm targets to be objectives which, if met, allow the nation's overall aim to be reached.

A planned economy is simple to understand but not simple to operate. It does, however, have a number of advantages:

* Everyone in society receives enough goods and services to enjoy a basic standard of living.

* Nations do not waste resources duplicating production.

* The state can use its control of the economy to divert resources to wherever it wants. As a result, it can ensure that everyone receives a good education, proper health care or that transport is available.

Several disadvantages also exist. It is these disadvantages that have led to many nations abandoning planned economies over recent years:

* There is no incentive for individuals to work hard in planned economies.

* Any profits that are made are paid to the government.

* Citizens cannot start their own businesses and so new ideas rarely come forward.

* As a result, industries in planned economies can be very inefficient.

A major problem faced by command or planned economies is that of deciding what to produce. Command economies tend to be slow when responding to changes in people's tastes 

and fashions. Planners are likely to under produce some items as they cannot predict changes in demand. Equally, some products, which consumers regard as obsolete and unattractive, may be overproduced. Planners are afraid to produce goods and services unless they are sure substantial amounts will be purchased. This leads to delays and queues for some products.

Markets and Monopolies
The term "market", as used by economists, is an extension of the ancient idea of market as a place where people gather to buy and sell goods. In former days part of a town was kept as the market or marketplace, and people would travel many kilometers on special market-days in order to buy and sell various commodities. Today, however, markets such as the world sugar market, the gold market and the cotton market do not need to have any fixed geographical location. Such a market is simply a set of conditions permitting buyers and sellers to work together.

In a free market, competition takes place among sellers of the same commodity, and among those who wish to buy that commodity. Such competition influences the prices prevailing in the market. Prices inevitably fluctuate, and such fluctuations are also affected by current supply and demand.

Whenever people who are willing to sell a commodity contact people who are willing to buy it, a market for that commodity is created. Buyers and sellers may meet in person, or they may communicate in some other way: by letter, by telephone or through their agents. In a 

perfect market, communications are easy, buyers and sellers are numerous and competition is completely free. In a perfect market there can be only one price for any given commodity: the lowest price which sellers will accept and the highest which consumers will pay. There are, however, no really perfect markets, and each commodity market is subject to special conditions. It can be said however that the price ruling in a market indicates the point where supply and demand meet.

Although in a perfect market competition is unrestricted and sellers are numerous, free competition and large number of sellers are not always available in the real world. In some markets there may only be one seller or a very limited number of sellers. Such a situation is called a monopoly, and may arise for a variety of different causes. It is possible to distinguish in practice four kinds of monopoly.

State planning and central control of the economy often means that a state government has the monopoly of important goods and services. Some countries have state monopolies in basic commodities like steel and transport, while other countries have monopolies in such comparatively unimportant commodities as matches. Most national authorities monopolize the postal services within their borders.

A different kind of monopoly arises when a country, through geographical and geological circumstances, has control over major natural resources or important services, as for example with Canadian nickel and the Egyptian ownership of the Suez Canal. Such monopolies can be called natural monopolies.

They are very different from legal monopolies, where the law of a country permits certain producers, authors and inventors a full monopoly over the sale of their own products.

These three types of monopoly are distinct from the sole trading opportunities which take place because certain companies have obtained complete control over particular commodities. This action is often called "cornering the market" and is illegal in many countries. In the USA anti-trust laws operate to restrict such activities, while in Britain the Monopolies Commission examines all special arrangements and mergers which might lead to undesirable monopolies.

Business cycles

The economy tends to move in a series of ups and downs, called business cycles, rather than in a steady pattern. The 1930s saw the greatest world-wide economic depression in the twentieth century, with nearly one-fifth of the UK labour force unemployed for an extended period. In con

trast, the twenty-five years following the Second World War were a period of sustained economic growth, with only minor interruptions caused by modest recessions. Then the business cycle returned in more serious forma. There have been three major recessions in the United Kingdom during the last three decades (1973-5,1979-8l and 1990-2), and most other major countries have experi

enced a similar pattern.

An understanding of business cycles is important for the owners and managers of firms. During recessions many businesses go bust, while profits fall for the survivors, in contrast, during a boom, demand for most products rise, profits rise, and most businesses find it easy to expand. Understanding the business cycle is, thus, important for successful businesses. Expanding capacity during the onset of a recession could be a recipe for disaster while having too little capacity during a boom may be a lost opportunity. Most importantly, although business cycles are beyond the control of individual firms, firms do need to understand that the economy moves in cycles. Governments sometimes claim that their policies will bring stable growth and the end to cycles, but business cycles have been around for a long time, and they are likely to be with us for much longer yet.

Macroeconomics as a subject was invented to help pro

duce policies that could ameliorate economic fluctuations. Much of what follows is devoted to explanations of why the economy goes through these ups and downs, and what, if anything, the government can do about them.

