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1. The economic environment: key economic issues


A variety of cultural, legal, political and economic factors influence the management of global
companies. The effect of these factors varies considerably, though there is great disparity among
the developing countries, they share many problems and characteristics. Some of the most
frequently mentioned problems are inflation, heavy external debt, weak currencies, shortage of
skilled workers, political and economic instability, over-reliance on the public sector, war, mass
poverty, rapid population growth and environmental degradation.

There are several important economic factors that influence management decisions:

1. Economic growth
Economic growth represents the expansion of a countrys potential GDP or GNP. It is a measure
of the rate at which the real output of an economy is growing over time.
GDP: Gross Domestic Product is often used to measure output. This refers to the output
produced by individuals and businesses within a countrys borders without regard to whether the
production is done by domestic or foreign factors of production.
GNP: Gross National Product is the broadest measure of economic activity. It is the total
value of final goods and services newly produced by domestic factors of production. The
production by domestic factors could take place at home or abroad.

Economic growth is calculated as a rate, namely the percentage change in real GDP (inflation
eliminated).
a.) Benefits of growth: why is the economic growth necessary?
If the growth of output exceeds the growth of population, the income per capita will rise, so
the standards of living will rise.
The economic growth makes investment in scientific research possible. This is particularly
important in medicine, where new vaccines (oltanyag) prevent the spread of disease and new
treatments make it possible to cure people of certain illness which a few years ago claimed
many lives.

b.) Costs of growth


The main costs of economic growth is the environmental costs. There is no doubt that in the
past the drive for greater economic growth has resulted in pollution and can lead to negative
externalities.
Opportunity cost: Increased investment requires abstention from current consumption And so
the population makes a sacrifice that makes a higher standard of living possible in the future.

c.) Factors influencing growth:


Factors, which may help to create growth:
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1. Capital stock: The first factor is the quantity of capital per worker. The greater the capital-
labour ratio, the higher the productivity of labour.
2. Technological process: It is the quality of capital employed that affects economic growth, and
this depends on technological progress.
3. The quantity and quality of the labour force:
- The quality of labour is determined by the population but the countries with the highest
populations dont have the highest economic growth. The optimum population is that level of
population which maximises average product. The quality of labour depends on e ducation and
training. The development of human skills will increase the capacity of an economy to growth.

d.) Government policy and growth:


Economic growth has been given priority as a policy objective. The government is seeking to
level out fluctuations in the economy. In seeking to reconcile the 4 ke y variables of growth,
inflation, unemployment and the balance of payments, the government has various weapons at its
disposal.
1. The government may induce injections into and withdrawals from the circular flow of
income: By adjustments in public spending it may manage the level of total demand in the
economy
2. By adjusting the level and types of taxation, social security benefits and subsidies, it may
also achieve the same effect.
3. It may use its powers of control over the money supply to manage aggregate demand.
4. Any increased level of demand resulting from high levels of growth may cause inflationary
pressures in the labour market, resulting in unacceptable rises in money incomes. An incomes
policy may then be used to slow down temporarily the rise in wages and salaries, thus reducing
aggregate demand and economic growth.
5. A protectionist policy may be used to return the balance of payments to equilibrium. The use
of exchanges in the exchange rate encourages exports and discourages imports. This disparity in
growth rates creates a major problem: industrial countries tend to invest in the fastest-growing
economies, and such investment increases the disparity.

2. Inflation
Inflation: is a persistent rise in the general level of prices over time. Economists attribute inflation
to 2 causes:
- demand-pull influences: the rise in price level is caused by increases in consumer demand,
especially when governments try to stimulate the economy by easing credits and to maintain full
employment. The demand for goods and services exceeds the supply available.
- cost push influences: some factors on the supply side of the economy which lead to increases
in the cost of production which is passed on to customers in higher prices. Such pressure may be
caused by strong bargaining power of large labour unions or by increases in the cost of basic raw
materials which force up the cost of industrial production.

The rate of unemployment and the rate of inflation are inversely related.: inflation can be reduced
by allowing more unemployment, but in some cases it is possible for both inflation and
unemployment rate ti rise at the same time.
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Effect of inflation:
1. Inflation is regarded as undesirable, because the value of money tends to decline, and some
groups in society gain (debtor), while others lose (savers, creditors, those on fixed incomes)
2. It makes planning for the future difficult
3. It rises the tax burden since some taxes are directly related to income and the value of
spending.
4. It may discourage savings since their real value falls through time.
5. It affects interest rates, exchange rates, and general confidence in a country political and
economic system. High inflation rate creates problems for companies that deal in imports and
exports. If the exchange rate depreciates at the same pace as the inflation rises, the prices
foreigners pay for export of the inflationary country will not change.
6. It causes political destabilisation: If the government tries to control inflation by controlling
wages, the real income of the population declines and frustration sets in. If the government
decides to do nothing, the economy may deteriorate to the point that real incomes fall anyway.

Government responses to inflation:


The government can affect the level of prices by controlling or regulating them. It is within the
governments power to control inflation, but there might be disagreement about the most
effective way of dealing with the problem.

1. The Keynesian solution would concentrate on a ttempts to aggregate demand through a


combination of monetary and fiscal policies.
- a range of credit control measures is used as part of monetary policy to increase the cost and
reduce the availability of credit for consumer purchases.
- a raising of tax rates or government spending cut as part of fiscal policy.

2. The monetarist solution is to control the growth of money supply To introduce monetary
restriction by raising interest rates and thereby reducing spending. I.e. it reduces the demand for
credit. Investment is discouraged, and thus the demand for capital goods and the demand for
labour falls.

3. Incomes policy is the most common form of policy to cope with cost push: The aim is to
secure agreement with both side of industry to moderate pay and price rises. The ideal is that
wages should rise by no more than productivity, which means wage increases are self-financing.

3. Employment:
The maintenance of full employment was a cen tral policy aim of governments, but it has been
accepted that there is some level of unemployment, below which it is not possible to go without
the return of inflationary pressures.

Causes of Unemployment:
1. Frictional unemployment: Persons who are made redundant will need time to search for and
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start a new job.


2. Seasonal unemployment: Fluctuation in demand for labour in certain industries will be linked
either to the seasonal nature of production (agriculture) or to seasonal patterns of demand
(childrens toy at Christmas).
3. Technological unemployment:
- This may result from new technology causing a change in the pattern of demand.
- It may occur where an established industrial process is replaced by new machinery, requiring
less labour.
4. Cyclical or deficiency unemployment: Fluctuation of demand, caused by the pattern of
business cycle, may compound some of the above effects to produce sudden increases in
unemployment.
5. Unemployment due to obstructions to the labour market: Monetarists believe that this is
the major cause of long term unemployment. They see the excessive national bargaining power of
trade unions as being especially important. They believe that workers are then priced out of work
by excessive increases in real wages.

Government Responses to unemployment:


Governments may respond in a number of ways to an increasing or high level of unemployment.
1. If it is believed that a deficiency in aggregate demand is the cause of unemployment, it is
possible to increase demand by use of a p ackage of measures, fiscal and monetary. Thus the
government might lower taxation or increase public spending.
2. If it is believed that imperfections in the labour market are the cause of unemployment,
the government might seek to break the power of the union by legislation. The government might
reduce the real value of benefits in order to make jobs on low wages more attractive.
3. Where specific industries or regions are worst affected, it might use a policy of direct
subsidy and regional aid measures in order to maintain existing jobs in the short term while
encouraging the creation of new jobs.

