Role of Government

Responsibilities of A Government In An Economy

Governments are appointed by citizens to manage the affairs of their country. Their responsibilities
include:
-Ensuring the security of a state- Government must maintain law and order internally. This is
realized through legislation, the court of justice and the police force. Externally the armed forces
protect citizens against external threats.
-Protection and general welfare of citizens - Government is responsible for the general
health and education of citizens. Welfare programmes must be provided for those who are very poor
and vulnerable.
-Management of the economy Governments are appointed by citizens to efficiently manage
the economy to bring about growth and development. This includes: encouraging local and foreign
investment, controlling inflation, maintaining the foreign reserve (NIR), curbing balance of
payments deficits and achieving high levels of employment.
-Protecting the environment Sustaining the environment is important to the well-being of
citizens. Ways of protecting the environment include: legislation to prevent further degradation,
zoning to protect wildlife areas from disruption by development of factories, shopping and
residential areas and taxation to reduce the level of pollution by firms.

Ways In Which Businesses Protect The Environment

1. Business owners must adhere to the various legislation set out by government and reduce pollution
in rivers, seas and the atmosphere.
2. Establish business in the zones legally allocated to reduce the impact of noise and air pollution in
residential areas.
3. Being part or initiating environmental projects such as beach clean-up and planting trees.

Ways By Which Government Regulates Business Activities

Consumers must be protected from business owners who are eager to sell without taking into
consideration the well-being of customers. Consumers must be protected from overcharging, poor
quality goods and services and short measurements and weights.
Consumers are protected by legislation delegated to various government agencies. These agencies
include:
1. The Consumer Affairs Commission- aids consumers with redress
2. The Fair Trading Commission- investigates cases of tied selling and misleading advertising.
3. The Bureau of standards set standards for goods and services to be sold on the market.
4. The Ombudsman- investigates injustices suffered by citizens from dealing with a government
agency or official.
Consumer Protection Laws
-The Food and drugs Act
-The Standards Act
-The public Health Act
-The weights and measures Act
-The processed food Act
-The hire purchase Act
Hire Purchase Law
Buyers and sellers must sign the hire purchase contract. The seller must state the cash price, down
payment and monthly instalments and total to be paid. Goods cannot be repossessed by the seller
once the buyer pays up to three quarters of the hire purchase price.
Price controls
Price controls are levied on certain good and services to prevent suppliers from increasing prices. For
example basic food items such as corn meal, flour, rice and sugar.
Zoning Laws
These laws protect the environment by identifying certain wildlife areas that should not be disrupted
by development. Therefore, areas are designated for factories, shopping centres and residential, away
from protected wildlife.
Taxation
Firms that pollute the atmosphere, rivers and seas are charged a tax for the harm caused to the
environment. This forces firms to find methods to reduce pollution to avoid this penalty.

Purpose Of Taxation
Taxes are mainly used to finance the expenses incurred by government to manage an economy.
These expenses include: health care, education, garbage collection and operating government
business entities. Taxation is also used by government for several other purposes.
a. To reduce pollution by taxing offending firms
b. To discourage unhealthy lifestyle e.g. a tax on cigarettes
c. To protect local and infant industries by taxing imports
d. To achieve greater equality of wealth and income. Revenue from taxation is used to help the very
poor e.g. providing food stamps.
e. To improve the balance of payments (BOP) by increasing the duties charged on imported goods.
f. To control spending in an economy thus reduce inflation

Direct And Indirect Taxes

Direct taxes are paid by individuals directly from income earned or on the value assets owned to the
income tax department.
Types of Direct Taxes
Income Tax This is a tax on earned income- individuals pay a percentage of their income.
Corporate Tax
This is a tax on the profits of companies
Capital Gains Tax
This is a tax on the proceeds resulting from the sale of assets, e.g. houses, land etc.
Capital Transfer and Estate Duties
This is a tax on the transfer of property (gifts) and on legacies (death duties)
Other Direct Taxes
These include: stamp duties, motor vehicle duties land taxes, etc.
Indirect taxes are paid to the income tax department through the suppliers of goods and services.
These taxes are levied on consumption and therefore are paid by individuals when purchasing
commodities.
Value Added Tax (Ad Valorem Tax)
This is the tax levied on goods as each stage of production. This tax generally is known as a General
Consumption Tax (G.C.T.).
Purchase Tax
This tax is placed on specific goods at retail outlets. Theses include gasoline, tobacco, rum etc.
Excise Duties
A tax placed on goods manufactured within a country. This tax is paid by the manufacturer of the
product.
Customs Duties
This is a tax on imports i.e. goods entering the country.