Inflation

The annual UK inflation rate was over 25 per cent in 1975. This was the highest level reached in peacetime for at least three centuries, and at that rate inflation halves the pur

chasing power of money in three years. The government of Margaret Thatcher was elected in 1979 on the promise of eliminating inflation from the British economy. Inflation did fall below 5 per cent by 1984, but it rose again to around 10 per cent before the end of the decade. By the late 1990s the annual rate of inflation had fallen to around 2-3 per cent, which was the lowest level since the early 1960s. In May 1997 the incoming Labour government set a target level of inflation of 2.5 per cent and gave the Bank of England the power to set interest rates in order to achieve this target. From 1997 to 2002 inflation stayed within one percentage point of the target as intended. (We will discuss monetary policy in the UK and euro area in Chapter 28.)



Swings in economic activity have usually accompanied swings in inflation. Generally, attempts by governments to control high inflation have tended to bring about recessions. However, the pattern of booms and recessions has been very similar across many different countries, so it cannot all be attributed to domestic government policy alone. Also, the relationship between inflation and recession seems to change over time. The 1979-81 UK recession was accompanied by inflation in the mid-teens, while the 1990-2 recession was accompanied by only single-figure inflation. The slowdown in major economies in 2000-2 was accompanied to anti-inflation policies.

An important policy problem for governments is how to stimulate economic activity without causing inflation. The rise in inflation during boom times often leads policy-makers tighten their policy to bring inflation under control. When inflation falls after recession, policy-makers feel that they have the leeway to stimulate the economy again. Hence they have to tread carefully to achieve a suitable balance between stimulus and contraction and we will learn below that timing policy interventions in order to achieve a desired outcome is not a simple matter.

Interest rates

In addition to fiscal policy, government (or the monetary authority, where this is independent of government) has available the tools of monetary policy. Monetary policy involves changing interest rates, or the money supply, in order to influence the economy. High interest rates are a symptom of a tight monetary policy. When interest rates are high firms find it more costly to borrow, and this makes them more reluctant to invest in expanding their busi

ness. Individuals with mortgages or bank loans are also hit by high interest rates since it costs more to make their loan repayments. Hence high interest rates tend to reduce demand in the economy—firms invest less, and those with mortgages have less to spend. Low interest rates tend to stimulate demand.

Unemployment

A downturn in economic activity causes an increase in unemployment. Indeed, it was the high unemployment of the 1930s that led to the establishment of the subject now known as macroeconomics, and unemployment is still a central concern of economics. During the Great Depression of the 1930s UK unemployment rose to nearly 20 per cent of the labour force, and even higher levels were reached in some other countries. Although in the 1950s and 1960s unemployment was consistently very low in most industrial countries, higher unemployment returned in the 1980s and 1990s. UK unemployment¹ reached peaks of 12.2 per cent in 1986 and of 10.8 per cent in 1993 in the two recessions, while unemployment in France and Germany reached post' war highs of 12.5 and 11.7 per cent, respectively, in 1997. Japanese unemployment in June 2002 reached a level of 5.4 per cent, not seen there since the Second World War. By 2000 unemployment had fallen in Britain and the United States, but it was still 

relatively high in several European countries, such as Spain, Germany, and France (and it started to rise again in the United States in 2001/2). Accordingly, the analysis of the causes of, and potential cures for, unemploy

ment is still very high on the agenda of macroeconomics today, especially in the EU and Japan. A new bout of high unemployment can never be ruled out, even for those coun

tries where it has been low for some time.

The main method of reducing unemployment that eco

nomists developed early in the twentieth century was for governments to increase their spending and reduce taxes. Such deliberate use of government spending and taxes to influence the economy is known as fiscal policy. In Chapter 33 we will discuss why this long accepted policy no longer seems promising.

Government budget deficits

With the exception of two brief periods (1970 and 1988-9), the British government has had a budget deficit since the Second World War—it was spending more than it was rais

ing in taxation. In the mid-1970s the budget deficit rose to around 8 per cent of the value of the nation's total annual output. In the early years of the twenty-first century the budget was again in deficit; and, with high government spending commitments, it seems likely to stay in deficit for the foreseeable future. Deficits have to be financed by government borrowing, which raises the national debt.

At one time it was thought that budget deficit might be good for the economy because government spending created jobs. Nowadays there is more concern about the potential burden of the debt, in the form of interest, which has to be paid by taxpayers and which, therefore, keeps taxes high. In later chapters we will discuss how the budget deficit affects the economy, and the conflict over the role of the government budget that is central to macroeconomics. We will also discuss the implications of the limitations on budget deficits imposed on EU member states by the Maastricht Treaty and the Stability and Growth Pact.