4. The Balance of Payments:


The balance of trade is the difference between the total value of a countrys exports and
imports. If the value of exports exceeds that of imports, the balance of trade is said to be
favourable, if the country imports more than it exports, the trade balance is unfavourable. This
balance only includes payments for trade in visible (merchandise), but payments for invisibles
(services) arent included.

Another measure of a co untrys foreign trade activities is the balance of payment: records all
the financial transactions between the home country and the other countries, including payments
for visible goods. Thus the trade balance is only part of the balance of payment, which records 2
broad groups of transaction: the capital and the current account.
A country balance of payments is a s tatistical record of all the economic transactions between
domestic residents of this country and foreign residents of the rest of the world during a given
time period (usually a year). This is one of the most important statistical statements for any
county. It reveals how many goods and services the country has been importing and exporting
and whether the country has been borrowing from or lending money to the rest of the world.
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Balance-of-payment surplus and deficit


The balance of payments always balances since each credit in the account has a co rresponding
debit elsewhere. However, this doesnt mean each of the individual accounts that make up t he
balance of payments is necessarily in balance. When we are talking about a balance of payment
deficit or surplus economists are really saying that one of the sub-account is in surplus or deficit.
A surplus means that the country as a whole is increasing its stock of claims on the rest of the
world, it is effectively an injection of money into an economy, this is sometimes termed export-
led-growth.
Deficit means that the country is reducing its net claims on the rest of the world, it is a
withdrawal of money from the economy.

Remedies for Balance of Payments problems:


The ultimate constraints on any government is the need to manage the current account in such a
way as to achieve equilibrium over the long term. Measures:
1.) Deflation: is monetary and fiscal measures designed to reduce the level of demand within the
economy. These measures not only have the impact of reducing a current account deficit on the
balance of the payments, but also of reducing investment and economic growth and increasing
unemployment in the domestic economy.
2.) Devaluation: is not always successful. So imports may include items we cant buy from
anywhere else, in which case depreciation merely forces us to pay a higher price for these
essential items. Conversely, although exports are cheaper we will have to sell a lot more in order
to obtain the same amount of revenue.

5. Public Finance:
1.) The main items of government spending:
- defence and law and order: The existence of state requires that its boundaries be defended from
incursions and that its citizens be protected.
- social security: State should support, wholly or partially, some citizens who are unwaged, or
low paid. Some benefits are paid directly. In time of recession it may be the largest item of
expenditure.
- local government spending
- national health service
- other expenditure, including support for industry, contributions to infrastructure expenditures
and education spending.

2.) Taxation:
Government spending has to financed either by taxation or by borrowing. Taxation is essential
and unavoidable. It may be imposed on income, expenditure, capital gains or wealth.
- direct taxes are levied on income and wealth
- indirect taxes are levied on spending
a.) Income tax: charged on all incomes from work or self employed above an amount dictated by
a personal allowance plus allowances for certain other items
b.) Corporation tax: charged on profits earned by a company. Small firms currently pay a lower
rate than larger ones.
c.) Capital Gains Tax: levied on the increase in the value of capital when it is sold.
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d.) Value Added Tax (VAT): is a charge on t he value added at each stage of the production
process. VAT paid by firms on the cost of inputs is reclaimable.
e.) Excise Duties: chargeable on certain products such as tobacco, wines and spirits.
f.) Inheritance Tax: There is no wealth tax as such in the UK, but tax is charged on assets above
a given amount which are inherited.

Economic Systems
Economic systems are usually classified as capitalist, socialist or mixed. However, it is also
possible to classify them according to 2 other criteria:
- Type of property ownership: - private (individuals own the resources)
- public ( the government owns the resources)
- Method of resource allocation and control: a centrally planned (command) economy, a market
economy

1.) Market Economy: (ME)


Two social units play important roles: individual consumers and businesses. Individuals, as
consumers, freely choose which goods and services they will purchase, and producers freely
decide which goods and serviced they will provide.

Characteristics of MEs:
a.) It is characterised by an almost total lack of government intervention. There is a limited role
for the state. b.) The right of individuals to own private property, and in particular to own a
dispose of land and capital
c.) In making decision about production, entrepreneurs are guided by the profit motive.
d.) reliance on the price mechanism: to allocate resources.

2.) In a Centrally Planned Economy the government


- co-ordinates the activities of the different economic sectors (central planning) Goals are set for
every enterprise in the country.
- it determines how much is produced, by whom, and for whom
- it is assumed to be a better judge of how resources should be allocated than are businesses or
consumers.
- One obvious problem for this kind of system is to ensure that the demands of consumers
matches the output of firms. That is why there can be shortages of some commodities and
surpluses of other commodities, with no automatic mechanism for their removal.
- Usually the production of capital goods has priority over that of consumer goods.
- They face a further problem of estimating the pattern of consumer demands.
3.) Mixed Economy:
In reality, no economy is one of these pure forms. Government intervention can be regarded in 2
ways:
- government ownership of the means of production:
- government influence in economic decision making.
Ownership is easy to quantify statistically, influence, however, is a matter of policy and custom
and therefore is more difficult to measure precisely. Many industrial (high-income) countries
have relatively low levels of government ownership but a strong tradition of social welfare
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supported by taxes.
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2. Markets, commodity exchanges, the Stock Exchange


Market functions:
The main function of a market is to provide facilities/place where buyers and sellers of goods or
services can trade. The market need not be a physical place but can be any situation or
organisation where purchases can be negotiated.

Types of market:
1.) Commodity markets
These markets provide facilities where large numbers of buyers and sellers of raw materials can
get together and prices are fixed.
On commodity exchange mass-goods can be sold and bought, which can be substitute for the
same quality. There is no individual product and industrial finish products. Goods arent present
physically on the Commodity exchange.

Types of commodity markets:


a.) Wholesale produce markets: In these markets products are actually physically handled. New
Covent Garden (for fruit and vegetables), Smithfield (for meat)
b.) Markets for commodities: London Diamond Market, London Metal Exchange, London
Wool Exchange, Baltic Exchange (shipping, air transport, grain, seeds and vegetable oils),
Liverpool Corn Exchange

Commodity market specialists:


a.) Merchant: buys on his own behalf, pays promptly and may provide his own transport
b.) Broker: buys and sells on behalf of others on a commission (brokerage) basis.
c.) Del credere agent: sells on behalf of others and also guarantees payments for goods in return
for extra commission.

Methods of sale:
a.) Private treaty: where a commodity can be graded (wheat) the seller and the buyer come to a
private agreement on purchase price by negotiation.
b.) Auctions: where goods vary in quality or grade (tea, tobacco, wool) a representative sample
is offered and the buyers or their agents will bid. Purchase goes to the highest bidder.
c.) Spot and futures:
- spot markets: markets which deal in goods for immediately delivery, because goods and
payment are available immediately (on the spot)
- future markets: where goods are being sold for delivery and payment at some time in the future.

