Fundamentals of commerce

Fundamentals of Commerce by Dr. V.S. Mege

1. Fundamentals of commerce

2. Introduction Commerce ensures a free and smooth flow of goods from producers to consumers. Commerce provides the advantages of specialisation . It helps to better satisfy human wants by collecting and distributing goods. Commerce provides the necessary link between the producers and consumers of goods .

3. Economics Economics the study of how societies use scarce resources to produce valuable commodities and distribute them among different people. Behind this definition are two key ideas in  economics : that goods are scarce and that society must use  its  resources efficiently.

4. Economics is a broader study about how individuals, businesses and societies use the resources, whereas Commerce involves the study of goods sold by producers to the consumers. Economics goes on to study the impact of businesses, government legislation, banks etc., as opposed to Commerce , which doesn’t have a wide area of study. Commerce detains its scope to business, whereas economics explores not only the business but also pubic policies and division of labour . Economics has a broad number of fields and areas to specialize in compared to commerce. Commerce examines trade and exchange, while economics examines this and extends its study to production and consumption.

5. Economics is concerned with the economic system and its operation in the country; whereas, the transfer of the results of production from producer to the consumer would be the key concern in commerce. Commerce has been part of history. From trading using barter system to selling and buying using currency, the activity of exchange of items of value between persons and companies has been in existence. When a person trades in a country, the trader will be concerned on the changes in the economic system of the country as this determines to a certain extent whether the business achieves success or failure

6. Commerce is a broad term and trade is just a part of commerce and narrow. Trade is just exchange of goods and services where commerce has many aspects. Commerce includes all the activities that help in facilitating the exchange of goods and services from the manufacturer or the producer to the ultimate consumers. Majorly the activities are transportation, banking, insurance, advertising, warehousing, etc. that act as an aide in the successful completion of the exchange. Trade is just the transfer of ownership from one person to another, that’s it. A simple and familiar example for you. ..If Egg or chicken is like a trade but the word Non- veg is commerce and If potato is a trade then, vegetables are commerce. Commerce Vs Trade

7. Economics is the study of how people allocate scarce resources for production, distribution, and consumption, both individually and collectively. Two major types of economics are  microeconomics , which focuses on the behavior of individual consumers and producers, and  macroeconomics , which examine overall economies on a regional, national, or international scale. English economist  Lionel Robbins  defined economics as “the  science  which studies  human behaviour  as a relationship between (given) ends and scarce means which have  alternative  uses.” Definitions

8. National Income Traditional Definition According to Marshall:  “The labor and capital of a country acting on its  natural resources  produce annually a certain net aggregate of commodities,  material  and immaterial including services of all kinds. This is the true net annual income or revenue of the country or national dividend.” Simon Kuznets  defines national income as “the net output of commodities and services flowing during the year from the country’s productive system in the hands of the ultimate  consumers .”

9. Enumerate the various methods of measuring National Income? Ans.  There are various methods for measuring National Income: Gross Domestic Product (GDP) Gross National Product (GNP) Net National Product (NNP) Net Domestic Product (NDP) National Income at Factor Cost (NIFC) Transfer Payments Personal Income Disposable Personal Income

10. Gross Domestic Product The total value of goods produced and services rendered within a country during a year is its  Gross Domestic Product. Further, GDP is calculated at market price and is defined as GDP at market prices. Different constituents of GDP are: Wages and salaries Rent Interest Undistributed profits Mixed-income Direct taxes Dividend Depreciation

11. Gross National Product For  calculation of GNP , we need to collect and assess the  data  from all productive activities, such as agricultural produce, wood, minerals, commodities, the contributions to production by transport, communications, insurance companies, professions such (as lawyers, doctors, teachers, etc). at market prices .

12. It also includes net income arising in a country from abroad. Four main constituents of GNP are: Consumer goods and services Gross private domestic income Goods produced or services rendered Income arising from abroad.

13. Net Domestic Product The net output of the country’s economy during a year is its NDP. During the year a country’s capital assets are subject to wear and tear due to its use or can become obsolete. Hence, we deduct a percentage of such investment from the GDP to arrive at NDP.

14. (C) Net Domestic Product (NDP): NDP is the value of net output of the economy during the year. Some of the country’s capital equipment wears out or becomes obsolete each year during the production process. The value of this capital consumption is some percentage of gross investment which is deducted from GDP. Thus Net Domestic Product = GDP at Factor Cost – Depreciation .

15. Gross National Product (GNP): GNP is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including net income from abroad. GNP includes four types of final goods and services: (1) Consumers’ goods and services to satisfy the immediate wants of the people; (2) Gross private domestic investment in capital goods consisting of fixed capital formation, residential construction and inventories of finished and unfinished goods; (3) Goods and services produced by the government; and (4) Net exports of goods and services, i.e., the difference between value of exports and imports of goods and services, known as net income from abroad.

