Firstly, here are a few extremely important definitions:
Gross Domestic Product (GDP) - The total value of Goods and Services produced within a country in a given period of time.
Gross National Product (GNP) - This is similar to GDP. The difference is that the total value includes Goods and Services produced by a nation's assets domestically and across international boundaries. Think about an Eastern European Tesco being controlled from the UK.
Economic Growth - When the value of what we produce year by year changes in some way. This means the GDP figure will change.
Note that although Growth implies a positive effect on GDP, the growth figure could also be negative if GDP decreases.
What factors contribute to GDP Growth?
Globalisation - 'Increasing the integration and dependence through trade of the World's Economies.' The idea here is that countries will develop from Specialisation. Taiwan specialise in manufacturing products and so attract Multinational corporations (MNCS or TNCs) from overseas. The UK specialise in banking and so people from all over the world are willing to open an account in the UK as it is more secure option. And so economies are reliant on each other.
Technology - If updated machinery is invested in this should improve efficiency and productivity and so output / capacity of G & S increases.
Capital Accumulation -Investment is required to increase production. Capital investment means cash is spent on goods used to make other goods which will boost output.
Natural Resources - It's great if you have an abundance of resources to use. If you manufacture cars, an abundance of iron ore deposits would be beneficial as raw materials don't have to travel far to be processed, and you don't have to import vast quantities of iron and steel from abroad. It also provides employment in the primary sector of the economy so everyone is a winner. Look at Saudi Arabia with its oil supplies...
However in some LEDCs such as Nigeria there is a paradox of plenty ('Resource Curse') which could decrease growth. Africa is mineral rich. There are diamonds, gold, coal and even oil but due to government mismanagement and corruption there are large conflicts as to whom has the rights to the resource deposits. Also due to large inward investments, the exchange rate makes other sectors of the Economy less competitive for obvious reasons.
Labour - Labour is a factor of production so is particularly relevant here.The size of the workforce and the skills and qualities that they possess will all influence GDP.
The size of the workforce will vary through Migration as workers from overseas seek work in your Economy. Also incentives such as low unemployment benefits and tax breaks for new workers encourage more to work as opposed to being voluntarily out of work. Finally structural changes will influence output. An ageing population has been a problem in the UK as it means there are more people consuming and a decreased number of the population are of working age. Baby Boomers are those who were born after the Second World War when the Birth Rate rapidly increased. Now pensioners, there is a huge strain on the government (e.g. state pensions) and less people are of working age.
Size has definitely assisted the Chinese Economy with their workforce of 1 billion people. 'Many hands make light work' or 'Many hands can produce more in a given time period.'
Savings - Don't let this one trip you up! Savings are usually a bad thing for the economy, right? In the Circular Flow of Income Savings are leakages. Surely we want investment in capital goods by firms and demand for these goods from households? Well, in theory a country needs a stable, safe and secure environment where people can save their money and hopefully this money will be used to boost growth in the long term.
Even with Positive GDP Growth, some groups argue against the figures...
UNSUSTAINABLE GROWTH - Say an economy relies on Logging. Although Lumberjacks may be producing loads of wood at the moment, it is unsustainable as wood is a non-renewable resource. It takes time to grow more trees. As the Economy here is built on an unsustainable source, there will be problems in the long term. So is this really Growth???
EXTERNALITIES - These are the effects on a third party arising from the production and consumption of a G or S. For example at Heathrow Airport, the producers ( Airlines) and the consumers (passengers) don't see any negative externalities but the local residents are affected by air and noise pollution. This is particularly relevant with the ongoing Third Runway Debate.
So fast growth causes negative externalities.
Tuesday 1 January 2013
Monday 3 December 2012
Types of Business - LTD, PLC and more...
So, you decide to start a business. But what type of business are you going to run and what are your prospects for its growth?
Sole Trader
Sole Traders are usually a One-Man-Band and the owner and business are defined as a single entity. You don't have to pay to form a Sole Trader business but the disadvantage is that a sole trader has unlimited liability in that they are responsible for any losses and are entitled to any profits. Hence when applying for a bank loan, the Bank Manager will take one your assets as a guarantee for the loan. If the business goes under, your house will be sold to pay off the bank loan...Hard Times :(
In addition you may well have a single bank account. e.g. with a plumber all payments are made to Mr T Smith, The Plumber rather than the business. Of course having a separate account is a lot easier though. A sole Trader pays income tax on profits because the profits of the business are treated as your income; provided you don't reinvest the cash. In the unfortunate death of the sole trader, the enterprise will end unless another person takes over.
