1. What is business?

Explain features, types of business and Factors affecting the choice of form of business
organization.
Ans:
Introduction:
Human beings are continuously engaged in some activity or other in order
to satisfy their unlimited wants. Every day we come across the word
'business' or 'businessman' directly or indirectly. Business has become
essential part of modern world. Business is an economic activity,
which is related with continuous and regular production and
distribution of goods and services for satisfying human wants.
All of us need food, clothing and shelter. We also have many other household requirements to be satisfied in
our daily lives. We met these requirements from the shopkeeper. The shopkeeper gets from wholesaler. The
wholesaler gets from manufacturers. The shopkeeper, the wholesaler, the manufacturer are doing business and
therefore they are called as Businessman. A business, also known as an enterprise or a firm, is an
organization involved in the provision of goods, services, or both to consumers.[1] Businesses are prevalent in
capitalist economies, where most of them are privately owned and provide goods and services to customers in
exchange for other goods, services, or money. Businesses may also be not-for-profit or state-owned. A
business owned by multiple individuals may be referred to as a company.

Definitions of Business

Stephenson defines business as, "The regular production or purchase and sale of goods undertaken with an
objective of earning profit and acquiring wealth through the satisfaction of human wants."

According to Dicksee, "Business refers to a form of activity conducted with an objective of earning profits
for the benefit of those on whose behalf the activity is conducted."

Lewis Henry defines business as, "Human activity directed towards producing or acquiring wealth through
buying and selling of goods."

Thus, the term business means continuous production and distribution of goods and services with the
aim of earning profits under uncertain market conditions.

Features of Business

Characteristics or features of business are discussed in following points:-

1. Exchange of goods and services

 All business activities are directly or indirectly concerned with the exchange of goods or services for money
or money's worth.

2. Deals in numerous transactions

In business, the exchange of goods and services is a regular feature. A businessman regularly deals in a
number of transactions and not just one or two transactions.

3. Profit is the main Objective

The business is carried on with the intention of earning a profit. The profit is a reward for the services of a
businessman.

4. Business skills for economic success

Anyone cannot run a business. To be a good businessman, one needs to have good business qualities and
skills. A businessman needs experience and skill to run a business.

5. Risks and Uncertainties

Business is subject to risks and uncertainties. Some risks, such as risks of loss due to fire and theft can be
insured. There are also uncertainties, such as loss due to change in demand or fall in price cannot be insured
and must be borne by the businessman.

6. Buyer and Seller

Every business transaction has minimum two parties that is a buyer and a seller. Business is nothing but a
contract or an agreement between buyer and seller.

7. Connected with production

Business activity may be connected with production of goods or services. In this case, it is called as
industrial activity. The industry may be primary or secondary.

8. Marketing and Distribution of goods

Business activity may be concerned with marketing or distribution of goods in which case it is called as
commercial activity.

9. Deals in goods and services

In business there has to be dealings in goods and service.
Goods may be divided into following two categories :-
1. Consumer goods : Goods which are used by final consumer for consumption are called consumer
goods e.g. T.V., Soaps, etc.
2. Producer goods : Goods used by producer for further production are called producers goods e.g.
Machinery, equipments, etc. Services are intangible but can be exchanged for value like providing
transport, warehousing and insurance services, etc.

10. To Satisfy human wants

The businessman also desires to satisfy human wants through conduct of business. By producing and
supplying various commodities, businessmen try to promote consumer's satisfaction.

11. Social obligations

Modern business is service oriented. Modern businessmen are conscious of their social responsibility.
Today's business is service-oriented rather than profit-oriented.

Types of business organizations

 want to be only owner (It means you what to be sole trader) or

 want to take some more professionals as co-owners along with you (If means you what to from partnership with
others as partners) or
 want to be a global player by mobilizing large resources across the country/world
 want to bring all like-minded people to share the benefits of the common enterprise (You want to promote a joint
stock company) or
 want to involve government in the IT business (here you want to suggest government to promote a public
enterprise!)

To decide this, it is necessary to know how to evaluate each of these alternatives.

Factors affecting the choice of form of business organization

Before we choose a particular form of business organization, let us study what factors affect such a choice?
The following are the factors affecting the choice of a business organization:

1. Easy to start and easy to close: The form of business organization should be such that it should be
easy to close. There should not be hassles or long procedures in the process of setting up business or
closing the same.
 2. Division of labour: There should be possibility to divide the work among the available owners.

3. Large amount of resources: Large volume of business requires large volume of resources. Some
forms of business organization do not permit to raise larger resources. Select the one which permits
to mobilize the large resources.

4. Liability: The liability of the owners should be limited to the extent of money invested in business. It
is better if their personal properties are not brought into business to make up the losses of the
business.

5. Secrecy: The form of business organization you select should be such that it should permit to take
care of the business secrets. We know that century old business units are still surviving only because
they could successfully guard their business secrets.

6. Transfer of ownership: There should be simple procedures to transfer the ownership to the next legal
heir.

7. Ownership, Management and control: If ownership, management and control are in the hands of one
or a small group of persons, communication will be effective and coordination will be easier. Where
ownership, management and control are widely distributed, it calls for a high degree of
professional’s skills to monitor the performance of the business.

8. Continuity: The business should continue forever and ever irrespective of the uncertainties in future.

9. Quick decision-making: Select such a form of business organization, which permits you to take
decisions quickly and promptly. Delay in decisions may invalidate the relevance of the decisions.

10. Personal contact with customer: Most of the times, customers give us clues to improve business. So
choose such a form, which keeps you close to the customers.

11. Flexibility: In times of rough weather, there should be enough flexibility to shift from one business
to the other. The lesser the funds committed in a particular business, the better it is.

12. Taxation: More profit means more tax. Choose such a form, which permits to pay low tax.

These are the parameters against which we can evaluate each of the available forms of business
organizations.
 2. What is sole tradership / sole proprietorship? Explain characteristics, advantages and limitations
of sole tradership.

Ans:

Introduction & meaning:

The sole trader is the simplest, oldest and natural form of business organization. It is also called sole
proprietorship. ‘Sole’ means one. ‘Sole trader’ implies that there is only one trader who is the owner of the
business.

It is a one-man form of organization wherein the trader assumes all the risk of ownership carrying out the
business with his own capital, skill and intelligence. He is the boss for himself. He has total operational
freedom. He is the owner, Manager and controller. He has total freedom and flexibility. Full control lies with
him. He can take his own decisions. He can choose or drop a particular product or business based on its
merits. He need not discuss this with anybody. He is responsible for himself. This form of organization is
popular all over the world. Restaurants, Supermarkets, pan shops, medical shops, hosiery shops etc.