2.) Financial markets


a.) Money market: this isnt a market in the physical sense but refers to a number of institutions
which provide short-term loans. The market includes:
- Commercial banks: provide loans and extend overdrafts to businesses and individuals.
- Discounting houses: buy dated B/E, (or Treasury bills) before they are payable thus allowing
the businessman to obtain cash immediately rather than at a later date.
- Merchant banks: extend short-term loans to British and foreign firms.
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- Hire-purchase companies: allow individuals and businesses to borrow and pay back later in
instalments while the goods purchased with the money are used as security against the loan.
- Finance companies: offers loans repayable by instalments, but in this case it is not necessarily
the purchased goods that are used as security.
b.)Capital market: isnt a physical market either, but a number of institutions providing long-
term loans almost entirely to business and industry. This market includes:
- Insurance companies: loan out some of the money they collected as premiums in the form of
long-term loans.
- Building societies: apart from loaning out money for house purchase, they invest some of the
money deposited with them by providing loans for the capital market.
- Investment trusts: buy shares of other companies using the money they get from the sale of
shares in their own company
- Unit trusts: invite the public to buy units. The money received from selling the units is then
used to buy shares in many different companies.
- Pension fund: collect regular contributions from members and provide them with pensions
when they retire. The contributions are made to work by investing them in low-risk securities.
- Issuing houses: arrange long-term capital for businesses by selling shares of the company
concerned to the public.
- The Stock Exchange: provides a market place for the buyers and sellers of second-hand
securities (the stock market)

The Stock Exchange


Functions and control
The Stock Exchange is a highly organised financial market place for the buyers and sellers of all
kinds of existing securities.
- Free market: the prices of securities are allowed to fluctuate in response to supply and demand.
The market price of shares is particularly influenced by the past performance and profitability of
a company. General market trends can provide an indicator or barometer of the future outlook for
industry and economy as a whole.
- It enables people to dispose quickly of any listed shares they hold, (especially when securities
must be easily turned into cash)

Membership
Only Member Firms of the Stock Exchange are allowed to take part in dealing on the Exchange
floor and outsiders must carry out their buying and selling through them. The Member Firms are
called:
a.) Brokers/dealers: buy or sell shares as agents for public investors, or as principals for their
own account with other Member Firms or outside investors, or they can act in a dual capacity as
both agent and principal. Some of them specialise as Market Makers:
b.) Market Makers: can operate on the Stock Exchange floor, off-floor, or both on and off floor.
They make a market in shares by being prepared to buy or sell shares at all times to and from
Broker/Dealers. They may deal direct with the Brokers on t he Exchange floors, or indirect
through the SEAQ (Stock Exchange Quotation System.)

Types of security
Security is the collective name given to the wide range of investments with which the Stock
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Exchange is concerned.
1. Government stocks or bonds: are used to raise money to finance government projects. They
represent a very safe form of investment because they are backed by government resources. They
are issues for a fixed period of time and receive a fixed rate of interest.
2. Local authority bonds: are issued by local authorities and money invested represents loan to
the authority. They are secure form of investment paying a fixed rate of interest
3. Debentures: are in effect a loan to a company and are often referred to as stocks. They
receive a fixed rate of interest which must be paid even if the company doesnt make a profit.
4. Preference shares: pay a fixed rate of dividend, but only if sufficient profits are available to
make a payment. Usually they carry no voting rights. The preference shareholders is entitled to a
fixed percentage of the profits, but after the debenture holders and before the ordinary
shareholders.
5. Ordinary shares (equities): represent a share in the ownership of a company. Each share is
entitled to an equal proportion (dividend) of the companys profits. The amount of dividend to be
paid is decided by the directors of the company and is dependent upon t he profitability of the
firm. It runs the risk that the shareholder may receive only little return in bad years, though in
good years he could receive twice as much as preference shareholders. The shareholder may gain
not only through his share of the companys profits, but also from an improvement in the current
market price of the shares. In addition, the ordinary shareholder has some power (through voting
rights) in the running of the company.

Futures and options


On spot market: currencies and commodities are traded for immediately delivery.
On futures market contracts can be made to buy and sell currencies, commodities or financial
instruments at a future date, but at fixed price pre-arranged at the time of the deal. It can be a
protection against price changes, called hedging.
- Traders or speculators might wish to buy or sell a currency at a future price is it is expected to
appreciate or depreciated, or if interests rates are expected to change.
- Prices of foodstuffs are frequently affected by droughts, flood and other extreme weather
conditions, which is why both producers and buyers often prefer to hedge, so as to guarantee next
seasons prices.

One can buy options giving the right to buy and sell securities at a fixed price in the future.
- A call option gives its holder the right but not the obligation to buy securities or a commodity or
a currency at a certain price during a certain period of time.
- A put option gives its holder the right to sell securities etc. At a certain price during a certain
period of time.
The buyer of a share option pays a premium per share to the seller, and only risks this amount.
The seller of an option (known as writer) risks losing an unlimited amount of money, depending
on the performance of the underlying share, especially if he doesnt actually possess it.
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3. Economy and environment

The effect of the economic activity to the environment


It happens day by day that the economic activity of a company influences negatively the situation
of the environment, so sauses environment pollution: water pollution, air pollution, earth
pollution (by placing dangerous wastes into it) etc.
These external negative effects generally are not intentional but they cause great losses
sometimes irreversible to the natural environment.
The fast increase of the number of people in the world, the expanding industrial activity in the
20th century can be caused entirely that our natural environment formed in thousands of years has
suffered a significant damage in a short period of time.

The environmental protection


For the European Community it became clear in the 50s that also the environmental protection is
one of the areas where it is necessary to create a common policy. The first action program started
in 1973.
The Single European Act was a s ignificant change in the area of the common policy because
this document istitutionalized the common policy of the environmental protection:
it created norms and value limits about air, water soiling etc.
it widen the action sphere of the environment protection policy
it made the conception of the economic growth based on the consideration of the view point of
the environment protection an essential principle
The Treaty of Amsterdam: has confirmed, or rather has put these principles to a higher level.
The aims of the common policy of the environment protection are:
the conservation, the protection and the improvement of the quality of the natural environment
the protection of the human health
the considerable and rational utilization of the natural resources
measures on international level for the solutions of the regional and global problems about the
natural environment
The instruments of the protection in the Union
1. Action programs
2. Legislation
3. Financial resources of structural funds, cohesion funds and credits of the Eurpean Investment
Bank

The Fifth Environmental Protection Programme of the European Communities began in


1993; this offers a philosophy of action that could, along with the harmonised management of
environmental, economic and other sectoral policies, also be a guide to Hungary. Gradual
European integration poses a substantial challenge for Hungarian environmental policy. Primary
tasks include the drafting of an implementation schedule for full environmental harmonisation
(directives, standards, policy), the harmonisation of the Hungarian environmental statistical
information system with the Eurostat and OECD systems and participation in the work of the
European Environmental Agency.
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Globalization:
Means the standardization of all the world markets to a dominant unique model in which the
circulation of the financial, commercial and productive resources.
Capital has a m uch better position than labour (mobility, flexibility, level of freedom) and
financecapital has a much better position than industrial capital and that international portfolio
investments function much more favourably than do m ultinational companies. The world
economy has a strong hierarchy. There is strong competition among companies on the same level
with the same levels of strength, but among those standing on different levels of the hierarchy the
final result of competition is obvious. One of the most important symptoms of globalization is
that finance and the real economy become apart from each other and the second one becomes
dominant in the relationship. A mutual fund represents much stronger capital than a range of
countries. Just one third of world trade is not influenced by multinational companies. Trade
between multinational companies comprises onethird of world trade.

