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Subjects | Fact sheet | Samples
Business and economy resources: Sample articles
cartel
German Kartell 'a group'
Agreement among national or international firms not to compete with one another. Cartels can be formed to fix prices by maintaining the price of a product at an artificially low level, to deter new competitors, or to restrict production of a commodity in order to maintain prices at an artificially high level to boost profits. The members of a cartel may also agree on which member should win a contract, known as bid rigging, or which customers they will supply. Cartels therefore represent a form of oligopoly. OPEC, for example, is an example of a transnational cartel restricting the output of a commodity, in this case oil. In many countries, including the USA and the UK, companies operating a cartel may be breaching legislation designed to abolish anticompetitive practices.
National laws concerning cartels differ widely, and international agreement is difficult to achieve. Both the Treaty of Rome and the Stockholm Convention, governing respectively the European Union (EU) and the European Free Trade Association (EFTA), contain provisions for control. In Germany, cartels are the most common form of monopolistic organization. In the USA, cartels are generally illegal. The Sherman Antitrust Act 1890 prohibited cartels, but legislation passed during the Great Depression permitted industries to enact 'codes of fair competition'. These were declared unconstitutional 1935, and public cartels in coal mining, oil production, and agriculture largely ended after World War II.
command economy
or planned economy
Economy planned and directed by government, where resources are allocated to factories by the state through central planning. This system is unresponsive to the needs and whims of consumers and to sudden changes in conditions (for example, crop failure or fluctuations in the world price of raw materials).
For example, in the former USSR, state planners decided what was to be produced. They passed orders down to factories, allocating raw materials, workers, and other factors of production to them. Factories were then told how much they should produce with these resources and where they should be sent. If there was a shortage of goods in the shops, then goods would be rationed through queuing.
In theory, the time and money spent on advertising and marketing in a free-market economy can in a command economy instead be devoted to producing something useful. However, historical experience in the 20th century suggests that planned economies have not produced as high growth as free-market or mixed economies. In practice most economies tend to be mixed, combining free-market policies with some state intervention.
franchise
In business, the right given by one company to another to manufacture, distribute, or provide its branded products. It is usual for the franchisor to impose minimum quality conditions on its franchisees to make sure that customers receive a fair deal from the
franchisee and ensure that the brand image is maintained. Famous examples of franchise businesses include McDonald's and the Body Shop.
The franchisor is also often responsible for advertising and product development. It may insist on franchisees buying raw materials from it alone. The franchisee has to pay a levy, usually a percentage of either profit or turnover, to the franchisor.
Examples of franchise operations in the UK include Benetton and the Body Shop. Many US companies use franchises to distribute their products. It is usual for US motor companies to give restricted franchise dealerships covering specified models, with the manufacturer fixing the quota and other stringent conditions of sale.
globalization
Process by which different parts of the globe become interconnected by economic, social, cultural, and political means. Globalization has become increasingly rapid since the 1970s and 1980s as a result of developments in technology, communications, and trade liberalization. Critics of globalization fear the increasing power of unelected multinational corporations, financial markets, and non-government organizations (NGOs), whose decisions can have direct and rapid effects on ordinary citizens' lives. This has led to growing antiglobalization and anticapitalist protests in the 1990s and early 21st century, which have disrupted international trade talks and meetings of international finance ministers. Supporters of globalization point to the economic benefits of growing international trade and specialization.
NGOs criticized by opponents of globalization include the World Trade Organization (WTO), World Bank, and the International Monetary Fund (IMF). Critics are also concerned about the potential environmental consequences, the risk of eroding distinctive local cultures, and the possible exploitation of workers. Solutions suggested to defuse opposition to globalization include making bodies such as the WTO more politically accountable, and ensuring greater protection of workers' rights.
Global warming and the international operation of financial markets are examples of processes operating on a global scale. The spread of the Internet and satellite communication systems has helped to foster the sense of a 'global village', while the collapse of communism has led to the global spread of capitalism: China joining the WTO in 2001. Globalization has been supported by the development of several major free-trade blocs – the European Union (EU), the North American Free Trade Agreement (NAFTA), and a planned Association of South East Asian Nations (ASEAN) free-trade area by 2008.
gross domestic product
GDP
Value of all final goods and services produced within a country within a given time period, usually one year. GDP thus includes the production of foreign-owned firms within the country, but excludes the income from domestically-owned firms located abroad. Intermediate goods, such as plastic and steel, are not included, in order to avoid double counting, because they will be turned into final goods. Household goods are included because they are intended for consumption or use rather than to be turned into other goods. GDP changes as total output and/or prices change. A rise in total output means that an economy is growing; two consecutive quarters of decline in total output is the technical definition of recession. Optimal economic growth with full employment is considered to be in the range between 2% and 2.5%. GDP needs to be adjusted to account for inflation because it is affected by changes in prices as well as by changes in output. Inflation-adjusted GDP, known as real GDP, is calculated by dividing nominal GDP by the appropriate price index. See also gross national product (GNP).