Regressive, Progressive And Proportional Taxation

Progressive Taxation
A progressive tax system levies a higher percentage of tax on high income earners compared to lower
income earners. This ensures that higher income earners pay a larger proportion of their income
than lower income earners.
Regressive Taxes
A regressive tax system levies a smaller percentage of tax on higher income earners compared to
lower income earners. This results in higher income earners paying a smaller proportion of their
income in taxes than lower income earners. For example, a purchase tax of 10% charged on a
commodity which values $100 is bought by a high income earner who receives $10,000 weekly and
also by low income earner who receives $1000 weekly. Both income earners will pay $10.00 in
taxes. This $10 represents a much higher percentage of the lower income earners pay which is .01%
than the higher income earner which is only .001% of his income
Proportional Taxation
Under this system all taxpayers pays the same proportion of their income in taxes. The same
percentage tax is levied on both high and low income earners. Therefore if the percentage tax
charged is 10% of income then each person will pay that proportion of their income.

Government Assistance Offered To Businesses

The survival and growth of the business sector will reduce unemployment, increase GDP and foreign
exchange earnings. This sector must therefore be support and encouraged by government.
Financing
Government assists local businesses by providing loans at low interest rates.
Protecting local industries
Custom duties charged on imported goods to protect local producers
Tax concessions
Reduced tax rates or tax holidays offered to industries will encourage production.
Subsidies
The cost of production is subsidised to reduce this cost to producers. For example, a subsidy offered
on fertilizer to farmers.
Promotion
Local and international trade shows as well as general advertisements promoting business locally
and overseas, for example, advertisements encouraging tourist to visit the region.
Training
Government agencies set up to provide technical and managerial training.
Social Services Provided By Governments
These services are provided by government to ensure the well-being of all citizens.
Education
An effective national education plan will ensure that the innate skills, talents and abilities of
individuals are harnessed and developed to their fullest potential. High levels of literacy and
numeracy will increase productivity.
Health
The economic development of any nation is dependent upon its population being physically and
mentally healthy. For someone to be productive he or she must be in good health.
Roads and Transportation
Proper Infrastructure such as roads, railways, sea and airports coupled with an efficient
transportation system are important to a countrys economic activities. Roads and transportation
facilitate trade of goods and services.
National Insurance Scheme
National Insurance Schemes protect the elderly and other categories of vulnerable persons within a
society. The elderly have contributed to the development of a nation and must be adequately
provided for when they no longer a part of the labour force.

Question 1

(a) Identify two responsibilities of government to an economy.

(b) Show how the government of your country carries out these two responsibilities.

Answer

(a) Protection and general welfare of citizens, and protecting the environment.

(b) The government of my country protects vulnerable citizens through welfare programms. These
include food stamps and cash grants.

The government of my country protects the environment by legislation to prevent degradation of

wetlands and the extinction of certain species.

Question 2
Give two reasons why government should be the chief guardians of the environment.

Answer

For the well-being of citizens; health issues can be a consequence of pollution. This is very costly for
the economy.

Eco-tourism is a market niche that can earn foreign exchange for an economy.

Question 3

Discuss two consequences of unregulated business activity in an economy.

Answer

If businesses are not regulated by government agencies then consumers may receive poor quality
goods and services. Acceptable standards are outlined by government agencies which business must
abide by.

Businesses may also overcharge for goods such as basic food items. If basic food items are
unaffordable to the very poor and vulnerable, the consequence might be malnutrition.

Question 4

List two consumer protection laws.

Answer

The Standards Act and The weights and measures Act.

Question 5

Identify two purposes of taxation and discuss the importance of each.

Answer
Taxation may be used to discourage behaviour. Taxing firms that pollute the atmosphere, rivers and
seas will reduce pollution. Also taxing the consumption of harmful goods such as cigarettes will
reduce its consumption.

Taxation can also redistribute income by providing welfare programs and cash grants to the very
poor and vulnerable in the society.

Question 6

Differentiate between direct and indirect taxes and give two examples of each.

Answer

Direct taxes are paid by individuals directly from income earned or on the value of assets owned to
the income tax department. Examples of direct taxes are: income tax, corporate tax and capital gains
tax. Indirect taxes differ from direct taxes as they are paid to the income tax department through the
suppliers of goods and services. These taxes are levied on consumption and therefore are paid by
individuals when purchasing commodities. Examples of indirect taxes include: value added tax,
purchase tax and excise and custom duties tax.

Question 7

Distinguish between progressive and regressive taxation.

Answer
A progressive tax system levies a higher percentage of tax on high income earners compared to lower
income earners. This ensures that higher income earners pay a larger proportion of their income in
taxes than lower income earners. However, a regressive tax system allows higher income earners to
pay a smaller proportion of their income compared to low income earners who pay a higher
proportion of their income in taxes.

Question 8

The regressive tax system is unfair and places a greater burden on the lower income earners. Discuss.

Answer
An examples of a regressive tax is a value added tax where each persons pays a fixed percentage on
the cost of a good or service. Therefore, if $10 is the tax amount to be paid for a particular item
charged, a high income earner who receives $1000 will pay 1% of his income in taxes while another
income earner who receives $100 will pay 10% of his income in taxes. The regressive tax system is
unfair as low income earners will pay a higher proportion of their income in taxes than a high income
earner.

Question 9

Outline two ways in which governments provide assistance for businesses.

Answer

Governments assist small businesses with soft loans. They provide loans at low interest rates through
financial institutions and government agencies.

Governments also provide information, training and advice through various agencies for small
business.