The base of the success of these companies is the flessibility, they can:
reduce the labour cost by delocalizing of labour where it is cheaper
reduce the transport cost by settling the company near the production place of raw materials or
near the selling place
get tax allowances from the state mainly in the first period
influence the policy of the government because of their financial power

The globalization has a lot of effects:


1. Economic effects
World-wide specialization of production
Expension of turism, we can cross the frontier easier
The peoples personal freedom increases, they have a wider possibility to choose a lifestyle
different from their own, knowing a lot of different cultures in the world

The different prices and the wages become more balanced in the different part of the world
2. Environmental effects
The homogenization of cultures
Modifications on the Earth: the deforestation, the desertification
The increase of the human population and their mobility
The loss of cultural traditions
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4. Banking: functions of a central bank, types of bank

Money is anything that permits indirect exchange as distinct from direct exchange (barter), and to
do this it must fulfil the following functions:
1. Medium of exchange (acceptability): We use money to exchange goods/services which we
provide for goods provided by others. Without money we have to barter
2. Unit of account (measure of value): A price is given to a product in order to measure its
value in money terms. This enables a person to compare one commodity with another in terms of
money by giving them common unit of measurement.
3. Store of value: These days this function doesnt operate successfully, as money kept in a bank
current account for a year will not have the same purchasing power as it did originally.
4. Standard for deferred payments: Contracts between 2 pe ople will be made showing the
amount to be paid or received. These deferred payments will be stated in monetary terms.

Structure of the British banking system


Central bank
1. Bank of England
Serves as the central bank in the UK and is at the centre of the British banking system. Single
central bank, plays a major role in controlling the monetary system. Its functions:
a.) It is the governments bank: - major function;
- it manages the governments banking accounts (e.g. for the Exchequer and other government
department.).
- it advises the government on formulation of monetary policy
- it assists the government in carrying out the monetary policy.
- it handles the arrangements for government borrowing:
- short-term: principally through the sale of Treasury bills
- long-term management of government stocks which form the bulk of the national debt.
- It influences the value of sterling by selling or buying pounds to affect the foreign exchange
market prices.
b.) It controls the note issue: it has the sole responsibility for the issue of bank notes
c.) It is the bankers bank: supervises the banking system
- Each of the clearing (commercial) banks has an account with the Bank
- The clearing banks keep about a half of their liquid reserves deposited at the Bank and use these
for settling debts among themselves
- The commercial banks rely on the Bank if they run short of money or require loans.
- Fix the minimum interest rate
d.) It has international responsibilities: It provides services for other central banks and for
international organisations (IMF)
e.) It is the lender of last resort: If the commercial banks run short of cash they recall deposits
they have in the money market.

Commercial banks
are businesses that trade in money. They receive and hold deposits in current and savings
account, pay money according to customers instructions, lend money and offer investment
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advice, foreign exchange facilities.

2. Discount houses:
Functions:
- accepting short-term deposits from businesses, particularly banks, in return for a low rate of
interest
- using fund raised in this way to purchase a variety of assets (Treasury bills, B/E, gilt-edged
securities)
- providing immediate finance for companies by discounting reliable B/E, i.e. buying them for
less than their face value and holding them until they mature to obtain the full value, or reselling
them and charging a higher rate of discount to achieve a profit.

3. Clearing banks:
handle the exchange and settlement of cheques through the clearing house system. Functions:
- acceptance of deposits of money
- providing a system of payment mechanism
- supply of finance
- provision of a wide range of services

4. Trustee Savings Bank (vagyonkezeli takarkpnztr): a fully fledged bank


They offer a variety of services similar those of the other clearing banks, and aimed at the
personal customer.
- current, deposit, saving and investment accounts
- credit transfer facilities
- overdrafts, personal loans and mortgage loans
- combined credit and cheque guarantee card; travel cheques and foreign currency.

5. State banks:
- the National Savings Bank (~OTP) is operated through the Post Office
- the National Girobank is a state-run bank and is a part of the business of the Post Office, but it
is financially
independent from it.

6. Merchant banks (acceptance house): are not banks in the commonly understood sense, but
private firms that offer highly specialised services almost exclusively for business customers.
Main activities:
a.) Acceptance house activities: lending their name to a B/E issued by less well-known traders,
so that it becomes more acceptable because of the good reputation of the bank in the financial
world.
b.) Issuing house activities: It assists in raising company finance by sponsoring first issues of
company shares on behalf of their clients, or it acts as an intermediary between companies
seeking capital and those willing to provide it.
c.) Capital market activities: It involves in a wide range of other capital market operations: for
ex.
- operate some current account services for customers
- accept larger deposits, generally for one year or more
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7. Foreign banks: give service and credit to companies from their own countries operating in
Britain. A number of these banks have expanded their activities and they now make substantial
sterling loans to British borrowers.

8. There are also supranational banks such as the World Bank or the European Bank for
Reconstruction and Development, which are generally concerned with economic development.
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5. Methods of payment in foreign trade; means of payment


Selling overseas poses more problems than selling in domestic market. Delivery generally takes
longer and payment for goods correspondingly can take more time. So exporters need to take
extra care in ensuring that prospective buyers are reliable payers and that payment is received as
quickly as possible

The method of payment chosen by the seller depends on several factors:


1. the usual contract terms adopted in an overseas buyers country
2. what competitors may be offering
3. how quickly funds are needed
4. the life of the product
5. market and exchange regulations
6. the availability of foreign currency to the buyer
7. whether the cost of any credit can be afforded by the buyer or the exporter

Basic methods of payment:


1.) payment in advance:
The buyer pays the total value of the goods before delivery. It is very risky for him, because there
is no s ecurity against non-delivery. On the other hand, for the seller it is the safest method of
payment, since the risk of non-payment for the goods is totally excluded.

a.) CWO: cash with order: avoids any risks on small orders with new buyers and may even be
asked for before production begins. However, this form of payment is extremely rare in foreign
trade, since it means that the buyer is extending credit to an exporter. It is used in special
circumstances, for ex. when the buyer urgently needs the goods and he is compelled to effect
payment in advance

b.) advanced payment: the buyer pays a certain percentages of the counter-value of the goods
before delivery or production. It is used when the subject of the contract represents high value or
when manufacturing takes longer.

2.) open account:


Payment on open account offers the least security to an exporter. It is just as disadvantageous for
the exporter as payment in advance is for the importer. It is rarely used, only in the case when the
exporter has reliable financial standing. The goods and accompanying documents are sent
directly to the buyer who has accepted to pay within certain period after the invoice date.

The most common methods of payment for open account trading are:
a.) payment by a c heque: might seem to be the simplest method, but there are some
disadvantages for the exporter: exchange control, postal delays, delays in clearing the cheque,
currency exchange risks

b.) in a bankers draft payment: the bank draws a draft on an overseas bank, which is sent
directly to the supplier:
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- exchange control problems are avoided, but


- there could still be delays in the post and in the clearances between the banks in the chain of
remittance.

c.) express telegraphic money transfer: is the fastest method of sending money abroad. It costs
more than the other methods as the bank has to instruct an overseas bank (by cable or telex) to
pay a stated amount of money to the suppliers account.
Within EU the open account method of payment is increasingly popular, because it is simple and
straightforward. It saves money and procedural difficulties, but it is risky for the exporter. It is
only used when an exporter trusts the business integrity and ability of overseas buyer.

3.)Bill of Exchange (vlt)


it is an unconditional order in writing addressed by one person (drawer) giving it, requiring the
person to whom it is addressed (drawee) to pay on demand or at a fixed future time a certain sum
of money to, or to the order of a specified person (payee).
- Draft: is a B/E before it is accepted.
-Acceptance: is a B/E, when the drawee accepted the draft. He adds his signature on the face of
the B/L.

Types:
a.) sight draft: if it is made out payable at sight (on demand)

b.) term draft: it is payable at a fixed or determinable future time. In this case the buyer receives
a period of credit, known as the tenor of the bill. The buyer signifies an agreement to pay on the
due date by writing an acceptance across the face of the bill.