Output is derived from expenditure on goods and services by firms, consumers, and government net of imports; and income (in the form of wages, salaries, interest, rent, and profits) is derived from the production of goods and services. Therefore, GDP can be measured either by the sum of total output or expenditure or incomes. However, in practice there is usually a slight discrepancy between the three because of the highly-complex calculations involved.
GDP ignores unpaid work and natural capital (for example, a forest is regarded as having no value until it is felled), and counts as economic benefits the costs of prisons, pollution, and so on, not distinguishing between desirable and undesirable consequences of economic activity.
GDP fluctuates in relation to the trade cycle and standard of living.
In the UK, the percentage increase in GDP from one year to the next is the standard measure of economic growth.
macroeconomics
Division of economics concerned with the study of whole (aggregate) economies or systems, including such aspects as government income and expenditure, the balance of payments, fiscal policy, investment, inflation, and unemployment. It seeks to understand the
influence of all relevant economic factors on each other and thus to quantify and predict aggregate national income.
Modern macroeconomics takes much of its inspiration from the work of Maynard Keynes, whose General Theory of Employment, Interest, and Money (1936) proposed that governments could prevent financial crises and unemployment by adjusting demand through control of credit and currency. Keynesian macroeconomics thus analyses aggregate supply and demand and holds that markets do not continuously 'clear' (quickly attain equilibrium between supply and demand) and may require intervention if objectives such as full employment are thought desirable. Keynesian macroeconomic formulations were generally accepted well into the post-war era and have been refined and extended by the neo-Keynesian school, which contends that in a recession the market will clear only very slowly and that full employment equilibrium may never return without significant demand management (by government). At the same time, however, neoclassical economics has experienced a resurgence, using tools from microeconomics to challenge the central Keynesian assumption that resources may be underemployed and that full employment equilibrium requires state intervention. Another important school is new classical economics, which seeks to show the futility of Keynesian
demand-management policies and stresses instead the importance of supply-side economics, believing that the principal factor
influencing growth of national output is the efficient allocation and use of labour and capital. A related school is that of the Chicago monetarists, led by Milton Friedman, who have revived the old idea that an increase in money supply leads inevitably to an increase in prices rather than in output; however, whereas the new classical school contends that wage and price adjustment are almost instantaneous and so the level of employment at any time must be the natural rate, the Chicago monetarists are more gradualist, believing that such adjustment may take some years.
monopoly
In economics, the domination of a market for a particular product or service by a single company, which can therefore restrict competition and keep prices high. In practice, a company can be said to have a monopoly when it controls a significant proportion of the market (technically an oligopoly). In a communist country the state itself has the overall monopoly; in capitalist countries some services, such as transport or electricity supply, may be state monopolies.
In the UK, monopoly was originally a royal grant of the sole right to manufacture or sell a certain article. In the Middle Ages, the crown granted trading or manufacturing privileges to specific companies or individuals in order to raise revenue or allow new industries to grow, such as the grant of privileges to develop new techniques in glass-making. By the 16th century, the system was open to widespread abuse and was being used as a form of patronage to favour individuals who used the monopoly solely for financial
gain, as when playing cards became the subject of a monopoly. Elizabeth I was forced to annul many of her grants after campaigns in Parliament in 1597, 1598, and 1601 but monopolies were revived under James I and Charles I. The system was extended to include the administrative powers of the crown, such as licensing alehouses. Monopolies were restricted to fostering economic innovation in 1624 and the Long Parliament abolished industrial monopolies, although they continued in the commercial field until after the Glorious Revolution of 1688.
The Monopolies Commission, now the Monopolies and Mergers Commission, was established in 1948 to regulate monopolies and investigate whether they operate against the public interest. The Fair Trading Act 1973 defines a monopoly supplier as one having 'a quarter of the market', and the Monopolies and Mergers Commission controls any attempt to reach this position (in the USA 'antitrust laws' are similarly used). The Competition Act 1980 covers both private monopolies and possible abuses in the public sector. A monopsony is a situation in which there is only one buyer; for example, most governments are the only legal purchasers of military equipment inside their countries.
profit
Difference between the selling price and the production cost. This means production cost in its wide sense, that is not only the cost of manufacturing a product, but all the fixed and variable costs incurred in the process of producing and delivering the product or service. A more refined definition of profit is that of net profit. This is the income remaining after all costs have been subtracted. The net profit figure may be stated as being before or after tax. Operating profit is a term used to define profit (or loss) arising from the principal trading activity of a company. Operating profit is calculated by deducting operating expenses – expenses vital to core activity – from trading profit – profit before deduction of items such as auditors
fees, interest etc.
Normal profit is the profit needed to keep a firm from switching its resources into the production of other goods and services. Abnormal profit is profit earned over and above normal profit. Pre-tax profit is profit before corporation tax and any other taxes on profit have been paid; post-tax profit is profit after tax. Retained profit is profit not distributed to shareholders but kept back to invest in the business.
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