Question 10

Discuss the importance of the provision of one social service by a government.

Answer

Education is a very important social service. High levels of literacy, numeracy, and skills will increase
productivity. A highly skilled workforce is also attractive to international investors who seek new
locations to expand their businesses.
Social Accounting and Global Trade

Factors That Determine A Countrys Standard Of Living

The standard of living is defined as the level of wealth experienced by a county which is indicated by
the average disposable income of the population, ownership of capital equipment, the level of
research and access to modern technology and the quality and quantity goods and services enjoyed
by citizens.
Level of goods and services available: goods and services are needed to satisfy the needs and wants
of a society.
Average disposable income: per capita GNP reveals the average amount of earnings of each person
in an economy.
Ownership of capital equipment: Capital goods/investment goods are used to create consumer
goods and services locally and for export.
Research and technology leads to innovation and increases production.
Whereas the standard of living is measured by physical quantity, a countrys quality of life is
determined by the quality of goods and services enjoyed by citizens. These include: safety (low crime
rates), good diet and nutrition, environmental quality, quality of heath and educational facilities, life
expectancy, rate of infant mortality and the access to public utilities such as water.

Factors That Determine A Countrys Standard Of Living

The standard of living is defined as the level of wealth experienced by a county which is indicated by
the average disposable income of the population, ownership of capital equipment, the level of
research and access to modern technology and the quality and quantity goods and services enjoyed
by citizens.
Level of goods and services available: goods and services are needed to satisfy the needs and wants
of a society.
Average disposable income: per capita GNP reveals the average amount of earnings of each person
in an economy.
Ownership of capital equipment: Capital goods/investment goods are used to create consumer
goods and services locally and for export.
Research and technology leads to innovation and increases production.
Whereas the standard of living is measured by physical quantity, a countrys quality of life is
determined by the quality of goods and services enjoyed by citizens. These include: safety (low crime
rates), good diet and nutrition, environmental quality, quality of heath and educational facilities, life
expectancy, rate of infant mortality and the access to public utilities such as water.

National Income
The national income of a country is the total income earned by that country from the production of
goods and the provision of services in a given year after deducting depreciation. It therefore
measures the level of economic activity of a country within a year. Note depreciation of assets is
taken into account when measuring national income.
Gross Domestic Product (GDP)
GDP is the total money value of all output produced within a country over a year. The word
domestic refers to income earned from local production only.
Gross National Product (GNP)
GNP is the total money value of all output produced over one year, both within a country and from
its overseas investments.
Therefore GNP = GDP + overseas earnings by nationals
Net National Product (NNP) or National Income (NI)
NB: The definition for national income includes adjustments for depreciation.
National Income (NI) = GNP- depreciation
Since GNP figures do not accurately measure the standard of living, the following indices may be
used.
Per capita GNP
This is calculated by dividing a countrys GNP by its total population. That is,
GNP
Total population
Thus if a countrys GNP is $40,000,000 and its total population is 5,000, its per capita GNP would
be $8,000.
40,000,000 = 8,000
5000
Thus each citizen enjoys on an average $8,000 worth of goods and services.

Economic Growth And Development

Economic growth is the expansion of national income. The rate of expansion is usually measured
from one year to the next. Economic growth can be achieved if countries increase their capacity to
produce.
Economic Development is sustained economic growth accompanied by policies that bring about
structural changes such as increase in exportation, decrease in importation, lesser dependence on
foreign aid and important infrastructural development. These changes will allow for higher levels of
national income.
Investment in education is important for a countrys economic growth and development. Education
increases productivity as individuals who are trained and knowledgeable will be more efficient.
Education is the process of imparting knowledge, skills, beliefs and cultures to empower and
influence behaviour.
The long-term returns to investments in human capital will reduce poverty

International Trade
It is an advantage for countries to be self-sufficient, but there are reasons why trade must take place
between nations.
Reasons for International Trade
(a) Lack of certain natural resources to produce essential goods. Oil which is important to economic
life must be imported into countries that do not posses that natural resource.
(b)Lack of capital, technology and specialist labour to manufacture certain goods on a large scale.
For example, Caribbean countries import machinery equipment and vehicle.
(c)Differences in climatic conditions, e.g. many tropical countries import grapes and strawberries as
these produce need cool climates to survive.
(d)Differences in the cost of production between countries. This reason is based on the principle of
comparative advantage which states that benefits will be gained from trade if countries produce
goods in which they have a relative advantage. Therefore, if two countries both produce cars and
coffee but each is more efficient at producing or produces either at a lower opportunity cost either
car or coffee, then trade can take place. The country that is more efficient at producing coffee should
put all its resources into coffee and import cars from the other country that is efficient in producing
cars.

