Nature and Scope of Business

NATURE AND SCOPE OF BUSINESS

1. NATURE OF BUSINESS

Meaning of business. In the literary sense, the word 'business1 means 'the state of being busy'. Technically, the term 'business' means all those activities which are related to the production and distribution of goods and services with the object of earning profit. For example, the farmer who cultivates land, the fisherman who catches fish, the manufacturer who converts raw material into semi fished (raw cotton to yarn) or finished goods (yarn to cloth) etc with the sole objective to earn profit, are engaged in business. In addition to this, the purchase and sale of goods on wholesale or retail basis by individuals and firms, the financing of trade by the bankers, the transporting of goods from one place to another by transporters etc. etc., for earning profit are economic activities and included in business. Beside goods, business also provides direct services to individuals and to business enterprises. The services may be health services like provision of doctor, legal services (provision of a lawyer) insurance services etc. The illegal activities like smuggling, gambling black marketing etc., are not included in business activities.

Activities excluded from business:

There are certain organizations which do not seek profit as their goal. These organizations are established with the sole objective of rendering service to the community. For instance, a hospital, a university, a library, a government agency, etc, may render service purely for a social benefit to society. These and such other non-profit organizations having a standard different from the profit-seeking organizations are excluded from the study of business.

Similarly, all the activities which are concerned with the production or purchase of goods and services for personal consumption fall outside the scope of business. For instance, a shoemaker making a pair of shoes for personal consumption or a taior sewing shirts for his own use or a nurse nursing her own child are not business activities because these do not involve in sale or transfer for value. However, if a shoemaker, manufactures shoes for sate in the market with a view to earn profit, It will be purely a business actfvty. The word, business, can be summed up in the foiowing words: 'Business1 refers to all those activities which are

related to the production or purchase of goods and services with the object of selling them at a profit. It includes activities connected with manufacturing, trading, transporting, warehousing, insurance, banking and finance. It does not include non-economic and illegal activities of man.

Definitions of business:

The term business has been defined by various authors. Some of the selected definitions are given below.

According to L.H._Haney, 'Business may be define as human activity directed towards providing or acquiring wealth through buying and sellings.'
Urwick and Hunt describes 'Business as an enterprise which makes, distributes or provides any article or service which the other members of the community need and are able and willing to pay for it."
Aecording^R.N. Owen, business includes all the commercial and industrial activities are provide goods and services to the people with an object

Origin and Growth of Money

Introduction to Morwy

Origin and Growth of Money
Money that we use today has not sprung up overnight. In fact it has passed through centuries of evolution to reach in its present form. Broadly speaking the evolution of money and its growth can be divided into four stages, namely barter, commodity, metallic and paper. These four stages are discussed below.
1. Barter System:
In barter age there was no money. The trade used to take place without an> money. Goods were exchanged for goods and there was a problem of double coincidence of wants. Further there were many other inconveniences such as absence of unit of value, lack of sub division, lack of common measure etc.
2. Commodity Money:
As the society developed people found that they need some commodities more than others and their wants are of varying importance. This increased the importance of some commodities and goods. Gradually these commodities attained the status of money in that era. People used to value these goods higher than others. So we can say that different goods or commodities became money in that era. Examples of goods used as money could be animal skin, barley, wheat etc. Certain defects of barter were also present in this era of commodity money. There were numerous similar problems such as inability to store wealth for a longer period of time, lack of unit of account, lack of subdivision, etc
3. Metallic Age:
With the passage of time, man found gold, silver and other precious metals. As these things were scarce, their charm and shine fascinated men, so people started using them as wealth. They were considered as a source of purchasing power and people started using gold and silver pieces as medium of exchange. However such pieces had following disadvantages:
No Valuation: There was no valuation of such prices as how much amount will be needed to buy any particular good.
Weight & Measurement: People had to weigh the pieces every time they are going to pay or receive them.
Transportation: Heavy pieces of precious metals were extremely difficult to transfer from one place to another.
Debasement: The pieces of gold and silver were exposed to wear and tear. This means that with continuous usage and change of hands they used to loose their weight and hence their value.
These problems led the man to mould heavy pieces of metal into standard coins and to give them a face value equal to their intrinsic value. These coins were then used as a medium of exchange but they also created problems. First, they were exposed to wear and tear which decreased their intrinsic value as against face value. Secondly, with the findings of new mines of gold and silver, the supply of these metals increased and their worth decreased.