Features

 It is easy to start a business under this form and also easy to close.
 He introduces his own capital. Sometimes, he may borrow, if necessary
 He enjoys all the profits and in case of loss, he lone suffers.
 He has unlimited liability which implies that his liability extends to his personal properties in case of
loss.
 He has a high degree of flexibility to shift from one business to the other.
 Business secretes can be guarded well
 There is no continuity. The business comes to a close with the death, illness or insanity of the sole
trader. Unless, the legal heirs show interest to continue the business, the business cannot be restored.
 He has total operational freedom. He is the owner, manager and controller.
 He can be directly in touch with the customers.
 He can take decisions very fast and implement them promptly.
 Rates of tax, for example, income tax and so on are comparatively very low.

Advantages
The following are the advantages of the sole trader from of business organization:

1. Easy to start and easy to close: Formation of a sole trader from of organization is relatively easy
even closing the business is easy.
2. Personal contact with customers directly: Based on the tastes and preferences of the customers the
stocks can be maintained.
3. Prompt decision-making: To improve the quality of services to the customers, he can take any
decision and implement the same promptly. He is the boss and he is responsible for his business
Decisions relating to growth or expansion can be made promptly.
4. High degree of flexibility: Based on the profitability, the trader can decide to continue or change
the business, if need be.
5. Secrecy: Business secrets can well be maintained because there is only one trader.
6. Low rate of taxation: The rate of income tax for sole traders is relatively very low.
7. Direct motivation: If there are profits, all the profits belong to the trader himself. In other words. If
he works more hard, he will get more profits. This is the direct motivating factor. At the same time,
if he does not take active interest, he may stand to lose badly also.
8. Total Control: The ownership, management and control are in the hands of the sole trader and
hence it is easy to maintain the hold on business.
9. Minimum interference from government: Except in matters relating to public interest,
government does not interfere in the business matters of the sole trader. The sole trader is free to fix
price for his products/services if he enjoys monopoly market.
10. Transferability: The legal heirs of the sole trader may take the possession of the business.

Disadvantages

The following are the disadvantages of sole trader form:

1. Unlimited liability: The liability of the sole trader is unlimited. It means that the sole trader has to
bring his personal property to clear off the loans of his business. From the legal point of view, he is
not different from his business.
2. Limited amounts of capital: The resources a sole trader can mobilize cannot be very large and
hence this naturally sets a limit for the scale of operations.
 3. No division of labour: All the work related to different functions such as marketing, production,
finance, labour and so on has to be taken care of by the sole trader himself. There is nobody else to
take his burden. Family members and relatives cannot show as much interest as the trader takes.
4. Uncertainty: There is no continuity in the duration of the business. On the death, insanity of
insolvency the business may be come to an end.
5. Inadequate for growth and expansion: This from is suitable for only small size, one-man-show
type of organizations. This may not really work out for growing and expanding organizations.
6. Lack of specialization: The services of specialists such as accountants, market researchers,
consultants and so on, are not within the reach of most of the sole traders.
7. More competition: Because it is easy to set up a small business, there is a high degree of
competition among the small businessmen and a few who are good in taking care of customer
requirements along can service.
8. Low bargaining power: The sole trader is the in the receiving end in terms of loans or supply of
raw materials. He may have to compromise many times regarding the terms and conditions of
purchase of materials or borrowing loans from the finance houses or banks.

3. What is partnership? Explain characteristics, types of partners, partnership deed, advantages and
limitations of partnership.

Ans:
Introduction & meaning:
Partnership is an improved from of sole trader in certain respects. Where there are like-minded persons with
resources, they can come together to do the business and share the profits/losses of the business in an agreed
ratio. Persons who have entered into such an agreement are individually called ‘partners’ and collectively
called ‘firm’. The relationship among partners is called a partnership.

Indian Partnership Act, 1932 defines partnership as the relationship between two or more persons who agree
to share the profits of the business carried on by all or any one of them acting for all.

Features

1. Relationship: Partnership is a relationship among persons. It is relationship resulting out of an

agreement.
2. Two or more persons: There should be two or more number of persons.
3. There should be a business: Business should be conducted.
 4. Agreement: Persons should agree to share the profits/losses of the business
5. Carried on by all or any one of them acting for all: The business can be carried on by all or any
one of the persons acting for all. This means that the business can be carried on by one person who is
the agent for all other persons. Every partner is both an agent and a principal. Agent for other
partners and principal for himself. All the partners are agents and the ‘partnership’ is their principal.

The following are the other features:

(a) Unlimited liability: The liability of the partners is unlimited. The partnership and partners, in the
eye of law, and not different but one and the same. Hence, the partners have to bring their personal
assets to clear the losses of the firm, if any.
(b) Number of partners: According to the Indian Partnership Act, the minimum number of partners
should be two and the maximum number if restricted, as given below:
 10 partners is case of banking business
 20 in case of non-banking business
(c) Division of labour: Because there are more than two persons, the work can be divided among the
partners based on their aptitude.
(d) Personal contact with customers: The partners can continuously be in touch with the customers to
monitor their requirements.
(e) Flexibility: All the partners are likeminded persons and hence they can take any decision relating to
business.

Partnership Deed

The written agreement among the partners is called ‘the partnership deed’. It contains the terms and
conditions governing the working of partnership. The following are contents of the partnership deed.

1. Names and addresses of the firm and partners

2. Nature of the business proposed
3. Duration
4. Amount of capital of the partnership and the ratio for contribution by each of the partners.
5. Their profit sharing ration (this is used for sharing losses also)
6. Rate of interest charged on capital contributed, loans taken from the partnership and the amounts
drawn, if any, by the partners from their respective capital balances.
 7. The amount of salary or commission payable to any partner
8. Procedure to value good will of the firm at the time of admission of a new partner, retirement of
death of a partner
9. Allocation of responsibilities of the partners in the firm
10. Procedure for dissolution of the firm
11. Name of the arbitrator to whom the disputes, if any, can be referred to for settlement.
12. Special rights, obligations and liabilities of partners(s), if any.