Balance Of Trade & Balance Of Payment

A countries balance of payments account records all the flow of money between residents of that
country and the rest of the world. A countrys balance of payments thus shows the difference
between the receipt for goods and services exported and payments made for goods and services
imported and movements of capital in and out of the account. The two main parts of the balance of
payments accounts are the current account and the capital account.
The current account records payments for imports and exports of goods and services. The balance of
trade or visible balance records imports and exports of physical goods only. The current balance
includes both the balance of trade and net invisible trade balance. A negative balance is a deficit
balance and a positive balance is a surplus balance. In the table below there is a balance of trade
deficit for 2001 (-800) and in 2002 (-1000). There is a current account surplus of US$200MN in
2001 but a deficit of US$300MN in 2002.
Example BOP for Country X (US$MN)

Balance of Trade/Visible balance = Export ($) Imports ($)

Invisible balance = Net transportation +net interest & profits + net government
Net figures are arrived at by subtracting payment from the receipt for each service. For example,
subtracting the out flow of money spent by locals on trips overseas from payments received from
visiting tourist, will give a net figure for tourism.
Current Balance = visible balance + invisible balance
The capital account
The capital account or financial account shows the flows of capital between countries i.e. Flows of
capital into a country and flows of capital leaving a country.
The Balance of Payments Accounts must balance
The sum of the current account and the capital account must be zero. A firms balance sheet shows
its financial position after one year of trading. The balance of payment similarly shows the countries
financial position on a yearly basis. Similar to a firms balance sheet the balance of payments account
must balance, since a debit or a credit balance must be covered in some way.
Credit items are- Inflows /receipts
Debit items are- outflows /payments

Balance Of Payment Problems

If a country continues to experience deficits in its visible and or invisible balances it will affect its
level economic activity. Deficits mean there is not enough money to purchase the goods and services
required by citizens.
Methods of Correcting Balance of Payment Problems
1. Tariffs (taxes on imports)
Taxes increase the cost of items imported and therefore will discourage imports. This may encourage
the purchase of cheaper local imports.
2. Import licences
Only holders of this licence can import particular goods and services. Government can restrict the
importation of certain goods and services e.g. those that compete with local goods.
3. Quotas
Restrictions on the quantity of a type of commodity to be imported.
4. Total ban of certain commodities.
5. Exchange Control
This is various forms of control by government on the purchase and sale of foreign currencies by
citizens and foreigners. Example: limiting the amount of foreign exchange that residents can leave
the country with, banning the use of foreign currencies locally and having a fixed exchange rate.
6. Encouraging export
Incentives given to exporters.
7. Devaluation the price of foreign currency is increased against the local currency thus
discouraging its purchase.
8. Special Drawing Rights -Drawing on the resources of the International monetary fund
9. Importing on credit Purchasing on credit delays payments in the short term
10. Accepting gifts from other countries This reduces the need to spend foreign exchange.
11. Borrowing from other countries This represents inflows into the Balance of payments accounts
 Quiz
Question1
Explain the difference between a countrys Gross National Product and National Income statistics.
Answer
GDP is the total money value of all output produced within a country over a year. National Income
figures includes (GDP + income from nationals abroad) Depreciation. Therefore net National
product/NI adds overseas earnings to earnings from local production. Depreciation is subtracted to
give final National Income figures.
Question 2
What is the standard of living?
Answer
The standard of living a country is determined by level of goods and services available, ownership of
capital equipment and access to modern technology.
Question 3
Outline two methods that can be used to achieve economic growth.
Answer
Economic growth is the expansion of national income. Two methods to increase the productivity of
industrial and commercial activities include: a training of human resources and the introduction of
technology.
Question 4

Differentiate between the balance of trade and the balance of payments

Answer
The balance of trade is the difference between earnings from exports and payments for imports. The
balance of payments is a summation of the balance of trade, net invisible earnings and capital flows.
Question 5
The balance of payments always balances. Explain this statement.
Answer
The balance of payments account is governed by accounting principles. For every debit entry there is
a corresponding credit entry. Outflows are matched by inflows. The summation of the current and
capital account is zero.
Question 6
State three measures used to correct balance of payments problems.
Answer
Balance of payment problems may be corrected by tariffs, quotas and export incentives to encourage
local production for export.
Question 7
Explain the term per capita GNP.
Answer
Per Capita GNP is the value of a countrys output from local production divided by its population. Per
capita GNP figures give an idea of the average income enjoyed by each individual in a country.
Question 8
Distinguish between visible and invisible trade.
Answer
Visible trade is the export and import of physical goods and services for example, sugar, coffee and
bauxite. Invisible trade refers to the trade of services for example, tourism and shipping.
Question 9
Explain two reasons why countries engage in international trade.
Answer
Countries engage in international trade to obtain goods that they lack the necessary raw materials to
produce.
Countries also engage in trade to obtain goods for which they do not have a comparative advantage.
Question 10
Differentiate between economic growth and economic development.
Answer
Economic growth refers to an increase in national income and economic development is sustained
growth that is accompanied by policies established to ensure continuous growth. These include an
increase in exportation, decrease in importation, lesser dependence on foreign aid and important
infrastructural development.