4. Paper Money:
The people were in the habit of keeping these gold coins and bars with goldsmiths. The receipts issued by goldsmiths become medium of exchange over time. People started using these receipt to discharge their obligations. This was the start of paper money and goldsmiths became commercial banks of that time. Later on confusion occurred due to different types of receipts belonging to different goldsmiths. So central bank was devised to take over the function of note issuance. Paper money itself passed through three stages of evolution. In first stage it was representative, in the second stage it became convertible and in the final stage it becomes inconvertible paper money.
Conclusion:
This is how the money originated and developed and reached at the stage where we are using it,today.

Barter System

Barter is the system of trade, that was prevailing in the economy before the invention of money. Under barter as there was no money so there was no medium of exchange. The commodities and goods were traded directly for each other. A person can •jade the things which he has got in surplus for the things which he is in need of. However this system was very difficult and inconvenient due to which modern world e up barter and started using money.

Defining Barter:
Following are some important definitions of barter; According to R.H.Parker
"Barter is the direct exchange of goods and services without the use of money as either the means of payment or a unit of account"
According to S.Sloan
"Barter is the direct exchange of commodity or service for another without the use of money"
Inconveniences of Barter:
Following are the inconveniences of barter. 1. Double Coincidence of Wants: .In barter there was a need of double coincidence of wants. This means that if you have got surplus sugar with you and you need a leather jacket. You will have to find a man who has surplus leather jackets and who is also willing to give leather jacket to you far sugar. This was the basic difficulty and inefficiency of barter system.

Barter system characteristics page 1

1No Measure of Value:

Under barter there was no standard unit to measure value of different units or to measure value of different goods. So there was difficulties in valuation of goods. For instance, the man who has sugar may assign the value to his Ikg sugar as equivalent to
2 jackets. But the man who has got jackets may value his jacket as equivalent to 5 kg sugar. This lack of common measure of value made trade difficult.
3. No Subdivision:
In barter, there is always a problem of lack of subdivision. As mostly goods and animals were traded for goods so it was nearly impossible to subdivide them (e.g., horses and catties) into smaller units for small transaction. For example a person has a horse and he needs a piece of cloth. Now the question arises that how many horses will be equal to how much yards of cloth? This problem hinders the flow of transaction in barter system.
4. No Store of Value:
Under barter, wealth can't be stored for a longer period of time. Though people were in the habit of holding precious metals but other goods which were perishable couldn't be stored for any longer time period.
5. Standard of Deferred Payments:
Under barter, there was no standard of deferred payments. There was no mechanism to state debts and payment in future with reasonable certainty and security.
6. No Investment / Savings:
Under barter, neither there was any investment nor any saving. People were in the habit of self-sufficiency and they were not able to save for rainy days or to invest what they have got in surplus to earn healthy returns.
7. Economic Measurements:
Under barter it was impossible to measure any economic variable both micro and macro. There was no system to measure personal income on micro level and GDP on macro level.
8. Comparison of Living Standard:
As under barter, wealth can't be stated in common units, so it was impossible to compare living standards of different classes of society. Further, it was also impossible to determine true worth of any stock or merchandise. There were no common units to compare wealth distribution among people.
9. Tax Collection: V
Under barter it is extremely difficult if not impossible to impose any type of duties and taxes and then to collect them. It was impossible to collect goods from different people as tax because they were of various forms and mostly perishable.