Kind of partners

The following are the different kinds of partners:

1. Active Partner: Active partner takes active part in the affairs of the partnership. He is also called
working partner.
2. Sleeping Partner: Sleeping partner contributes to capital but does not take part in the affairs of the
partnership.
3. Nominal Partner: Nominal partner is partner just for namesake. He neither contributes to capital
nor takes part in the affairs of business. Normally, the nominal partners are those who have good
business connections, and are well places in the society.
4. Partner by Estoppels: Estoppels means behavior or conduct. Partner by estoppels gives an
impression to outsiders that he is the partner in the firm. In fact be neither contributes to capital, nor
takes any role in the affairs of the partnership.
5. Partner by holding out: If partners declare a particular person (having social status) as partner and
this person does not contradict even after he comes to know such declaration, he is called a partner
by holding out and he is liable for the claims of third parties. However, the third parties should prove
they entered into contract with the firm in the belief that he is the partner of the firm. Such a person
is called partner by holding out.
6. Minor Partner: Minor has a special status in the partnership. A minor can be admitted for the
benefits of the firm. A minor is entitled to his share of profits of the firm. The liability of a minor
partner is limited to the extent of his contribution of the capital of the firm.

Advantages

The following are the advantages of the partnership from:

 1. Easy to form: Once there is a group of like-minded persons and good business proposal, it is easy to
start and register a partnership.
2. Availability of larger amount of capital: More amount of capital can be raised from more number
of partners.
3. Division of labour: The different partners come with varied backgrounds and skills. This facilities
division of labour.
4. Flexibility: The partners are free to change their decisions, add or drop a particular product or start a
new business or close the present one and so on.
5. Personal contact with customers: There is scope to keep close monitoring with customers
requirements by keeping one of the partners in charge of sales and marketing. Necessary changes
can be initiated based on the merits of the proposals from the customers.
6. Quick decisions and prompt action: If there is consensus among partners, it is enough to
implement any decision and initiate prompt action. Sometimes, it may more time for the partners on
strategic issues to reach consensus.
7. The positive impact of unlimited liability: Every partner is always alert about his impending
danger of unlimited liability. Hence he tries to do his best to bring profits for the partnership firm by
making good use of all his contacts.

Disadvantages:

The following are the disadvantages of partnership:

1. Formation of partnership is difficult: Only like-minded persons can start a partnership. It is

sarcastically said,’ it is easy to find a life partner, but not a business partner’.
2. Liability: The partners have joint and several liabilities beside unlimited liability. Joint and several
liability puts additional burden on the partners, which means that even the personal properties of the
partner or partners can be attached. Even when all but one partner become insolvent, the solvent
partner has to bear the entire burden of business loss.
3. Lack of harmony or cohesiveness: It is likely that partners may not, most often work as a group
with cohesiveness. This result in mutual conflicts, an attitude of suspicion and crisis of confidence.
Lack of harmony results in delay in decisions and paralyses the entire operations.
 4. Limited growth: The resources when compared to sole trader, a partnership may raise little more.
But when compare to the other forms such as a company, resources raised in this form of
organization are limited. Added to this, there is a restriction on the maximum number of partners.
5. Instability: The partnership form is known for its instability. The firm may be dissolved on death,
insolvency or insanity of any of the partners.
6. Lack of Public confidence: Public and even the financial institutions look at the unregistered firm
with a suspicious eye. Though registration of the firm under the Indian Partnership Act is a solution
of such problem, this cannot revive public confidence into this form of organization overnight. The
partnership can create confidence in other only with their performance.

4. What do you mean by Joint Stock Company? What are the salient features and formation
procedure? Describe the advantages and disadvantages of Joint Stock Companies?

Ans:

Introduction & meaning:

The joint stock company emerges from the limitations of partnership such as joint and several liability,
unlimited liability, limited resources and uncertain duration and so on. Normally, to take part in a business,
it may need large money and we cannot foretell the fate of business. It is not literally possible to get into
business with little money. Against this background, it is interesting to study the functioning of a joint stock
company. The main principle of the joint stock company from is to provide opportunity to take part in
business with a low investment as possible say Rs.1000. Joint Stock Company has been a boon for investors
with moderate funds to invest.

The word ‘ company’ has a Latin origin, com means ‘ come together’, pany means ‘ bread’, joint stock
company means, people come together to earn their livelihood by investing in the stock of company jointly.

Company Defined

Lord justice Lindley explained the concept of the joint stock company from of organization as ‘an
association of many persons who contribute money or money’s worth to a common stock and employ it for
a common purpose.

Features

This definition brings out the following features of the company:

1. Artificial person: The Company has no form or shape. It is an artificial person created by law. It is
intangible, invisible and existing only, in the eyes of law.

2. Separate legal existence: it has an independence existence, it separate from its members. It can
acquire the assets. It can borrow for the company. It can sue other if they are in default in payment of
 dues, breach of contract with it, if any. Similarly, outsiders for any claim can sue it. A shareholder is
not liable for the acts of the company. Similarly, the shareholders cannot bind the company by their
acts.

3. Voluntary association of persons: The Company is an association of voluntary association of

persons who want to carry on business for profit. To carry on business, they need capital. So they
invest in the share capital of the company.

4. Limited Liability: The shareholders have limited liability i.e., liability limited to the face value of
the shares held by him. In other words, the liability of a shareholder is restricted to the extent of his
contribution to the share capital of the company. The shareholder need not pay anything, even in
times of loss for the company, other than his contribution to the share capital.

5. Capital is divided into shares: The total capital is divided into a certain number of units. Each unit
is called a share. The price of each share is priced so low that every investor would like to invest in
the company. The companies promoted by promoters of good standing (i.e., known for their
reputation in terms of reliability character and dynamism) are likely to attract huge resources.

6. Transferability of shares: In the company form of organization, the shares can be transferred from
one person to the other. A shareholder of a public company can cell sell his holding of shares at his
will. However, the shares of a private company cannot be transferred. A private company restricts
the transferability of the shares.

7. Common Seal: As the company is an artificial person created by law has no physical form, it cannot
sign its name on a paper; so, it has a common seal on which its name is engraved. The common seal
should affix every document or contract; otherwise the company is not bound by such a document or
contract.

8. Perpetual succession: ‘Members may comes and members may go, but the company continues for
ever and ever’ A. company has uninterrupted existence because of the right given to the shareholders
to transfer the shares.

9. Ownership and Management separated: The shareholders are spread over the length and breadth
of the country, and sometimes, they are from different parts of the world. To facilitate
administration, the shareholders elect some among themselves or the promoters of the company as
directors to a Board, which looks after the management of the business. The Board recruits the
managers and employees at different levels in the management. Thus the management is separated
from the owners.