Regional and Global Business Environment

Economic Institutions And Systems

Caribbean Community Common Market (CARICOM)
A common market is an association of countries that have joined together to bring about the
harmonious development, continuous economic expansion and increased stability of the countries
involved. CARICOM was formed in July 1973 when Barbados, Trinidad and Tobago, Jamaica and
Guyana signed the treaty of Chaguaramas. Since then the following Caribbean countries have joined:
Antigua and Barbuda, Belize, Dominica, Barbados, Suriname, Grenada, Montserrat, St. Kitts &
Nevis, St. Lucia, St. Vincent and the Grenadines and Bahamas and Haiti.
Associate members of CARICOM are Anguilla, Bermuda, British Virgin Island and Turk and Caicos.
Objectives of CARICOM
-Improved standard of living.
-Expansion of trade.
-Joint negotiations internationally.
-Co-ordination on foreign and economic policies.
-Full employment of labour and other factors of production.
-Economic integration.
Caribbean Single Market and Economy (CSME)
The CSME was established in 2006. It seeks to transform the common market into a single market
and economy. It was established to deepen the integration among Caribbean states and to respond
effectively to the challenges and opportunities globally.
Objectives of CSME:
-Deepening economic integration.
-Free trade of services.
-Free movement of capital, labour and the freedom to establish business enterprises anywhere
within CARICOM states.
-Widening of membership.
-A common currency/single currency.
Caribbean Development Bank
The CDB is a regional financial institution. It finances regional projects that contribute to the
economic growth and development of the region. Sectors financed by the CDB includes:
infrastructure, tourism, mining and refining, agriculture, agriculture, manufacturing, heath and
education.
The objectives of the Caribbean Development Bank are:
-Supporting regional and local financial institutions
-Assisting borrowing member countries to optimize the use of their resources
-To mobilize financial resources regionally and internationally
-To support capital markets
-Stimulating growth
-Supporting business activities
The World Bank
The aim of the World Bank is to reduce poverty worldwide. It therefore assists developing countries
by providing loans for projects such as housing, infrastructure and industry. The World Bank
provides long term loans for developmental purposes. It is used interchangeably with the
International Bank for Reconstruction and Development (IBRD). However, the IBRD is only one of
the five agencies of the World Bank.
The five agencies of the World Bank are:
-International Bank for Reconstruction and Development (IBRD)
-International Development Association (IDA)
-International Finance Corporation
-Multilateral Investment Guarantee Agency (MIGA)
-International Centre for Settlement of Investment Disputes (ICSID)
Inter-American Development Bank (IADB)
The IADB was established in 1959 for the purpose of assisting Latin American and Caribbean
countries. It offers loans, lines of credit and technical assistance to member governments for social
and economic development. Areas of assistance include: agriculture, industry, mining health,
tourism and infrastructure.
The Organization of Eastern Caribbean States (OECS)
OECS was formed in 1981 for the purpose of promoting cooperation among member states. These
countries include Montserrat, Anguilla, Antigua, Dominica, Grenada, St. Kitts and Nevis, St. Lucia
and St. Vincent, Anguilla and the British Virgin Islands are associate members.
Eastern Caribbean Common Market (ECCM)
The objectives: Creating a single financial and economic space
Organization of American States (OAS)
The OAS was established for the main purpose of increasing interdependence and solidarity, and
promoting regional co-operation and the peaceful settlement of disputes among the member
countries. These countries include: North and South America, Canada and the Caribbean.
Economic Commission for Latin American Countries (ECLAC)
The ELAC was established in 1948 for the main purpose of integrating Latin American countries for
their development. Caribbean countries were later included in the ELAC. Their objectives include:
-Guaranteeing equal rights and opportunities
-Economic integration of Latin American and Caribbean countries.
-Reinforcing economic ties among countries of Latin America and other nations of the world
-Economic development of Latin America
Association of Caribbean States (ACS)
The ACS was established in 1994 to promote cooperation among Caribbean countries. Its objectives
include:
-The strengthening of regional cooperation and integration
-Preserving the environmental integrity of the Caribbean Sea
-Promoting the sustainable development of the Caribbean
The European Union (EU)
The European Union is an economic and political partnership between its 27 member countries. It is
a single market economy with the euro as its common currency.
These countries include: Spain, Luxemburg, Britain, France Portugal, Italy, Greece, Belgium,
Germany, Denmark, Finland, Sweden and Switzerland.
Their objectives include:
-Free movement of people services and capital
-Removal of customs duties and quotas among members
-Establishment of common policies for agriculture and transport
-Establishment of a common tariff and common policies towards other countries
-Economic cooperation
-Promoting equal rights
-Fighting climate change
World Trade Organization (WTO)
The WTO is an international organization that monitors and regulates trade among the nations of
the world based on trade agreements by member states. The WTO replaces the General Agreement of
Tariffs and Trade (GATT).
Their main aim is to encourage the free flow of trade among nations.
Their objectives include:
-discouraging unfair trading practices e.g. export subsidies and selling products below cost to gain
market share
-settling disputes among members
-environmental protection
-monitoring and reviewing the trade policies
-reducing trade
Caribbean Basin Initiative (CBI)
CBI allows certain Caribbean and Central American products duty free entry into the United States.
Products exported include chemicals, manufactured goods, fresh fruits and vegetables.
Oil Producing Exporting Countries (OPEC)
OPEC is an organization of 12 oil exporting countries. This organization was established in 1960 for
the purpose of unifying the petroleum policies of member countries.
Objectives include:
-Regular supply of petroleum products on the world market
-A steady income for producers
In 1976 OPEC established a special fund to provide financial assistance to developing countries.
OPEC countries: Kuwait, Venezuela, Iran, Iraq, Angola, Saudi Arabia, Algeria, Ecuador, Libya,
Nigeria, Qatar, United Arab Emirates
CARIBCAN
The agreement allows preferential duty free access to the Canadian market for almost all imports
from Commonwealth Caribbean Countries.
Its main objectives are:
-to enhance the Commonwealth Caribbeans existing trade
-improve economic development prospects of the region
-promote new investment opportunities
-encourage economic integration and cooperation within the region
-to encourage long term investments through development projects.
North American Free Trade Agreements NAFTA
This agreement allows duty free entry of goods among Canada, United States and Mexico.
Free Trade Area of the Americas (FTAA)
The FTAA is an expansion of NAFTA. It is an organization of 34 countries of the Americas including
North and South America, Canada and the Caribbean except for Cuba. It s objectives include
economic prosperity, free market of goods and services and democracy.