Barter system characteristics page 2

10. Difficulties in Transfer of Wealth:

Under barter, transfer of wealth was very difficult if not impossible. Mostly people were in the habit of holding wealth in form of animals and perishable goods and it was not an easy task to transfer them over longer distances.
11. No Specialization:
Specialization is an essential for gaining competitive advantage over others. However in barter system there are no incentives for specialization. People usually try to attain self sufficiency and this does not make efficient allocation of resources. Inefficient use of resources leads to high wastages and increased cost of production that further undermines competitiveness. Apart from this barter system does not allow division of labour. Thus, not allowing workers to make best use of their competencies and energy.
12. No Budgeting:
Under barter, there are no incentives for budgeting expenses and incomes. People are unable to forecast the worth of their merchandise with any reasonable certainty. They, therefore, cannot make any estimates of their future incomes and revenues. Similarly, the government in a barter system cannot play any effective role to influence the economy. In the absence of money the government cannot impose or collect taxes or make any borrowings.
13. No Capital Formation:
Under barter, there are no incentives for savings and production of capital goods. People are usually concerned with current consumption needs and do not pay any attention towards capital formation. Further under barter much of the trade is related to eatables and perishable goods. These commodities cannot be stored for a long time so rates of savings and capital accumulation are almost negligible in the barter economy. Summing Up:
These were the inconveniences of barter that made this system simply impossible to flourish in the modern economy. With the invention of money, these difficulties were removed and money played an extremely efficient role in the modern economy.
How use of money overcome inconveniences of Barter:
With the invention of money, the inconveniences of barter were removed completely. Money served as a medium of exchange, store of value and unit of account. ": serves the basis for the working of modern economic system. 1. Medium of Exchange:
Money serve as a common medium of exchange. It eradicates the inconvenience of "double coincidence of wants." Now anyone can buy anything and sell anything for money. There is no need to find a person who is in need of the things that you have in abundance and who has got the things that you need. In money economy, people sell their goods and services for money and use that money to fulfil their wants.

Paper Currency

Paper Currency

Paper currency is the most advanced form of money. It fulfills nearly all the characteristics of an. ideal money. It is economical, easily recognizable, stable and conveniently storagable.

Paper currency (as already explained previously) can be classified , into representative, convertible and fiat money.

Now a days almost majority of the paper currency is fiat money.. In words of Keynes:

"Fiat money is one which _ts created and issued by state but is hot convertible by law into anything other than itself and has no fixed value in terms of an objective standard."

Other definitions of the paper currency are as follows: 'According to Hanson:

"Paper money means the paper instruments sucri as bank notes, cheques, bills, and other forms which act as a currency"

According to F. Perry:

"Paper money js a document representing money such as bank notes, promissory notes, bills of exchange, etc"

Thus paper currency is inconvertible but at the same time it is unlimited legal tender. Following are the advantages and disadvantages of paper currency.

Advantages: 1.      Economical:

Paper currency is' very economical to issue. The cost of currency as compared to its face value is, very low. Printing of paper currency requires certain special type of paper, ink and printing technology. These things are no doubt costly but the overall cost of printing paper currency is quite low.

2.       Unlimited Legal Tender:

Paper currency is unlimited legal leader any amount of debt can be paid in it.
It can be used to discharge all kinds of business obligations and liabilities. No one can
refuse to accept it in settlement of any debt.          

3.     Elasticity in Supply:

'The supply of paper currency' is elastic. It can bt increased or decreased according to monetary situation. It gives an ease of control to central authority over monetary matters. In times of need the central bank can print more notes, to stimulate the economy. •On the other hand during inflationary cycles the central bank can reduce the supply of currency and credit to check general price level.

4.      Convenience:

The paper currency is convenient to carry and transfer. It can be easily kept in pocket or~wallets. Further it can also be readily converted into cheques, drafts, TC's etc. Further it can also be transferred over long distances in no time.

o.       Difficulty to Copy:

The design of paper currency is very intricate and special type'of paper and ink is used hence it is impossible to copy it. Even if it is copied by some fake means then also it can be checked by some electronic machines.

6.       Uniformity:

The paper currency stays uniform. The apparent loss of color or tearing of paper does not effect the face value. It can be used many times by different people without any loss of value or damage. The writings on it or any other marks also do not effect its validity.