10. Winding up: Winding up refers to the putting an end to the company. Because law creates it, only
law can put an end to it in special circumstances such as representation from creditors of financial
institutions, or shareholders against the company that their interests are not safeguarded. The
company is not affected by the death or insolvency of any of its members.

11. The name of the company ends with ‘limited’ : it is necessary that the name of the company ends
with limited (Ltd.) to give an indication to the outsiders that they are dealing with the company with
limited liability and they should be careful about the liability aspect of their transactions with the
company.
Formation of Joint Stock company

There are two stages in the formation of a joint stock company. They are:

(a) To obtain Certificates of Incorporation

(b) To obtain certificate of commencement of Business

Certificate of Incorporation: The certificate of Incorporation is just like a ‘date of birth’ certificate. It
certifies that a company with such and such a name is born on a particular day.

Certificate of commencement of Business: A private company need not obtain the certificate of
commencement of business. It can start its commercial operations immediately after obtaining the certificate
of Incorporation.

The persons who conceive the idea of starting a company and who organize the necessary initial resources
are called promoters. The vision of the promoters forms the backbone for the company in the future to
reckon with.

The promoters have to file the following documents, along with necessary fee, with a registrar of joint stock
companies to obtain certificate of incorporation:

(a) Memorandum of Association: The Memorandum of Association is also called the charter of the
company. It outlines the relations of the company with the outsiders. If furnishes all its details in six
clause such as (ii) Name clause (II) situation clause (iii) objects clause (iv) Capital clause and (vi)
subscription clause duly executed by its subscribers.

(b) Articles of association: Articles of Association furnishes the byelaws or internal rules government
the internal conduct of the company.

(c) The list of names and address of the proposed directors and their willingness, in writing to act as
such, in case of registration of a public company.

(d) A statutory declaration that all the legal requirements have been fulfilled. The declaration has to be
duly signed by any one of the following: Company secretary in whole practice, the proposed
director, legal solicitor, chartered accountant in whole time practice or advocate of High court.

The registrar of joint stock companies peruses and verifies whether all these documents are in order or not.
If he is satisfied with the information furnished, he will register the documents and then issue a certificate of
incorporation, if it is private company, it can start its business operation immediately after obtaining
certificate of incorporation.

Advantages

The following are the advantages of a joint Stock Company

1. Mobilization of larger resources: A joint stock company provides opportunity for the investors to
invest, even small sums, in the capital of large companies. The facilities rising of larger resources.

2. Separate legal entity: The Company has separate legal entity. It is registered under Indian
Companies Act, 1956.

3. Limited liability: The shareholder has limited liability in respect of the shares held by him. In no
case, does his liability exceed more than the face value of the shares allotted to him.

4. Transferability of shares: The shares can be transferred to others. However, the private company
shares cannot be transferred.

5. Liquidity of investments: By providing the transferability of shares, shares can be converted into
cash.

6. Inculcates the habit of savings and investments: Because the share face value is very low, this
promotes the habit of saving among the common man and mobilizes the same towards investments
in the company.

7. Democracy in management: the shareholders elect the directors in a democratic way in the general
body meetings. The shareholders are free to make any proposals, question the practice of the
management, suggest the possible remedial measures, as they perceive, The directors respond to the
issue raised by the shareholders and have to justify their actions.

8. Economics of large scale production: Since the production is in the scale with large funds at

9. Continued existence: The Company has perpetual succession. It has no natural end. It continues
forever and ever unless law put an end to it.

10. Institutional confidence: Financial Institutions prefer to deal with companies in view of their
professionalism and financial strengths.
 11. Professional management: With the larger funds at its disposal, the Board of Directors recruits
competent and professional managers to handle the affairs of the company in a professional manner.

12. Growth and Expansion: With large resources and professional management, the company can earn
good returns on its operations, build good amount of reserves and further consider the proposals for
growth and expansion.

All that shines is not gold. The company from of organization is not without any disadvantages. The
following are the disadvantages of joint stock companies.

Disadvantages

1. Formation of company is a long drawn procedure: Promoting a joint stock company involves a
long drawn procedure. It is expensive and involves large number of legal formalities.

2. High degree of government interference: The government brings out a number of rules and
regulations governing the internal conduct of the operations of a company such as meetings, voting,
audit and so on, and any violation of these rules results into statutory lapses, punishable under the
companies act.

3. Inordinate delays in decision-making: As the size of the organization grows, the number of levels
in organization also increases in the name of specialization. The more the number of levels, the more
is the delay in decision-making. Sometimes, so-called professionals do not respond to the urgencies
as required. It promotes delay in administration, which is referred to ‘red tape and bureaucracy’.

4. Lack or initiative: In most of the cases, the employees of the company at different levels show slack
in their personal initiative with the result, the opportunities once missed do not recur and the
company loses the revenue.

5. Lack of responsibility and commitment: In some cases, the managers at different levels are afraid
to take risk and more worried about their jobs rather than the huge funds invested in the capital of
the company lose the revenue.

6. Lack of responsibility and commitment: In some cases, the managers at different levels are afraid
to take risk and more worried about their jobs rather than the huge funds invested in the capital of
the company. Where managers do not show up willingness to take responsibility, they cannot be
considered as committed. They will not be able to handle the business risks.

5. What is public enterprise? Explain different forms and their features, advantages and
disadvantages.

Ans:
 Introduction & meaning:

Public enterprises

Public enterprises occupy an important position in the Indian economy. Today, public enterprises provide
the substance and heart of the economy. Its investment of over Rs.10,000 crore is in heavy and basic
industry, and infrastructure like power, transport and communications. The concept of public enterprise in
Indian dates back to the era of pre-independence.

Genesis of Public Enterprises

In consequence to declaration of its goal as socialistic pattern of society in 1954, the Government of India
realized that it is through progressive extension of public enterprises only, the following aims of our five
years plans can be fulfilled.

 Higher production

 Greater employment

 Economic equality, and

 Dispersal of economic power

The government found it necessary to revise its industrial policy in 1956 to give it a socialistic bent.

Need for Public Enterprises

The Industrial Policy Resolution 1956 states the need for promoting public enterprises as follows:

 To accelerate the rate of economic growth by planned development

 To speed up industrialization, particularly development of heavy industries and to expand public

sector and to build up a large and growing cooperative sector.