Economic And Social Problems In The Caribbean

Unemployment
Globalization has contributed significantly to unemployment in the Caribbean. With the removal
trade barriers, some industries have not been able to compete globally. The lack adequate skills that
are required for the new industrial paradigm for example, information technology skills have also
contributed to the problem of unemployment.
A high level of unemployment among the young people of the Caribbean may results in various
social problems, as survival may depend on illegal activities.
Reasons for unemployment
-firms e.g. multinationals closing down
-lack of investment to create new businesses
-lack of skills training
Population density
Population density Refers to the average number of people living on every square kilo meter in a
country. The formula used for calculating population density is:
Density of population
= Total population
Area (sq. km.)
Very high population densities can indicate overpopulation. This occurs when the facilities in a
location, are not able to serve the number of persons in that location. This will cause heavy
competition for jobs, schools, health facilities etc.
Migration
Caribbean people migrate to first world countries in search of opportunities such as employment and
education. When skilled and professional workers migrate, Caribbean countries may experience
shortages in critical areas such as health care. Loss of skilled workers from industry will also retard
growth and development. Social problems may arise when children are left in the care of
grandparents and other relatives who have challenges to discipline them.
Debt burden
Many Caribbean countries have high debt- to-GDP ratios. This ratio is the amount of national debt
of a country as a percentage of its Gross Domestic Product. High debt-to-GDP can stifle an economy
as a large portion of its GDP is consumed in debt payment and very little is left for investment in the
economy. A very low debt- to- GDP ratio is desirable for economic growth and development.
Sourcing Capital and raw materials
While the Caribbean might be rich in certain natural resources such as bauxite, oil and gold the
region lacks other very important resources such as capital and entrepreneurial skills. Capital is
important as it increases production through the use of machinery, equipment and money invested.
The spirit of entrepreneurship is necessary for the creation of new business ideas and
entrepreneurship skills are important for the successful running of the businesses.
Economic dualism in the region
Economic dualism occurs in countries where there exist two opposite economic sectors. One sector is
characterized by development, capital intensive industries, large scale farming and technological
advancement, and the other sector is characterized by subsistence farming, labour intensive
industries, handicraft industries and simple trading means of survival.

Possible Solutions To Economic And Social Problems

Access to Foreign Direct Investment (FDI)
Foreign Direct Investments refers to capital investments into factories, machinery and equipment by
a foreign company or an individual. FDI is important for the development of Caribbean economies as
they are challenged by their high debt- to-GDP ratios and increased global competition for export
earnings. Attracting foreign direct investment is a way for Caribbean countries to obtain capital for
growth and development.
Benefits of FDI include:
-Employment for nationals
-Increased access to global markets
-Introduction of advanced technologies and processes
-Improvement in human resource skills
Development of human resource
Investment in human resources is imperative for Caribbean economies to compete globally.
Improving the value of human resources through education and training will increase the productive
capacity of Caribbean countries.
Development of manufacturing sector
The manufacturing sector creates value added products which increases export earnings for
Caribbean economies. Developing the manufacturing sector therefore will impact on the potential
economic growth of a country.
Methods of developing the manufacturing sector:
-Encouraging Foreign Direct Investment
-Retooling
-Research and development
-Technological advancement
Quiz

Question 1

List three objectives of CARICOM.

Answer

Three objectives of CARICOM are:

-joint negotiations internationally

-economic integration of the region

-improved standard of living for the region

Question 2

Explain how the CSME differs from CARICOM.

Answer

This transforms the common market into a single market and economy. It establishes a single
currency for the region and the free movement of human and capital resources throughout the
region.

Question 3
Outline the main objective of the World Bank.

Answer

The World Bank provides long-term loan for developmental projects. Its main aim is the reduction of
poverty in worldwide. Loans are provided for purposes such as infrastructure and industry.