The buyer buys on credit and he has payment obligations. The buyer issues a promissory note, so
he makes an unconditional promise to pay a certain amount of money to an exporter at a fixed
date.
The B/E can be transferred by endorsement.

4.)Documentary credits
a.) clean bill collection: an exporter can pass a B/L to a bank, who forwards the bill to its
overseas branch or to a correspondent bank in the overseas buyers country. This bank, known as
the collecting bank, presents the bill to the drawee,
- for immediate payment if it is sight draft
- for acceptance, if it is a term draft.
In this procedure no shipping documents are required.

b.) documentary collection method of payment. The seller sends the bill to the buyer through
the banking system with the shipping documents, including the document of title to the goods.
The bank then releases the documents on payment or acceptance of the bill by the buyer. If the
bill is payable at a future time, and the seller would like to get the money, he has 2 possibilities:
- he could wait till the date of maturity and presents the bill to the buyer.
- he could go to the bank for discounting it. But in this case the seller wont get the total value of
the bill.
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c.) cash against documents (CAD) collection: In this case only the shipping documents are sent.
There are:
- documentary sight bill (documents against payment, D/P): The seller hands over the
documents to a bank and instructs it to release them only after payments made by the buyer. It is
used when there is a great distance between the partners.

- documentary term bill (documents against acceptance, D/A): Buyers buy on credit and he
requests that the supplier draws a term B/E, which calls for the payment after a certain number of
days usually 31, 60, 90 or 180 days.

Risks of the CAD for the seller:


buyer change his mind (e.g. sharp fall in demand) and doesnt pay. Than the seller can:
- grant a special discount to a buyer
- sell the goods to other person at a reduced price
- put up to auction
- bring home

d.) Documentary Letter of Credit: It is the common and safe method of payment, and it is an
undertaking by an issuing bank to an exporter through an advising bank in the exporters country,
that the issuing bank will pay for the goods, provided the beneficiary/exporter complies precisely
with all the conditions of the credit.
It is the most suitable method of payment between buyers and sellers, who have not done
business with each other before.

Types:
1.) revocable: is not legally binding, is seldom used because the credit terms can be amended or
cancelled by the issuing bank at any time without any prior notice to the beneficiary.
2.) irrevocable: most commonly used type of credit. It cant be amended or revoked without the
agreement of all parties concerned, and gives the beneficiary the assurance that he will be paid
for his goods
3.) confirmed: the advising bank adds its confirmation to the L/C and undertakes that the
exporter will be paid if he meets the term of the L/C. This types provides the seller with
maximum security.
4.) unconfirmed: the confirming bank doesnt add its undertaking to pay under credit. It only
informs the exporter of the terms and conditions of the credit.
5.) transferable: the exporter can ask the advising bank to transfer the credit opened in his
favour to a third party. In this case the amount of the L/C will be paid to that third party.
6.) revolving L/C: automatically reinstated back to the full amount after each drawing. Seller
effects delivery in partshipment. Buyer has not deposit the total value with the bank, just for
the value of the partshipment.
7.) acceptance credit: the payment of the full amount is due at maturity. The contract specifies
payment at a future date. After pr esentation of the documents the issuing bank accepts the
bill.
8.) deferred payment: it doesnt call for presentation of B/E, but the issuing bank undertakes to
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 19

honour drawings on a fixed future date, provided the correct documents are presented.

5.) Payment by cheque


A cheque is a written instruction to the bank to pay money to the account holder or to another
person stated on the cheque. It is a negotiable instrument. It can be transferred from person to
person before it is actually paid by the bank.
It can be made out to order or to bearer:
- order cheque: transferred by endorsement, it must be signed on the reverse by the named payee
- bearer cheque: may be paid to anyone who presents it; can be transferred without any
endorsement.

The things written on a cheque:


- the date from which the value of the cheque is payable
- name of payee (person the cheque is payable)
- amount to be paid in words and in figures
- signature of drawer person from whose account funds are to be withdrawn

Types of cheque:
1. open cheque: it doesnt have 2 pa rallel lines drawn across it. It can be paid out to whoever
presents it at a bank; isnt very safe.

2. crossed cheque: has 2 parallel lines across the face of the cheque from bottom to top. It serves
safety purposes, their amount may be paid only into the payees banking account and cant be
exchanged for cash except by the drawer at his own bank, or at another bank with the use of
credit card.

3. dishonoured cheques: this isnt passed for payment by the drawers bank. When a cheque is
refused for payment the drawers bank will write: refer to drawer the cheque and return it the
payee who must find out from the drawer why the cheque has not been honoured. Reasons for
ex.:
- cheque contains an error or is unsigned
- signature differs from specimen held at the bank
- cheque has been altered/post-dated
- cheque is stale more than 6 month old
- drawer doesnt have sufficient funds in account
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6. Business organisations

Organisations and their environment


People establish an organisation in order to achieve goals which they unable to achieve by
working alone as individuals. A company is a group of people, organised to carry out business or
industrial activity. Organisations are commonly classified according to their: Legal form; Size;
Ownership; Industry sector

Private sector organisations


1.) The sole trader
- It is operated by the proprietor (owner) alone or may employ several people, but the main
feature of it is that it is the owned by one person and tends to be a small business.
- This type of organisation doesnt have separate legal form, and the business and the individual
are considered to be legally indistinguishable. The individual carries on business in his name,
with the result that the individual assumes all the rights and duties of the business.

Advantages:
- The size of my business means that I need less capital (money) to start the business
- Freedom and flexibility: I have independence and need not consult anyone when making
decisions
- He neednt share his profit with anyone else
- Personal contact with all of the business and customers.
- secrecy: there is no need to disclose business affairs, except to tax authorities and to creditors

Disadvantages
- Limited sources of finance:
- Limited scope for economies of scale
- Unlimited liability. This means that if the business goes bankrupt and hes unable to pay his
creditors, they can take his personal possessions
- Lack of continuity. This means that if he is unable to run the business, even temporarily, then
often there will be no one to run it
- It is particularly open to pressure from the larger business units.
- Restricted growth.

2.) Partnership
Two or more persons in partnership can combine their resources and expertise to form business
unit.
- The maximum number of people who can form a partnership is limited by legislation to 20 in
the UK, although certain professional firms are allowed to have more than 20 people
- Partnerships are generally formed by contract between the parties. A Partnership Agreement
sets out the rights of each people, division of profits etc. If such a deed doesnt exist then it is
assumed that the profits or debts of the partnership are shared equally.
- A partner may be willing to introduce capital into a business but not wish to take an active part
in the running of the business. In such case he becomes a sleeping partner.
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- It doesnt have its own legal personality, so the partner bear unlimited personal liability for the
debts of the business.
- The withdrawal of any one partner (either voluntary or upon de ath or bankruptcy) causes the
automatic termination of the partnership. A new partnership will come into being, if an additional
partner was admitted to the partnership.
Advantages over the sole trader:
- Additional sources of finance
- Specialisation
- Sharing of responsibilities
- Sharing of losses
- Because there are more people in a partnership, there is more experience and knowledge
available when making decision, and sometimes one or more partners have specialist knowledge

Disadvantages:
- The partnership generally has unlimited liability and each partner is fully liable for the debts of
the business.
-Disagreements between partners and more partners there are, the greater is the likelihood of
disagreements occurring, and also, decisions by one partner are binding on all of the others.