 To increase infrastructure facilities

  To disperse the industries over different geographical areas for balanced regional development

 To increase the opportunities of gainful employment

 To help in raising the standards of living

 To reducing disparities in income and wealth (By preventing private monopolies and curbing
concentration of economic power and vast industries in the hands of a small number of individuals)

Achievements of public Enterprises

The achievements of public enterprise are vast and varied. They are:

1. Setting up a number of public enterprises in basic and key industries

2. Generating considerably large employment opportunities in skilled, unskilled, supervisory and

managerial cadres.

3. Creating internal resources and contributing towards national exchequer for funds for development
and welfare.

4. Bringing about development activities in backward regions, through locations in different areas of
the country.

5. Assisting in the field of export promotion and conservation of foreign exchange.

6. Creating viable infrastructure and bringing about rapid industrialization (ancillary industries
developed around the public sector as its nucleus).

7. Restricting the growth of private monopolies

8. Stimulating diversified growth in private sector

9. Taking over sick industrial units and putting them, in most of the vases, in order,

10. Creating financial systems, through a powerful networking of financial institutions, development and
promotional institutions, which has resulted in social control and social orientation of investment,
credit and capital management systems.

11. Benefiting the rural areas, priority sectors, small business in the fields of industry, finance, credit,
services, trade, transport, consultancy and so on.
Let us see the different forms of public enterprise and their features now.

Forms of public enterprises

Public enterprises can be classified into three forms:

(a) Departmental undertaking

(b) Public corporation

(c) Government company

These are explained below

Departmental Undertaking

This is the earliest from of public enterprise. Under this form, the affairs of the public enterprise are carried
out under the overall control of one of the departments of the government. The government department
appoints a managing director (normally a civil servant) for the departmental undertaking. He will be given
the executive authority to take necessary decisions. The departmental undertaking does not have a budget of
its own. As and when it wants, it draws money from the government exchequer and when it has surplus
money, it deposits it in the government exchequer. However, it is subject to budget, accounting and audit
controls.

Examples for departmental undertakings are Railways, Department of Posts, All India Radio, Doordarshan,
Defence undertakings like DRDL, DLRL, ordinance factories, and such.

Features

1. Under the control of a government department: The departmental undertaking is not an independent
organization. It has no separate existence. It is designed to work under close control of a government
department. It is subject to direct ministerial control.
 2. More financial freedom: The departmental undertaking can draw funds from government account as
per the needs and deposit back when convenient.

3. Like any other government department: The departmental undertaking is almost similar to any other
government department

4. Budget, accounting and audit controls : The departmental undertaking has to follow guidelines (as
applicable to the other government departments) underlying the budget preparation, maintenance of
accounts, and getting the accounts audited internally and by external auditors.

5. More a government organization, less a business organization . The set up of a departmental

undertaking is more rigid, less flexible, slow in responding to market needs.

Advantages

1. Effective control: Control is likely to be effective because it is directly under the Ministry.

2. Responsible Executives: Normally the administration is entrusted to a senior civil servant. The
administration will be organized and effective.

3. Less scope for mystification of funds : Departmental undertaking does not draw any money more
than is needed, that too subject to ministerial sanction and other controls. So chances for mis-
utilisation are low.

4. Adds to Government revenue: The revenue of the government is on the rise when the revenue of the
departmental undertaking is deposited in the government account.

Disadvantages

1. Decisions delayed: Control is centralized. This results in lower degree of flexibility. Officials in the
lower levels cannot take initiative. Decisions cannot be fast and actions cannot be prompt.

2. No incentive to maximize earnings: The departmental undertaking does not retain any surplus with
it. So there is no inventive for maximizing the efficiency or earnings.

3. Slow response to market conditions: Since there is no competition, there is no profit motive; there is
no incentive to move swiftly to market needs.
 4. Redtapism and bureaucracy: The departmental undertakings are in the control of a civil servant and
under the immediate supervision of a government department. Administration gets delayed
substantially.

5. Incidence of more taxes: At times, in case of losses, these are made up by the government funds
only. To make up these, there may be a need for fresh taxes, which is undesirable.

Any business organization to be more successful needs to be more dynamic, flexible, and responsive to
market conditions, fast in decision marking and prompt in actions. None of these qualities figure in the
features of a departmental undertaking. It is true that departmental undertaking operates as a extension to the
government. With the result, the government may miss certain business opportunities. So as not to miss
business opportunities, the government has thought of another form of public enterprise, that is, Public
corporation.

Public corporation

Having released that the routing government administration would not be able to cope up with the demand
of its business enterprises, the Government of India, in 1948, decided to organize some of its enterprises as
statutory corporations. In pursuance of this, Industrial Finance Corporation, Employees’ State Insurance
Corporation was set up in 1948.

Public corporation is a ‘right mix of public ownership, public accountability and business management for
public ends’. The public corporation provides machinery, which is flexible, while at the same time retaining
public control.

Definition

A public corporation is defined as a ‘body corporate create by an Act of Parliament or Legislature and
notified by the name in the official gazette of the central or state government. It is a corporate entity having
perpetual succession, and common seal with power to acquire, hold, dispose off property, sue and be sued
by its name”.

Examples of a public corporation are Life Insurance Corporation of India, Unit Trust of India, Industrial
Finance Corporation of India, Damodar Valley Corporation and others.
Features

1. A body corporate: It has a separate legal existence. It is a separate company by itself. If can raise
resources, buy and sell properties, by name sue and be sued.

2. More freedom and day-to-day affairs: It is relatively free from any type of political interference. It
enjoys administrative autonomy.

3. Freedom regarding personnel: The employees of public corporation are not government civil
servants. The corporation has absolute freedom to formulate its own personnel policies and
procedures, and these are applicable to all the employees including directors.

4. Perpetual succession: A statute in parliament or state legislature creates it. It continues forever and
till a statue is passed to wind it up.

5. Financial autonomy: Through the public corporation is fully owned government organization, and
the initial finance are provided by the Government, it enjoys total financial autonomy, Its income
and expenditure are not shown in the annual budget of the government, it enjoys total financial
autonomy. Its income and expenditure are not shown in the annual budget of the government.
However, for its freedom it is restricted regarding capital expenditure beyond the laid down limits,
and raising the capital through capital market.

6. Commercial audit: Except in the case of banks and other financial institutions where chartered
accountants are auditors, in all corporations, the audit is entrusted to the comptroller and auditor
general of India.

7. Run on commercial principles: As far as the discharge of functions, the corporation shall act as far as
possible on sound business principles.

Advantages

1. Independence, initiative and flexibility : The corporation has an autonomous set up. So it is
independent, take necessary initiative to realize its goals, and it can be flexible in its decisions as
required.