Partnership
A partnership has the same characteristics as above. Only there are multiple people who run the business and are accountable for the losses / gains.
Private Limited Company (LTD)
You may wish to form a company if your small enterprise and partnership grows big enough. Although you have to apply to Companies House and inform Inland Revenue and Customs etc, you will gain limited liability which means the owners and business are seen as two separate entities. You are required to set up separate bank accounts too. However if the business gets into financial difficulty, you will not have to sell off personal assets the bank can only take the cash out of the business' assets and so you are protected.
Many firms with an uncertain / inconsistent sales pattern may opt for this classification a partnership as it minimises risk. A Sole Trader such as a Market Retailer selling vegetables buys stock and sells it the same day and so risk of loss is rather small, but for a firm producing chocolate bars such as Mars, one of the largest LTD companies, customers may stop demanding your product and there are substantial bills and loans which could become a problem if demand falls significantly. It is not unheard of for big firms to go bust. Look at what happened in the huge global recession of 2008/09.
Finally a LTD company pays Corporation Tax on its profits to the Governments.If the owners wish to pay themselves a wage out of this then they will have to pay income tax on the cash they withdraw. But it will show up on the financial records as a labour cost and so won't be charged corporation tax and income tax simultaneously.
Public Limited Company (PLC)
Liability is still limited but large corporations may wish to raise capital for investment or cash in on their ownership of the firm by listing on the Stock Exchange. They sell shares in the business for the public, who may be eager investors, regular people or pension fund managers to eagerly buy up in the hope that they will increase in value. Therefore the company gets money to grow and those with a stake in the firm get a windfall. As Mark Zuckerberg was a major shareholder in Facebook, when it became a PLC, he became extremely wealthy. The disadvantage is that you lose control in the business. Most owners try and maintain some power by holding on to 51% of the shares but are still answerable to all of the other shareholders who can vote on a new leader (a CEO) if they feel it will boost company performance.
Sole Trader
Sole Traders are usually a One-Man-Band and the owner and business are defined as a single entity. You don't have to pay to form a Sole Trader business but the disadvantage is that a sole trader has unlimited liability in that they are responsible for any losses and are entitled to any profits. Hence when applying for a bank loan, the Bank Manager will take one your assets as a guarantee for the loan. If the business goes under, your house will be sold to pay off the bank loan...Hard Times :(
In addition you may well have a single bank account. e.g. with a plumber all payments are made to Mr T Smith, The Plumber rather than the business. Of course having a separate account is a lot easier though. A sole Trader pays income tax on profits because the profits of the business are treated as your income; provided you don't reinvest the cash. In the unfortunate death of the sole trader, the enterprise will end unless another person takes over.
Partnership
A partnership has the same characteristics as above. Only there are multiple people who run the business and are accountable for the losses / gains.
Private Limited Company (LTD)
You may wish to form a company if your small enterprise and partnership grows big enough. Although you have to apply to Companies House and inform Inland Revenue and Customs etc, you will gain limited liability which means the owners and business are seen as two separate entities. You are required to set up separate bank accounts too. However if the business gets into financial difficulty, you will not have to sell off personal assets the bank can only take the cash out of the business' assets and so you are protected.
Many firms with an uncertain / inconsistent sales pattern may opt for this classification a partnership as it minimises risk. A Sole Trader such as a Market Retailer selling vegetables buys stock and sells it the same day and so risk of loss is rather small, but for a firm producing chocolate bars such as Mars, one of the largest LTD companies, customers may stop demanding your product and there are substantial bills and loans which could become a problem if demand falls significantly. It is not unheard of for big firms to go bust. Look at what happened in the huge global recession of 2008/09.
Finally a LTD company pays Corporation Tax on its profits to the Governments.If the owners wish to pay themselves a wage out of this then they will have to pay income tax on the cash they withdraw. But it will show up on the financial records as a labour cost and so won't be charged corporation tax and income tax simultaneously.
Public Limited Company (PLC)
Liability is still limited but large corporations may wish to raise capital for investment or cash in on their ownership of the firm by listing on the Stock Exchange. They sell shares in the business for the public, who may be eager investors, regular people or pension fund managers to eagerly buy up in the hope that they will increase in value. Therefore the company gets money to grow and those with a stake in the firm get a windfall. As Mark Zuckerberg was a major shareholder in Facebook, when it became a PLC, he became extremely wealthy. The disadvantage is that you lose control in the business. Most owners try and maintain some power by holding on to 51% of the shares but are still answerable to all of the other shareholders who can vote on a new leader (a CEO) if they feel it will boost company performance.
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