3.) Limited liability (or joint stock) companies


They are association of people who join together to contribute money to the company
- It has a separate legal personality from the owners. The act of incorporation creates a new legal
entity distinct from the shareholders who own the company
- The company can make contract and it can sue and be sued. All action taken by a company are
actions of the company rather than the action of individual owners.
- Legal position of a company is completely unaffected by the death or retirement of one of the
shareholders.
- Shareholders have limited liability, which means that they are liable to meet the debts of the
business only to a limited extent (extent, that they have invested in the business).
- The status of limited liability allows people to invest in a business without having to face the
risk of unlimited liability. When a business has limited liability, the investor is only liable to lose
the amount of money he has put into the business.

a.) Private Limited Company:


- The capital of the business is divided into shares, but they cant be advertised for sale publicly.
So it cant appeal to the public to subscribe to a share. The shares arent sold on t he Stock
Exchange, new shareholders must be found privately.
- The minimum share capital is 100 pounds
- the minimum number of directors is one

Advantages:
- It can have more people contributing capital than the sole trader or partnership
- It has greater continuity than the sole trader or partnership
- They enjoy limited liability

Disadvantages:
- They arent allowed to sell shares to the public on the Stock Exchange and this may limit the
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 22

capital we can raise.

b.) Public Limited Company (PLC)


- It takes a minimum of 2 pe rsons to form a public company and there is no m aximum to
membership.
- The minimum share capital is 50000 pounds
- It must have at least 2 directors
- It has limited liability and obviously enjoys greater continuity than the other forms of business
- It can sell shares to the public and the ownership of shares can easily be transferred to new
owners via market provided by the Stock Exchange, and therefore the number of owners or
shareholders can become very considerable.
- Their size enables them to enjoy economies of scale (advantage of size)
- being able to purchase in bulk, thus obtaining the most favourable terms, particularly in
relation to price.
- purchasing equipment which save labour and expense
- finding it easier to borrow money and obtain credit

Registration under the Company Act.


Companies are established by registration under the Company Act. The founders are required to
lodge a Memorandum and Articles of Association with the Registrar of Companies and to pay
certain fees. When these documents have been registered, a Certificate of Incorporation will be
issued (bejegyzsi igazols).

The Memorandum of Association (Alapt okirat)


It states the external relationship of the company, regulates the relationships of the company with
the outside world, and consists of 6 main clauses:
1. Name of the company
2. Situation clause
3. Object clause: this states the object for which the company is established.
4. Liability clause: this is straightforward statement that the liability of members is limited by
the amount invested in shares in the company
5. Capital clause: this states the amount of capital with which the company is to be registered
and the manner in which the capital is divided into shares.
6. Association clause: this is a declaration by the signatories implying that they wish to form the
said company and that they are prepared to take up and pay for the number of shares shown on
the form beside their names.

The Articles of Association (Trsasgi, mkdsi szablyzat)


It regulates the internal administration of the company, the relationship between the company and
its members and between the members themselves. It covers matters as:
- nominal capital (i.e. face value of shares)
- issue and transfer of shares
- the rights of shareholders
- the way in which meetings are to be conducted
- appointment of directors
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Structure of the a limited liability company:


a.) The shareholders (or members) of a company are the owners and as such are entitled to the
ultimate say in the business. In a large company the running of the business is delegated to
directors, who are elected to the board, called a Board of Directors, by shareholders. In theory the
ultimate control over a company lies with the members in general meeting:
Annual General Meetings at which dividends are declared, reports are issued and directors are
appointed
Extraordinary General Meetings: they discuss special business matters

b.) Considerable power resides in the Board of Directors, whose function:


- taking decisions on behalf of the shareholder.
- setting up objectives
- determining strategy, policy
- approving plans
- monitoring progress
- company financing
- appointment senior executives

Directors have the authority to act on behalf of members. Action taken by directors are legally
binding on the company provided they are acting within their authority. To balance the authority
granted to directors, they have duties imposed on them by law:
- fiduciary duty (bizalmon alapul ktelezettsg): to use their power for the benefit of the
company and its
members
- not to allow a conflict of interest to arise
- not to take secret profit from the company.
- duty of care (gondossg ktelessge) not to act negligently.
They can be removed by normal rotation, at the retirement age or by ordinary resolution in a
general meeting.

c.) Secretary: on them law has placed a number of duties and responsibilities. It is responsible
for legal matters that concern the business. It is the chief administrative officer of the company,
usually chosen by the directors.

d.) There are some departments, each has own structure and duties:
- the administration department will co-ordinate and supervise the activities of other sections
of the firm whose function is to realise policies determined by the Board of Directors.
- the finance and accounts department has a dual role to play. It will monitor the debts owed to
the firm by customers and by the firm to its suppliers, at the same time closely watching the
overall financial status of the company.
- purchasing department: will buy raw materials to be converted into manufactured goods
through production.
- sales and marketing department is responsible for the selling of finished goods, it may be
divided into separate sections to deal with home sales and export sales.

In line organisation: staff in a department is responsible or accountable to one superior, the head
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 24

of the department. Its purpose is to ensure that staff have clean ideas about their duties, and there
is one source of instructions and little confusion.
In functional organisation: the horizontal communication is possible, but one employee may
get instructions from more director, which can create confusion.

Reports and accounts of companies


Companies are required to provide information.
Annual report consists of
- financial statements: profit and loss account (eredmny-kimutats), audited balance sheet
(mrleg), cash-flow statement
- reports from the chairman, the directors and the auditors. Include: review of results, summary of
financial result, statement of paid and proposed dividends (to give a true and fair representation
of the years transactions)

Termination of business enterprises


a.) Bankruptcy:
this doesnt apply to companies but only to individuals (sole traders, partnership)
where liabilities exceed assets, creditors can petition the courts to declare a debtor bankrupt. The
courts appoints a receiver to realise the bankrupts assets for the benefit of creditors. The assets
will be sold and the proceeds distributed among the creditors.

b.) Insolvent companies (fizetskptelen)


In the case of insolvent companies, creditors can apply to the courts for action to secure
repayment of money owing to them. This action will take forms:
- Liquidation: involves the closing down of an insolvent company. The liquidator appointed by
the court will attempt to realise the companys assets to pay outstanding debts.
- Receivership: the receiver will dispose of assets while keeping parts of the business running
- Administration: the administrator is appointed to rehabilitate (salvage) the company rather than
close it down.

Public sector organisations


Government has traditionally been involved in providing goods and services that cant be
sensibly provided by market forces: defence, education and basic health services, central or local
government has a controlling interest. They are owned and operated by the government on behalf
of the public.

1.) Nationalised industries:


Most countries have a nationalised industry sector. Some reasons why a business may be
nationalised:
1. Monopolies: Where a business is so strong that it can control the market price of the service or
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 25

product it supplies, perhaps because its competitors have been forced out of business, a
government may feel justified in nationalisation if the business exploits or abuses the power it
holds.
2. Unprofitable: There are some services which are essential to our welfare but by their very
nature are unlikely to be profitable enough for private enterprise to be interested in exploiting
them, e.g. sanitation, hospitals
3. To avoid unemployment: Where a business is likely to cease trading and thus cause a
considerable unemployment, the government may nationalise to save the jobs at risk.

Advantages of nationalisation:
1. government has the resource to undertake vast capital equipment costs which may be beyond
private enterprise, e.g. Atomic Energy. In addition it can provide resources for research into
important but perhaps commercially unworthwhile areas, e.g. medical research
2. It provides essential but uneconomical services e.g. unprofitable railway lines
3. It eliminates duplication of equipment and services e.g. water pipes, railway lines.
4. It enables large sections of the economy to be planned as a whole
5. Profits are to the benefit of the whole country as opposed to private individuals.