Question 4

(a) Identify two economic problems that affect Caribbean countries.

(b) Discuss one method that can be used to solve one of these problems.

Answer

(a) Two economic problems that affect Caribbean countries are unemployment and high debt
burdens.

(b) High debt burdens can be reduced by methods that increase foreign exchange earnings and
reduce dependency on imports. Support for local industries in the form of tax holidays, duty free
imports and low interest loans will reduce cost of production and thus encourage output. Lower
market prices will encourage local consumption and increase the competitiveness of products on the
international market.

Question 5

Explain the role of the Caribbean Development bank.

Answer

The Caribbean Development bank was set up to finances regional projects that contribute to the
economic growth and development of the region. For example: providing funds for roads, education
and business development.

Question 6

Give two methods that can be used to increase FDI.

Answer

Caribbean government can encourage FDI incentives with methods such as tax holidays, affordable
operating costs (labour and utility) and availability of human and natural resources.

Question 7

What is the role of the WTO?

Answer

The WTO was set up to monitor and regulate trade among nations of the world based on their
collective agreements.

Question 8

List three international trade agreements.

Answer

Three international trade agreements are:

-The Caribbean Basin Initiative (CBI)

-CARIBCAN

-North American Free Trade agreement (NAFTA)

Question 9

Outline one trade agreement that involve Caribbean countries and explain the long term benefits of
these agreements to the Caribbean.

Answer

CARIBCAN gives Caribbean countries duty free access to markets in Canada. It ensures a steady
market for Caribbean products and thus long-term development of local industries. Other benefits
include: employment and linkage industries.
Question 10

Write brief notes on ECLAC.

Answer

The ELAC is an organization of Latin American and Caribbean countries. They aim to reinforce
economic ties among the countries of Latin America and the Caribbean.

Business Finance

Role of Commercial Banks

-Commercial bank accepts money deposits and therefore provides a safe place for saving money.
-Offering loans and overdraft to persons who need financial assistance.
-Assisting customers to easily make payments through standing orders, current accounts and debit
cards.
Services offered by Commercial banks
-Commercial banks provide advisory services to clients who wish to borrow a loan to make
investments and persons who wish to purchase securities.
-Safety deposit boxes at the bank are used to store safely items that individuals deem as highly
valuable.
-Selling travelers cheques.
-Credit cards allows persons to purchase items by using funds that the bank makes available. There
is a limit to how much the bank makes available to credit card holders.

Functions Of The Central Bank

-The Central Bank has the sole authority to issue notes and coins.
-The Central Bank is a banker to the government as it keeps the government accounts.
-It manages the national debt.
-It is a banker to all banks as commercial banks must keep an account with the central bank.
-A lender of last resort-The commercial banks and all other financial institutions can count on the
central bank for financial assistance.
-It is a financial agent for government. The government uses the Central Bank to carry out its
economic policies. These policies are known as monetary policies.
Monetary policies
These are policies used to affect the level of the money supply to bring about high employment, price
stability and sustainable economic growth. The money supply is composed of notes and coins in
circulation plus deposits in commercial banks. If this supply is too high then inflation will occur. If
the supply is too low the economy may experience an economic depression.
Decreasing the money supply
When the money supply is too high monetary policies such as high interest rates, selling certificates
of deposits and treasury bills and increasing the cash reserve ratio are used to discourage borrowing
and spending.
Increasing the money supply
To increase the money supply the opposite must be done. Monetary policies such as low interest
rates, buying securities from other financial institutions and decreasing the cash reserve ratio are
used to encourage borrowing and spending. When interest rates are lowered citizens will borrow
funds and reduce savings to purchase assets and consumption items. This will increase the money
supply in the economy. The government may wish to increase the money supply to boost an
economy when there is an economic decline. As the money supply rises demand for goods and
services will rise resulting in the expansion of the business sector and the level of employment.

Relationship between the Central Bank and Commercial Banks

The Central Bank is the head of the financial system. All financial institutions including commercial
banks are regulated and monitored by the Central Bank.
All commercial banks must keep an account with the Central Bank. These balances are used for
cheque clearing purposes between banks. Payments for cheques between banks are set off at the
Central Banks clearing house. The Central Bank can also demand commercial banks to deposit a
certain percentage of their total deposits with the central bank in order to control the money supply.
The Central Bank is a lender of last resort and will aid commercial banks when needed. The Central
Bank dictates the interest rate that commercial banks can offer by setting the bank rate. This is the
interest rate set by the Central Bank and the rate at which commercial banks and the Central Bank
do business, e.g. loans offered by the Central Bank to commercial bank.
 Strategies To Manage Personal Income
Subsequent to the deduction of taxes and other statutory payments the income earner must manage
his money to maximize its use. He must exercise and develop habits of careful spending and saving
techniques. A good money manager will budget.
A budget outlines how much of an individuals income is to be spent on his various expenses; it
disciples an individual to live within the constraints of his personal income. The process of preparing
a budget involves the record keeping of past expenditures, and making decision based on these about
future expenditures. Priorities must be set to meet basic needs and a systematic plan for savings to
achieve future goals.