16. 1. Income Method to GNP: The income method to GNP consists of the remuneration paid in terms of money to the factors of production annually in a country. Thus GNP is the sum total of the following items: ( i ) Wages and salaries: Under this head are included all forms of wages and salaries earned through productive activities by workers and entrepreneurs. It includes all sums received or deposited during a year by way of all types of contributions like overtime, commission, provident fund, insurance, etc. (ii) Rents: Total rent includes the rents of land, shop, house, factory, etc. and the estimated rents of all such assets as are used by the owners themselves. (iii) Interest: Under interest comes the income by way of interest received by the individual of a country from different sources. To this is added, the estimated interest on that private capital which is invested and not borrowed by the businessman in his personal business. But the interest received on governmental loans has to be excluded, because it is a mere transfer of national income. (iv) Dividends: Dividends earned by the shareholders from companies are included in the GNP. (v) Undistributed corporate profits: Profits which are not distributed by companies and are retained by them are included in the GNP.

17. (vi) Mixed incomes: These include profits of unincorporated business, self-employed persons and partnerships. They form part of GNP. (vii) Direct taxes: Taxes levied on individuals, corporations and other businesses are included in the GNP. (viii) Indirect taxes: The government levies a number of indirect taxes, like excise duties and sales tax. These taxes are included in the price of commodities. But revenue from these goes to the government treasury and not to the factors of production. Therefore, the income due to such taxes is added to the GNP. (ix) Depreciation: Every corporation makes allowance for expenditure on wearing out and depreciation of machines, plants and other capital equipment. Since this sum also is not a part of the income received by the factors of production, it is, therefore, also included in the GNP. (x) Net income earned from abroad: This is the difference between the value of exports of goods and services and the value of imports of goods and services. If this difference is positive, it is added to the GNP and if it is negative, it is deducted from the GNP.

18. Personal Income:  Personal income is the sum of all incomes actually received by all individuals or households during a given year. In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits. On the other hand there are income (transfer payment), which is received but not currently earned such as old age pensions, unemployment doles, relief payments, etc. Thus, in moving from national income to personal income we must subtract the incomes earned but not received and add incomes received but not currently earned. Therefore, Personal Income = National Income – Social Security contributions – corporate income taxes – undistributed corporate profits + transfer payments.

19. Disposable Income:  From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income. Thus, Disposable Income = Personal income – personal taxes. Disposable Income can either be consumed or saved. Therefore, Disposable Income = consumption + saving.

20. MEASUREMENT OF NATIONAL INCOME Production generate incomes which are again spent on goods and services produced. Therefore, national income can be measured by three methods: 1. Output or Production method 2. Income method, and 3. Expenditure method.

21. 1. Output or Production Method:  This method is also called the value-added method. This method approaches national income from the output side. Under this method, the economy is divided into different sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services. Then, the gross product is found out by adding up the net values of all the production that has taken place in these sectors during a given year. In order to arrive at the net value of production of a given industry, intermediate goods purchase by the producers of this industry are deducted from the gross value of production of that industry. The aggregate or net values of production of all the industry and sectors of the economy plus the net factor income from abroad will give us the GNP. If we deduct depreciation from the GNP we get NNP at market price. NNP at market price – indirect taxes + subsidies will give us NNP at factor cost or National Income. The output method can be used where there exists a census of production for the year. The advantage of this method is that it reveals the contributions and relative importance and of the different sectors of the economy.

22. 2. Income Method:  This method approaches national income from the distribution side. According to this method, national income is obtained by summing up of the incomes of all individuals in the country. Thus, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs and income of self-employed people. This method of estimating national income has the great advantage of indicating the distribution of national income among different income groups such as landlords, capitalists, workers, etc.

23. 3. Expenditure Method : This method arrives at national income by adding up all the expenditure made on goods and services during a year. Thus, the national income is found by adding up the following types of expenditure by households, private business enterprises and the government: - (a) Expenditure on consumer goods and services by individuals and households denoted by C. This is called personal consumption expenditure denoted by C. (b) Expenditure by private business enterprises on capital goods and on making additions to inventories or stocks in a year. This is called gross domestic private investment denoted by I. (c) Government’s expenditure on goods and services i.e. government purchases denoted by G. (d) Expenditure made by foreigners on goods and services of the national economy over and above what this economy spends on the output of the foreign countries i.e. exports – imports

24. Economic planning  is a resource allocation system based on a computational procedure for solving a constrained maximization problem with an iterative process for obtaining its solution.  Planning  is a mechanism for the allocation of resources between and within organizations contrasted with the market mechanism. Economic planning , the process by which key economic decisions are made or influenced by central governments.  Economic Planning .  Planning  is  defined  as conceiving, initiating, regulating and controlling  economic  activity by the state according to set priorities with a view to achieving well- defined  objectives within a given time. One of the most  important  functions of  economic planning  is to achieve consistency among different  economic  objectives. Some desirable goals are likely to conflict with others Economic Planning In India  – Five Year Plans. The term  economic planning  is used to describe the long term plans of the government of  India  to develop and coordinate the  economy  with efficient utilization of resources.