Disadvantages of nationalisation:
1. Ultimate bosses are politicians who may not have the expertise that a businessman has. In
addition, there is a danger that political objectives may overrule business sense.
2. State enterprise often enjoys a monopoly, and the lack of competition can lead to self
satisfaction and inefficiency.

Now governments have chosen a number of methods to transfer state-owned industries to the
private sector:
a.) Sales of shares to the public privatisation: Before shares in a s tate owned organisation
can be sold to the public, a private sector limited company must be formed. Initially all of the
new companys shares are owned by the government, and privatisation subsequently involves
selling these shares to the public.
b.) Trade sale: smaller state-owned industries can often be easily sold to private sector
companies as a complete entity. (while large nationalised industries have been broken away for
sale to private buyers)
c.) Management/employee buy-out: In case of people-intensive business, which financial
institutions may have difficulty in deciding on a value, especially in industries with a history of
poor industrial relations.

2.)Local authority enterprises


In addition to providing basic services: roads, education, housing and social services, local
authorities have operated bus services and leisure facilities. Reasons:
- to provide a valuable public service
- to earn profit to supplement the local authoritys income

3.) QUANGOS quasi-autonomous national government organisations


They were removed from public-owned organisations, and have increased significantly in
importance in recent years. Characteristics:
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- They provide services that are considered politically inappropriate for private companies to
dominate
- Their assets are vested in a body, whose constitution is determined by government, and cant be
changed without its approval.
- They have structures and process that resemble private sector organisations in terms of their
speed and flexibility.
E.g. National Health Service Trusts; Higher Education Corporations

Distinctive features of public sector organisations:


- They operate with relatively diverse and unquantified objectives
- Many of their aims that they seek to achieve are external
- They are accountable to a wider constituency of interest than private sector organisation
- For non-traded public services price is reflection of centrally determined social values
- They are frequently involved in supplying publicly beneficial services, where it can be difficult
to identify just who the customer is
- They may be required by law to supply service to specific groups, even though a market-led
decision may lead them not to do.

Other types of organisation


1.) Co-operative societies
Owned and run by a society of persons whose aim is not to make a profit but to give benefits to
the members. Co-operative societies play a tiny and diminishing part in the modern world. 2
types according to who owns them:

a.) Consumer co-operatives: societies that buy goods from a co-operative wholesale society and
sell them in a retail store.

b.) Producer co-operatives: are formed, where suppliers feel they can produce and sell their
output more effectively by pooling their resources. Popular among farmers (by sharing
manufacturing equipment and jointly selling out)

2.) Charities and voluntary organisations: (jtkonysgi; nkntes vll.)


Charities are registered with the Registrar of Charities. They are given numerous benefits by the
government such as tax concession. Charities and Voluntary organisation can act very differently
to private and public sector organisations.
- Customers may show a loyalty to the cause which goes beyond any rational economic
explanation.
- Employers often work for no monetary reward, providing a dedicated and low-cost work-force
which can help the organisation achieve its objectives.

3.) Building Societies (lakhzpt szvetkezet):


They operate on a non-profit-making basis and are concerned with personal rather than business
matters; consequently, they are considered to be on the fringe of commercial activities.
They are intermediaries between small savers and people who wish to borrow money to purchase
or improve their own home. Most of the depositors to building societies are lent out in this
manner, but some of their funds have to be retained to meet demands for cash withdrawals.
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4.) Franchise organisations


Franchise is an agreement, under which an exclusive rights (i.e. held by no one else) are
purchased for producing or selling goods and services under a specified trade-name and within a
specified geographical area. Different forms:
a.) Dealership or distributorship: in which exclusive rights to sell certain products in a defined
area are granted by the producer
b.) Licence to manufacture a product in a defined area
c.) Tied public house in which the licensee obtains his stock from a single brewer.

Business format franchise:


- The franchisor sells a business format in return for a fixed sum or a royalty. The format includes
a licence to trade under the franchisors name and to use its trade mark and logo. This right is
limited to a specific area for a specific time period. The franchisor provides a blueprint for the
operation of the business and will provide training and back-up services.
- In return the franchisee has to accept certain conditions relating to quality and purchase of
equipment and material. He pays an initial franchise fee and further payments linked to turnover
or profits are also made to the franchiser.

Master franchising system:


In it a large foreign partners are selected and awarded the rights to a large territory in which they
in turn can subfranchise. As a r esult, the franchisor gains market experience and an effective
screening mechanism for new franchises, without incurring costly mistakes.

7. Associations and alliances

The size of organisations


Organisational goals:
- Make a profit for their owners
- Maximise benefit to society or to their members
- Specific objectives: profit or market share maximisation, corporate growth or survival

Firms can grow:


1.) Internal (organic) growth: involves the expansion of the existing organisation.
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 28

2.) External growth: involves the acquisition of other firms by merger or take-over
a.) Merger: implies:
- measure of voluntary agreement
- fusing of the organisation rather than just a change in ownership
b.) Take-over (acquisition): implies that a predator organisation swallows up a nother firm by
buying its shares. Usually the company which is taken over remains distinct, but the controlling
interest is enjoyed by the predator firm.

Direction of growth types of mergers and acquisition


1. Horizontal: the combining of 2 firms at the same stage in the production of goods/service.
Reasons:
- reduce competition
- secure market domination or secure the advantage of being larger buyer of inputs
- prevent price wars

2. Vertical: merger or take-over of firms at different stages in the chain of production


- backward integration: the acquisition of the firm at an earlier stage
- froward integration: the acquisition of the firm at a later stage
Aims: to secure supplies, to control quality of inputs, to establish a distribution network

3. Lateral: the merger or take-over of firms which produce related goods using similar
techniques of production but which dont compete directly with one another. Aim: to diversify or
to achieve economies of scale

4. Conglomerate: merger or take-over of firms in totally unrelated markets. Aims:


- to overcome problems of seasonality in sales
- increase financial strength

Holding companies
In many cases merger or take-over is not followed by the integration of the business. The separate
elements owned by a conglomerate remain as separate companies. Legally the companies are
independent (retain their separate legal identity) but are wholly or partially owned by a parent or
holding company.
It is a combination of a number of businesses in this way might be used to bring together several
separate process into one unit.
Holding company: acts as an investment company and although strategy will be decided at the
centre, it is likely that the subsidiary companies will enjoy a considerable amount of autonomy. It
allows for decentralisation if necessary easy divestment or demerger.

8-9. Commerce and channels of distribution, trade, retail trade and


wholesale trade
Commerce provides the important links between the producer and consumer. Commerce can be
divided into two clear areas:

Trade is the process of changing ownership. Traders are the businesses directly involved in the
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 29

buying and selling of goods and services.


- home trade: trade takes place within a country Home trade involves the activities of wholesalers
and retailers.
- foreign trade: takes place between countries. Foreign trade involves importers (who buy goods
from other countries) and exporters (who sell goods to other countries).

Services to trade are the commercial activities that assist trade in the job of selling goods and
services. The activities that provide these services are:
1. Banking: providing short-term finance and providing facilities for easy payment transfer.
2. Finance: various institutions providing long-term finance for industry, commerce and
consumer credit.
3. Insurance: spread the risks faced by industrial and commercial businesses
4. Transport: engaged in the movement of commodities from one place to another
5. Communications:
- postal: transfer of written communication through mail services
- telecommunications: immediate distance transfer of written, verbal or data communications by
electronic devices
- advertising: provides potential customers with information about goods and services available.

