Unit 7 Solutions: Business — Concept, Evolution & Types
Answers to the Unit 7 exercises. Each answer is as long as its marks call for: a sentence or two for 1 mark, four explained points for 4 marks, and an introduction, explained points and a conclusion for 8 marks.
A. Very Short Answer Questions (1 Mark Each)
1. Define business in one sentence.
Business is any lawful, regular human economic activity of producing, buying and selling goods and services with the main objective of earning profit through customer satisfaction.
2. What is meant by Entrepôt Trade?
Entrepôt (re-export) trade is importing goods from one country, not for use at home, but to process or re-pack them and export them to a third country, as trading hubs such as Singapore and Dubai do.
3. Write the equation connecting Commerce, Trade, and Auxiliaries to Trade.
Commerce = Trade + Auxiliaries to Trade
4. Which hindrance of trade is removed by (a) Warehousing and (b) Insurance?
(a) Warehousing removes the hindrance of time, and (b) insurance removes the hindrance of risk.
5. Write the full form of PAN and VAT, and state the standard rate of VAT in Nepal.
PAN stands for Permanent Account Number and VAT for Value Added Tax; the standard rate of VAT in Nepal is 13%.
B. Short Answer Questions (4 Marks Each)
1. Explain any five essential characteristics of business.
- Human economic activity: Business is carried out by human beings to earn a livelihood and create wealth. Cooking food for one’s own family is not business, but cooking and selling food in a restaurant is. Charity and hobbies are not business either.
- Production and exchange of goods and services: Business involves either producing goods (industry) or buying and selling goods and services for value (commerce). Producing something only for one’s own use is not business.
- Regularity and continuity in dealings: A single, isolated transaction, such as selling one’s own old motorcycle, is not business. Buying and selling motorcycles regularly in a showroom is.
- Profit motive: The main driving force of every business is profit, the surplus of revenue over cost. Profit is needed for the business to survive and grow.
- Risk and uncertainty: Every business faces changes in customer taste, price fluctuations, competition, natural disasters and fire, so a loss is always possible.
The other two characteristics are creation of utilities and customer satisfaction (form, place and time utility) and legality (smuggling, black-marketing and gambling are not business).
2. Differentiate between Industry, Commerce, and Trade.
Industry and commerce are the two branches of business, and trade is a part of commerce.
| Basis | Industry | Commerce | Trade |
|---|---|---|---|
| Meaning | Extraction, reproduction, conversion, processing and construction of goods | All activities that carry goods from the place of production to the final consumers by removing hindrances | Actual buying and selling of goods and services for money or money’s worth |
| Main function | Production of goods and services | Distribution of goods and services | Exchange of goods (transfer of ownership from seller to buyer) |
| Utility created | Form utility | Place, time and possession utility | Possession (ownership) utility |
| Hindrance removed | Does not remove hindrances; it produces the goods | Hindrances of person, place, time, finance, risk and information | Hindrance of person, by bringing buyers and sellers together |
| Scope | Primary, secondary and tertiary (service) industry | Wider than trade: Trade + Auxiliaries to Trade | Narrowest: home trade and foreign trade only |
| Examples | Poultry farming, mining, a cement factory, road construction | Ilam tea carried by truck, stored, insured, advertised and sold in Kathmandu | A retailer buying tea from a wholesaler and selling it to consumers |
3. Distinguish between Home Trade and Foreign Trade on any four bases.
| Basis | Home (Internal) Trade | Foreign (International) Trade |
|---|---|---|
| Meaning | Buying and selling of goods within the boundaries of the same country, e.g., tea produced in Ilam sold in Kathmandu or Pokhara | Buying and selling of goods and services across national borders, e.g., Nepal importing petroleum from India or exporting carpets and pashmina |
| Currency | Settled in domestic currency (Nepalese rupees) | Involves foreign currency and its exchange |
| Customs duties | No customs duties or border formalities | Customs duties and customs formalities at the border |
| Payment method | Simple payment by cash, cheque or bank transfer | Letters of Credit (L/C) are commonly used |
| Types | Wholesale trade and retail trade | Import trade, export trade and entrepôt (re-export) trade |
| Risk and cost | Lower, as distances are shorter and the same laws apply | Higher, because of long distances, different laws and changes in exchange rates |
C. Long Analytical Questions (8 Marks Each)
1. What is meant by Auxiliaries to Trade? Explain how transportation, warehousing, banking, insurance, and advertising help in the smooth operation of commerce.
Auxiliaries (aids) to trade are the activities that help trade run smoothly by removing specific hindrances between producers and consumers. They do not buy or sell goods themselves, but without them goods would stay where and when they are produced. Together with trade, they make up commerce: Commerce = Trade + Auxiliaries to Trade. Each auxiliary helps commerce as follows:
- Transportation (removes the hindrance of place): Goods are produced in one place but consumed in many places. Transport carries raw materials to factories and finished goods to distant markets, for example trucks bringing tea from Ilam to Kathmandu. It creates place utility and widens the market for every product.
- Warehousing (removes the hindrance of time): Many goods are produced in one season but demanded all year, or produced now but needed later. Warehouses store seasonal products such as paddy, potatoes and woolen garments safely until consumer demand arises. This creates time utility and keeps supply and prices steady.
- Banking and finance (removes the hindrance of finance and payment): Traders need money to buy stock and pay suppliers before they sell. Banks provide working capital loans and overdrafts, and make payment easy through cheques and remittances. In foreign trade, a Letter of Credit (L/C) gives the exporter an assurance of payment.
- Insurance (removes the hindrance of risk): Goods may be destroyed by fire, transit accidents, theft or natural calamities. In exchange for a periodic premium, an insurance company compensates the trader for such losses, so traders can carry on business without fear of losing everything.
- Advertising (removes the hindrance of information or knowledge): Consumers cannot buy a product they do not know about. Advertising informs them about its availability, features, price and uses, creates demand for new products and helps traders sell more.
- Communication (removes the hindrance of information in dealings): The unit pairs communication with advertising. Post, telephone, email and the internet let buyers and sellers send inquiries, orders and quotations and negotiate deals instantly, even when they are far apart.
Conclusion: Trade alone cannot carry goods from producers to consumers. Transport, warehousing, banking, insurance and advertising remove the hindrances of place, time, finance, risk and information, so goods reach the right consumer at the right place and time. That is why they are called aids to trade and are an essential part of commerce.