2. Scope for Redtapism and bureaucracy minimized : The Corporation has its own policies and
procedures. If necessary they can be simplified to eliminate redtapism and bureaucracy, if any.

3. Public interest protected: The corporation can protect the public interest by making its policies more
public friendly, Public interests are protected because every policy of the corporation is subject to
ministerial directives and board parliamentary control.
 4. Employee friendly work environment: Corporation can design its own work culture and train its
employees accordingly. It can provide better amenities and better terms of service to the employees
and thereby secure greater productivity.

5. Competitive prices: the corporation is a government organization and hence can afford with
minimum margins of profit, It can offer its products and services at competitive prices.

6. Economics of scale: By increasing the size of its operations, it can achieve economics of large-scale
production.

7. Public accountability: It is accountable to the Parliament or legislature; it has to submit its annual
report on its working results.

Disadvantages

1. Continued political interference: the autonomy is on paper only and in reality, the continued.

2. Misuse of Power: In some cases, the greater autonomy leads to misuse of power. It takes time to
unearth the impact of such misuse on the resources of the corporation. Cases of misuse of power
defeat the very purpose of the public corporation.

3. Burden for the government: Where the public corporation ignores the commercial principles and
suffers losses, it is burdensome for the government to provide subsidies to make up the losses.

Government Company

Section 617 of the Indian Companies Act defines a government company as “any company in which not less
than 51 percent of the paid up share capital” is held by the Central Government or by any State Government
or Governments or partly by Central Government and partly by one or more of the state Governments and
includes and company which is subsidiary of government company as thus defined”.

A government company is the right combination of operating flexibility of privately organized companies
with the advantages of state regulation and control in public interest.

Government companies differ in the degree of control and their motive also.

Some government companies are promoted as

  industrial undertakings (such as Hindustan Machine Tools, Indian Telephone Industries, and so on)

 Promotional agencies (such as National Industrial Development Corporation, National Small

Industries Corporation, and so on) to prepare feasibility reports for promoters who want to set up
public or private companies.

 Agency to promote trade or commerce. For example, state trading corporation, Export Credit
Guarantee Corporation and so such like.

 A company to take over the existing sick companies under private management (E.g. Hindustan
Shipyard)

 A company established as a totally state enterprise to safeguard national interests such as Hindustan
Aeronautics Ltd. And so on.

 Mixed ownership company in collaboration with a private consult to obtain technical know how and
guidance for the management of its enterprises, e.g. Hindustan Cables)

Features

The following are the features of a government company:

1. Like any other registered company: It is incorporated as a registered company under the Indian
companies Act. 1956. Like any other company, the government company has separate legal
existence. Common seal, perpetual succession, limited liability, and so on. The provisions of the
Indian Companies Act apply for all matters relating to formation, administration and winding up.
However, the government has a right to exempt the application of any provisions of the government
companies.

2. Shareholding: The majority of the share are held by the Government, Central or State, partly by the
Central and State Government(s), in the name of the President of India, It is also common that the
collaborators and allotted some shares for providing the transfer of technology.

3. Directors are nominated: As the government is the owner of the entire or majority of the share
capital of the company, it has freedom to nominate the directors to the Board. Government may
consider the requirements of the company in terms of necessary specialization and appoints the
directors accordingly.

4. Administrative autonomy and financial freedom : A government company functions independently

with full discretion and in the normal administration of affairs of the undertaking.

5. Subject to ministerial control: Concerned minister may act as the immediate boss. It is because it is
the government that nominates the directors, the minister issue directions for a company and he can
call for information related to the progress and affairs of the company any time.
Advantages

1. Formation is easy: There is no need for an Act in legislature or parliament to promote a government
company. A Government company can be promoted as per the provisions of the companies Act.
Which is relatively easier?

2. Separate legal entity: It retains the advantages of public corporation such as autonomy, legal entity.

3. Ability to compete: It is free from the rigid rules and regulations. It can smoothly function with all
the necessary initiative and drive necessary to complete with any other private organization. It
retains its independence in respect of large financial resources, recruitment of personnel,
management of its affairs, and so on.

4. Flexibility: A Government company is more flexible than a departmental undertaking or public

corporation. Necessary changes can be initiated, which the framework of the company law.
Government can, if necessary, change the provisions of the Companies Act. If found restricting the
freedom of the government company. The form of Government Company is so flexible that it can be
used for taking over sick units promoting strategic industries in the context of national security and
interest.

5. Quick decision and prompt actions: In view of the autonomy, the government company take decision
quickly and ensure that the actions and initiated promptly.

6. Private participation facilitated: Government company is the only from providing scope for private
participation in the ownership. The facilities to take the best, necessary to conduct the affairs of
business, from the private sector and also from the public sector.

Disadvantages

1. Continued political and government interference: Government seldom leaves the government
company to function on its own. Government is the major shareholder and it dictates its decisions to
the Board. The Board of Directors gets these approved in the general body. There were a number of
cases where the operational polices were influenced by the whims and fancies of the civil servants
and the ministers.

2. Higher degree of government control: The degree of government control is so high that the
government company is reduced to mere adjuncts to the ministry and is, in majority of the cases, not
treated better than the subordinate organization or offices of the government.

3. Evades constitutional responsibility: A government company is creating by executive action of the

government without the specific approval of the parliament or Legislature.

4. Poor sense of attachment or commitment: The members of the Board of Management of government
companies and from the ministerial departments in their ex-officio capacity. The lack the sense of
 attachment and do not reflect any degree of commitment to lead the company in a competitive
environment.

5. Divided loyalties: The employees are mostly drawn from the regular government departments for a
defined period. After this period, they go back to their government departments and hence their
divided loyalty dilutes their interest towards their job in the government company.

6. Flexibility on paper: The powers of the directors are to be approved by the concerned Ministry,
particularly the power relating to borrowing, increase in the capital, appointment of top officials,
entering into contracts for large orders and restrictions on capital expenditure. The government
companies are rarely allowed to exercise their flexibility and independence.

Comparisons:
Comparison of Private and Public Sector

Private sector Public sector

1. Profit is the main motive. It benefits only Service to the country is the main motive. It
owners. benefits all.

2. It is owned and managed by an individual or It is owned and managed by the government

a group of individuals.

3. It has to face tough competition in the Generally it is a monopoly concern hence less
market. competition.

4. Large amount of capital may not be available. Large amount of capital can be available

5. It leads to economic inequality and It leads to economic equality. The profits earned
concentration of wealth in the hands of a few are utilized for public welfare.