Sources Of Short & Long Term Financing

Short-term capital may be accessed through the money market. Institutions in the money market
include commercial banks, merchant banks, credit unions and discount houses. Borrowers are
required to repay within a short-term e.g. 1 to 5 years.
Long term capital may be accessed through building societies, the stock exchange, unit trust
companies and development banks. Borrowers are given a much longer repayment periods e.g. up to
20 years.

Savings And Investments

Savings is defined as money set aside or not spent from ones personal income. Money saved is most
effective in an interest bearing facility such as a commercial bank to keep up with inflation which
reduces the value of money over time. Other forms of savings include, the credit union and partner
(meeting turn, sou sou, box hand).
Investment is defined as methods of increasing wealth. It differs from savings as it involves risks.
Earning from capital invested is usually amuch higher than interest earned on savings. Forms of
investments include: unit trust companies, the stock exchange and starting a business.

Stock Market
The stock market facilitates the trading of stocks/shares between buyers and sellers. The Stock
Exchange is the governing body that overseas and regulates the activities of the stock market.
Companies that wish to obtain capital to expand may offer shares for sale on the stock market. It is
therefore essential to the expansion of businesses in an economy. It provides a form of investment
for persons who are very speculative and will buy stocks for resale at higher anticipated prices.
Types of speculators/stock market investors
Bears
These are speculators who sell securities because they expect the price to fall soon. A bear market is a
stock market that is slow moving i.e. investors are not keen on buying stocks.
Bulls
These are speculators who buy securities because they think the price will rise soon. A bull market
that is very active with high interest in the buying and selling shares.
Stags
Stags are short term speculators. They are also known as day traders. They carefully watch the
movement of stock prices and buy stocks with the intention of quick resale for profits.
Cross List
Cross listing occurs a company lists shares on more than one stock exchange. It not only lists stocks
for sale on the exchange in the country which it operates but also on other exchanges.
Stock Broker
This is someone who is authorized to buy and sell shares. Persons wishing to buy or sell shares must
contact a stock broker who will buy or sell shares on their behalf

Quiz
Question 1
Explain the importance of two functions of the commercial bank to business.
Answer
The commercial banks offer loans and overdrafts to the business sector. Loans are required for start-
up capital and for business expansion. Overdrafts assist business to bridge finance so that liquidity
may be maintained to continue operation.
Commercial banks also provide a safe place for business to keep money. A business only needs to
keep enough cash on location that is required for its daily operations.
Question 2
Explain the benefits of two services of commercial banks to customers.
Answer
It sells travelers cheques to customers who are travelling overseas. Travelers cheques are a safe way
of traveling with funds overseas. They give financial advice to customers. This advice will help
customers to make informed decisions concerning investment.
Question 3
Outline two functions of the central bank.
Answer
The Central Bank is a banker to other banks. All commercial banks must keep an account with the
Central Bank. These balances are used for cheque clearing purposes between banks. The Central
Bank can also demand commercial banks to deposit a certain percentage of their total deposits with
the central bank in order to control the money supply.
The Central Bank is responsible for designing printing and issuing the countrys currency. It has the
sole authority to issue notes and coins. Any other forms of printing money is counterfeit money and
illegal.
Question 4
Explain how government is able to control inflation through the Central Bank.
Answer
The government can control inflation through the Central Bank. When the money supply is too high
monetary policies such as high interest rates, selling certificates of deposits and treasury bills and
increasing the cash reserve ratio are used to discourage borrowing and spending.
Question 5
Explain the term money management.
Answer
Money management refers to methods used to efficiently manage ones income. Preparing a budget
will ensure that an individual lives within his means and save to achieve future goals.
Question 6
Give two reasons for drafting a budget.
Answer
A budget is outlines how much of an individuals personal income is to be allotted to various living
expenditures. It provides a record of past expenditures so that the individual can analyze his
expenditures and make more efficient spending decisions. It ensures that priorities are taken care of
and that a system for savings can be developed to meet future goals.
Question 7
Distinguish between long and short-term financing.
Answer
Short-term financing involves loans that require repayment up to five years. Short-term loans can be
accessed through commercial and merchant banks and credit unions. Long-term financing involves
loans that allow a longer payment period. Building societies and development banks require
repayment of to 20 years.
Question 8
Distinguish between savings and investment.
Answer
Savings is defined as money set aside or not spent from ones personal income. However, investment
is defined as methods of increasing wealth. It differs from savings as it involves risks. Examples of
investments include, starting a business and purchasing shares.
Question 9
Discuss the importance of the stock market to an economy.
Answer
The stock market provides a means of financing for firms. Firms that need capital to expand may
offer shares for sale. The stock market also provides an opportunity for investment. Individuals who
buy shares may resell them when the stock prices rise.
Question 10
Differentiate between two type of investors on the stock market.
Answer
Bears are speculators who sell securities because they expect the price to fall soon. Bears wish to
prevent losses by selling their shares before prices fall. However, bulls are speculators who buy
securities because they think the price will rise soon. They purchase shares as they expect to make
profits as soon as stock prices increase.