7.       Growth & Development:

The present era of economic-prosperity and development :owies great to the paper currency. Paper currency is at the base of world's vast economy. It has given new meanings ta exchange .and trade. The brisk'trading of today's world is possible because of rapid.means of payments and receipts. Paper currency has also helped the banks arid financial houses to flourish rapidly. It is also the root for development of numerous other paper credit instruments such as drafts, cheques etc.

8.       Price Mechanism:

Our market forces of demand and supply works because of the price mechanism. Paper currency has greatly helped in making price mechanism Workable and effective.

9.       International Trade:

The .present state of international trade also owes great to paper, currency. Different paper currencies can be conveniently interchanged and used indifferent parts of world! This has increased ,'tbe liquidity of world's economy. Moreover it has greatly contributed to increase fdrejgn trading in all the regions of the world.

10.     Monetary Management:

As the supply of paper currency can be regulated by central bank, thus monel management becomes easy. The volume of currency in circulation can be easily k under observation by the Central Bank. The Central Bank can use its monetary powers influence the supply of currency and credit in the economy.

11.     Record:

Paper currency is always numbered. Each note has a distinct number. So, in C£
of a robbery or bank frauds, the involved people can be traced out when they use I
embezzled money.                                                     _t

12.     Ease of Counting:

The paper money can be easily counted and piled up in bundles. It can be count) either manually or by specialized currency counting machines.* These machines can al; detect any fake currency note while counting.

13.     Convertibility:

Paper currency is easily convertible into¹ other credit instruments such as draft promissory notes, bills etc

14.     Saving in the Use of Metal;

Paper currency indirectly leads to the saving in the metallic reserves of the country. Due to the issuance of paper currency there is no need to issue coins in grate value. Thus metal is saved and can be used for other more useful purposes.

15.     Ease of Issuance:

The paper currency is easy to issue and administer. There are different methods for the issuance of paper currency which can be altered to meet the typical requirements of any economy. The method of issuance can also be changed in response to changes in the pattern of economy.

Disadvantages: 1..      inflation:

The major disadvantages of paper currency is -that it is exposed to inflation. The
• face value remains unchanged but the purchasing power declines. This has made people
suspicious about its validity. The problem of inflation is mainly faced by under developed-
countries,,In such countries people try to hold¹ savings in the form of foreign currencies
just as we people cherish to hold dollars. This further leads to business of speculation in
the economy. People try to make easy money by taking advantage of the fluctuations in
the exchange rates   

Importance of Near Money

Importance of Near Money

Near money holds a great importance in the monetary set up. This is explained "in the following heads.

1.       Spending & Consumption:

The quantity and stock of near money directly affects the spending and consumption volume of fee economy. When the amount of near money is high this means people have less of perfectly liquid money, so they are able to consume and spend less. On the other hand, if more people-are holding their wealth in perfectly liquid form, there will be tendency to spend it and this will increase the consumption expenditure of economy.

2.       Inflationary Trends:

Quantity of near money and their conversion directly affects trends of economy. If during boom period, people convert their near money in perfectly liquid money, .then this will increase the spending and will lead to inflation in the economy.

X      Economic Policies:

N

Near money are also important determinant of economic policies. If there are

inflationary trends in the economy, government increases the interest rate. This directs people to convert their cash in near money to gain interest. This will reduce fee- eash holdings aid will help, to decrease inflation. On the other hand, if government wants to generate rapid economic activity it reduces the interest rate. This induces people to convert their near money into cash and enjoy current consumption. ,

4.      Liquidity Preference:

' Near money is also an important factor of liquidity preference theory of Keynes. According to this theory the quantity of near .money in the economy has an important bearing on the rate of interest and the equilibrium quantity of money supply. The degree of willingness of the people to hold wealth in the form of near money and other interest earning assets affect the level of interest rates prevailing in the economy.

Use as Security:

Near money are also used as security to obtain loans and credits from banks and other financial institutions. Banks also grant loans against investment in different deposit schemes. Near money are generally shown under the current asset in the balance, sheet Thus it also effects the current ratio of the business