6. Large scale business is generally not possible Large scale is always possible as the
because of limited resources. government has huge resources.

7. Private sector dominates in the production of The public sector dominates in the production of
consumer goods. producer goods.

Comparison of Partnership Business and Joint Stock Company

Partnership Business Joint Stock Company

1. Registration: Registration is a matter of compulsion for every

company, as per the companies’ Act, 1956,
Not a matter of compulsion but a matter of provisions.
voluntary decision.

2. Basic document: Memorandum articles of association prospectus

are the documents which create some base for
 A partnership deed or agreement is the base working of a company.
which helps partners to conduct business.

3. Continuous survival: This being artificial personality liquidation or

dissolution is not an easy process. They enjoy
In case of firm with only two partners, natural longer life than any other form of business.
death, retirement of any one partner may
dissolve the business.

4. Capital resources: Public as well as private companies are allowed

to tackle many sources of finance i.e.
Partnership forms are not allowed to issue
shares or debentures to the public. They have Shares, debentures, public deposits, etc so, they
to rely on the partner’s ability to invest and enjoy sound financial position.
borrow from banks.

5. No. of presentation: Minimum 2 and maximum 50 persons for

private company, No limit of maximum
Minimum 2 persons and maximum 20 members in public companies.
persons can be admitted an s partners.

6. Competition capacity: More capital and use of expert persons increase

the capacity to compete with any other forms of
In case of partnership organization, capacity business organization.
is more than sole trader but less than joint
stock company.

7. Legal restriction: More legal and other restrictions. Publishing

annual reports, according statements is a matter
These are very limited for partnership firms. of compulsion.
No required to give any publicity to its
accounts.

8. Scope for expansion: More capacity to face competition. Joint stock

companies can easily. Undertake expansion
In case of firms they have to rely on local activities. They can even export goods to other
markets. Scope of expansion is very limited. countries.
Cannot take expert’s advice.

Comparison of Individual Proprietorship and Partnership

Proprietorship Partnership

1. Single owner of the firm. Minimum two or maximum twenty partners.

2. Easy to form the organization. Some legal documents are to be prepared.

3. Success depends on skills of single owner. Success depends on co-operation, understanding

and skills of different partners.

4. Proprietor enjoys more freedom and profit. Partner has less freedom and share of profit.

5. Single proprietor can raise limited capital. Partners together can collect large capital as
compared to proprietor.

6. Business risk is totally with single Risk of business is equally divided among
 proprietor. partners.

7. Individual proprietor can take decisions fast. Partnership decisions are critical and take time.

8. Individual proprietor business is less Partnership business is more efficient and more
efficient with less expertise. expertise can be available from partners.

9. After the death of proprietor the business Partners may carry out the business.
may discontinue.

10. The business secret can be maintained or Business secrecy cannot be maintained.
kept confidential.

6. What is business cycle? Explain features and phases of business cycle.

The term "business cycle" (or economic cycle or boom-bust cycle) refers to economy-wide fluctuations in
production, trade, and general economic activity. From a conceptual perspective, the business cycle is the
upward and downward movements of levels of GDP (gross domestic product) and refers to the period of
expansions and contractions in the level of economic activities (business fluctuations) around a long-term
growth trend

Meaning:
Many free enterprise capitalist countries such as USA and Great Britain have registered rapid economic
growth during the last two centuries. But economic growth in these countries has not followed steady and
smooth upward trend. There has been a long-run upward trend in Gross National Product (GNP), but
periodically there have been large short-run fluctuations in economic activity, that is, changes in output,
income, employment and prices around this long- term trend.

The period of high income, output and employment has been called the period of expansion, upswing or
prosperity, and the period of low income, output and employment has been described as contraction,
recession, downswing or depression. The economic history of the free market capitalist countries has shown
that the period of economic prosperity or expansion alternates with the period of contraction or recession.

These alternating periods of expansion and contraction in economic activity has been called business cycles.
They are also known as trade cycles. J.M. Keynes writes, “A trade cycle is composed of periods of good
trade characterised by rising prices and low unemployment percentages with periods of bad trade charac-
terised by falling prices and high unemployment percentages.”

A noteworthy feature about these fluctuations in economic activity is that they are recurrent and have been
occurring periodically in a more or less regular fashion. Therefore, these fluctuations have been called
business cycles. It may be noted that calling these fluctuations as ‘cycles’ mean they are periodic and occur
regularly, though perfect regularity has not been observed.

The duration of a business cycle has not been of the same length; it has varied from a minimum of two years
to a maximum of ten to twelve years, though in the past it was often assumed that fluctuations of output and
other economic indicators around the trend showed repetitive and regular pattern of alternating periods of
expansion and contraction.

However, actually there has been no clear evidence of very regular cycles of the same definite duration.
Some business cycles have been very short lasting for only two to three years, while others have lasted for
several years. Further, in some cycles there have been large swings away from trend and in others these
swings have been of moderate nature.

A significant point worth noting about business cycles is that they have been very costly in the economic
sense of the word. During a period of recession or depression many workers lose their jobs and as a result
large-scale unemployment, which causes loss of output that could have been produced with full-
employment of resources, come to prevail in the economy.

Besides, during depression many businessmen go bankrupt and suffer huge losses. Depression causes a lot
of human sufferings and lowers the levels of living of the people. Fluctuations in economic activity create a
lot of uncertainty in the economy which causes anxiety to the individuals about their future income and
employment opportunities and involve a great risk for long-run investment in projects.

Who does not remember the great havoc caused by the great depression of the early thirties of the present
century? Even boom when it is accompanied by inflation has its social costs. Inflation erodes the real
incomes of the people and makes life miserable for the poor people.

Inflation distorts allocation of resources by drawing away scarce resources from productive uses to
unproductive ones. Inflation redistributes income in favour of the richer actions and also when inflation rate
is high, it impedes economic growth.

About the harmful effects of the business cycles Crowther writes, “On the one hand, there is the misery and
shame of unemployment with all the individual poverty and social disturbances that it may create. On the
other hand, there is the loss of wealth represented by so much wasted and idle labour and capital.”

Phases of Business Cycles:

Business cycles have shown distinct phases the study of which is useful to understand their underlying
causes. These phases nave been called by different names by different economists.

Generally, the following phases of business cycles have been distinguished:

1. Expansion (Boom, Upswing or Prosperity)

2. Peak (upper turning point)

3. Contraction (Downswing, Recession or Depression)

4. Trough (lower turning point)

The four phases of business cycles have been shown in Fig. 27.1 where we start from trough or depression
when the level of economic activity i.e., level of production and employment is at the lowest level. With the
revival of economic activity the economy moves into the expansion phase, but due to the causes explained
below, the expansion cannot continue indefinitely, and after reaching peak, contraction or downswing starts.
When the contraction gathers momentum, we have a depression.
 The downswing continues till the lowest
turning point which is also called trough is reached. In this way cycle is complete. However, after remaining
at the trough for some time the economy revives and again the new cycle starts.

Haberler in his important work on business cycles has named the four phases of business cycles as:

(1) Upswing,

(2) Upper turning point,

(3) Downswing, and

(4) Lower turning point.

There are two types of patterns of cyclic changes. One pattern is shown in Fig. 27.1 where fluctuations
occur around a stable equilibrium position as shown by the horizontal line. It is a case of dynamic stability
which depicts change but without growth or trend.

The second pattern of cyclical fluctuations is shown in Fig. 27.2 where cyclical changes in economic
activity take place around a growth path (i.e., rising trend). J.R. Hicks in his model of business cycles
explains such a pattern of fluctuations with long-run rising trend in economic activity by imposing factors
such as autonomous investment due to population growth and technological progress causing economic
growth on the otherwise stationary state. We briefly explain below various phases of business cycles.

Expansion and Prosperity:

In its expansion phase, both output and employment increase till we have full-employment of resources and
production is at the highest possible level with the given productive resources. There is no involuntary
unemployment and whatever unemployment prevails is only of frictional and structural types.
Thus, when expansion gathers momentum and we have prosperity, the gap between potential GNP and
actual GNP is zero, that is, the level of production is at the maximum production level. A good amount of
net investment is occurring and demand for durable consumer goods is also high. Prices also generally rise
during the expansion phase but due to high level of economic activity people enjoy a high standard of
living.

Then something may occur, whether banks start reducing credit or profit expectations change adversely and
businessmen become pessimistic about future state of the economy that bring an end to the expansion or
prosperity phase.

As shall be explained below, economists differ regarding the possible causes of the end of prosperity and
start of downswing in economic activity. Monetarists have argued that contraction in bank credit may cause
downswing.

Keynes have argued that sudden collapse of expected rate of profit (which he calls marginal efficiency of
capital, MEC) caused by adverse changes in expectations of entrepreneurs lowers investment in the
economy. This fall in investment, according to him, causes downswing in economic activity.

Contraction and Depression:

As stated above, expansion or prosperity is followed by contraction or depression. During contraction, not
only there is a fall in GNP but also level of employment is reduced. As a result, involuntary unemployment
appears on a large scale. Investment also decreases causing further fall in consumption of goods and
services.

At times of contraction or depression prices also generally fall due to fall in aggregate demand. A significant
feature of depression phase is the fall in rate of interest. With lower rate of interest people’s demand for
money holdings increases.

There is a lot of excess capacity as industries producing capital goods and consumer goods work much
below their capacity due to lack of demand. Capital goods and durable consumer goods industries are
especially hit hard during depression. Depression, it may be noted, occurs when there is a severe contraction
or recession of economic activities. The depression of 1929-33 is still remembered because of its great
intensity which caused a lot of human suffering.

Trough and Revival:

There is a limit to which level of economic activity can fall. The lowest level of economic activity, generally
called trough, lasts for some time. Capital stock is allowed to depreciate without replacement. The progress
in technology makes the existing capital stock obsolete.

If the banking system starts expanding credit or there is a spurt in investment activity due to the emergence
of scarcity of capital as a result of non-replacement of depreciated capital and also because of new
technology coming into existence requiring new types of marines and other capital goods. The stimulation
of investment brings about the revival or recovery of the economy.

The recovery is the turning point from depression into expansion. As investment rises, this causes induced
increase in consumption. As a result industries start producing more and excess capacity is now put into full
use due to the revival of aggregate demand. Employment of labour increases and rate of unemployment
falls. With this the cycle is complete.
Features of Business Cycles:
Though different business cycles differ in duration and intensity they have some common features
which we explain below:

1. Business cycles occur periodically. Though they do not show same regularity, they have .some distinct
phases such as expansion, peak, contraction or depression and trough. Further the duration of cycles varies a
good deal from minimum of two years to a maximum of ten to twelve years.

2. Secondly, business cycles are Synchronic. That is, they do not cause changes in any single industry or
sector but are of all embracing character. For example, depression or contraction occurs simultaneously in
all industries or sectors of the economy. Recession passes from one industry to another and chain reaction
continues till the whole economy is in the grip of recession. Similar process is at work in the expansion
phase, prosperity spreads through various linkages of input-output relations or demand relations between
various industries, and sectors.

3. Thirdly, it has been observed that fluctuations occur not only in level of production but also
simultaneously in other variables such as employment, investment, consumption, rate of interest and price
level.

4. Another important feature of business cycles is that investment and consumption of durable consumer
goods such as cars, houses, refrigerators are affected most by the cyclical fluctuations. As stressed by J.M.
Keynes, investment is greatly volatile and unstable as it depends on profit expectations of private
entrepreneurs. These expectations of entrepreneurs change quite often making investment quite unstable.
Since consumption of durable consumer goods can be deferred, it also fluctuates greatly during the course
of business cycles.

5. An important feature of business cycles is that consumption of non-durable goods and services does not
vary much during different phases of business cycles. Past data of business cycles reveal that households
maintain a great stability in consumption of non-durable goods.

6. The immediate impact of depression and expansion is on the inventories of goods. When depression sets
in, the inventories start accumulating beyond the desired level. This leads to cut in production of goods. On
the contrary, when recovery starts, the inventories go below the desired level. This encourages businessmen
to place more orders for goods whose production picks up and stimulates investment in capital goods.

7. Another important feature of business cycles is profits fluctuate more than any other type of income. The
occurrence of business cycles causes a lot of uncertainty for businessmen and makes it difficult to forecast
the economic conditions. During the depression period profits may even become negative and many
businesses go bankrupt. In a free market economy profits are justified on the ground that they are necessary
payments if the entrepreneurs are to be induced to bear uncertainty.

8. Lastly, business cycles are international in character. That is, once started in one country they spread to
other countries through trade relations between them. For example, if there is a recession in the USA, which
is a large importer of goods from other countries, will cause a fall in demand for imports from other
countries whose exports would be adversely affected causing recession in them too. Depression of 1930s in
USA and Great Britain engulfed the entire capital world.