Retail trade:
The part of commerce, where goods are sold to the final consumer. The retailer performs a
number of important functions:
- He buys in large quantities and cut up into small quantities.
- Outlet: provide the producer with an outlet for his products, thus saving the producer from the
need to market his own goods.
- Stocks: hold stocks which the consumer can purchase locally in small, convenient quantity.
- Choice: the consumer is able to choose from the variety of products of different producers
offered by retailer.
- Information and advice: the retailers expert knowledge enables them to advise and inform
customers on quality and suitability of products.
- Feedback: he provides a feedback of consumer responses to wholesalers and producers. This
helps the producer to become aware of what the consumer market wants, and also help to ensure
that consumers requirements are satisfied.

Types of retailer:
1.)Door to door: traders involved in this form of selling generally deal in sales of minor items of
goods and services.
- Pedlars: carry goods from door to door on foot.
- Hawkers: use some method of transport
- Mobile shops: a vehicle adapted to serve as a travelling shop.
2.) Market traders: are operate from stalls in open or covered areas, sometimes in street or areas
specially kept for markets. They are often able to keep prices low, because they avoid overheads
e.g. heating, high rent, shop fitting.

3.) Independent shops (sole traders): is owned by a sole trader or small partnership, and is
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typically sited away from town centres. It often specialises in offering a single commodity or
service. (barker, butcher)
Its advantages are:
- gives personal attention to customers
- saves customers for need to travel into town
- sometimes allows customers credit
Disadvantages:
- Cant buy in very large quantities
- p rices often higher than in larger shops
- carries a limited range of goods
- difficulties in running shop if the owner is sick

4.) Multiples: (Chain sores): are chains of shops trading under a single name of common
ownership. They are generally controlled from central headquarters and often be sited in town
centres and shopping precincts.
It enjoys many advantages over smaller retailers:
- their large size enables them to by-pass wholesalers and buy in large quantities from the
producer.
- a single national advertisement can cover all branches nation-wide.
- they have the resources to rent or buy stores in prime central sites with large car parking
space.
- They can afford to attract customers with loss leaders (goods sold at below cost price)

5.) Self-service stores and supermarkets: It is considered to be a supermarket when it has more
than 2000 square feet of shopping area and 3 or more check-out points.
Advantages:
- These shops deal particularly in pre-packed, price-labelled products.
- Loss-leaders are frequently used to attract customers
- Customers serve themselves, so they save in staff because the customers do m uch of the
work.
- Shopping trolleys reduces the customers awareness of the weight of their purchases and
encourages
impulse buying (unplanned purchase)
- They benefit from economies of scale (able to employ specialist staff e.g. butchers, bakers)
Disadvantages:
- large premises in prime areas are expensive
- pilferage (stealing) levels are high
- customers receive little personal contact
- shopping trolleys are stolen
Loss leaders: Usually the supermarkets pursue this policy, which means: cutting the price of
some popular article very much below the market price in order to attract customers to the shop.

6.) Department stores shop of shops


It is divided into commodity departments. Each department is operated like a single shop
responsible for its own profitability.
Advantages:
- customers can do the shopping in comfort
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- wide variety of goods available under on roof


- shop assistants give personal service
- sited in towns and convenient to transport and car parks.
Disadvantages:
- large central sites are expensive
- cant compete with prices of multiples
- comfort surrounding can be a drain on profit

7) Hypermarkets:
They are a very large form of supermarket with a shopping area in excess of 50000 square feet.
They offer a very wide range of goods in many specialist department similar to the divisions in a
department store.
- Parts of the hypermarket complex may be rented out to other traders.
- They are usually one of many in a chain.
- they are frequently sited on the outskirts of towns, where sites are cheaper.
- good parking facilities are provided and some late night trading

8.) Mail-order:
products are sold in a variety of ways through the mail order method:
- advertising in the press, TV, radio, inviting potential customers to buy by post.
- direct selling to customers choosing articles from a catalogue at home
- part-time agents selling to friends from catalogues in return for a commission.
Advantages
- interest free credit often given
- buying in comfort of home
- goods chosen at leisure
Disadvantage:
- prices often more expensive than shops
- difficult to assess quality from a catalogue
- can be inconvenient to return unsuitable goods.

9.) Vending machines:


- retail outlets open 24 hours a day and provide a wide variety of products (hot and cold
snacks,
confectionery, drinks, petrol).
- they are sited in busy public spaces and they sometimes suffer as a result of vandalism.

Recent developments in retailing:


1.) Shopping centre:
It is an area exclusively devoted to shops. It consists of a whole range of shops, including
department stores, chain stores and small shops. In 1986 Duna plaza was opened. It is the first
western-style shopping centre in Hungary.

2.) Franchising franchisor helps in: advising, training, supplying, advertising

3.) Use of technology: a feature of retail trade has been the increasing use of electronic
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equipment:
Electronic check-outs: Many items have bar codes on their label. At the check out these labels
can be passed through a laser beam, which reads the information and transmits it to the
electronic cash register. The register then produces for each customer a detailed list of the
items bought.
Light pens: can be used to scan the bar codes of products on t he shelves of a store. This
allows the firm to know precisely what goods are in stock. Bar codes convey information
about an item, e.g. the manufacturers name or the brand name of the product.

Wholesale trade
Wholesalers are businessmen who handle goods in the intermediate position between the
producer and the retailer, buying in large quantities and selling in smaller, more convenient lots
to the retailer. Traditionally they have always dealt in large quantities. Their premises are usually
a large warehouse divided into sections. Retailers may visit the wholesaler to choose their
purchased, or orders may be telephoned in or passed to the wholesalers representative.

Functions of the wholesalers:


1. Acting as an intermediary: He is positioned between the producer and the retailer. But there
are exceptions where the producer will sell direct to the retailer or even straight to the consumer.
2. Breaking of bulk: buying in large quantities from the producer and selling in small lots,
usually to the retailer.
3. Taking on risks: if the wholesaler buys goods immediately they have been manufactured, then
the risks will no longer be borne by the manufacturer but by the wholesaler. There is always the
risk that
- the price of a finished product may fall or
- the goods wont be needed because there is no demand.
- they can be disposed off (tlad) only at a lower price than the cost price (nkltsgi r) to the
wholesaler
- deterioration: (megromls)
- theft and misappropriation (eltulajdonts), which are specially high when goods are in
transit
4. Warehousing: by storing goods the wholesaler saves space for both the producer and the
retailer.
5. Offering credit: he may supply goods and allow the retailer to pay at some later date (trade
credit). This gives the retailer the opportunity to possibly sell the goods before he has paid for
them

Services provided by the wholesaler


For the producer:
- reduces transport costs: transport goods from the point of production
- advises producer of current market trends
- finishes goods by grading, packing and branding
- make mass production possible by ordering in large quantities and therefore reducing
production cost
For the retailer:
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- offers choice of products from many producers


- supplies small quantities to suit retailers needs
- locally situated providing quick access to goods and open until late in the evening
- advises latest trends and best buys
- pre-pack goods for the retailers shelves (graded, labelled, priced, weighted)

Types of wholesaler three basic forms:


1.) General wholesalers: operate very large warehouses sited for convenient access from many
local towns
2.) Cash and carry wholesalers: dont allow credit and dont deliver goods. Retailers come to
warehouses, select goods, pay for them and provide their own transport.
3.) Co-operative Wholesale Society: it supplies its own retail outlets, often obtaining goods
from its own factories, farms and plantation.

Elimination of wholesaler:
Sometimes the producer will by-pass the wholesaler and sell directly to the retailer (in these
cases)
- if the retailer is part of a large multiple chain, it can buy in large quantities and deal direct with
the producer
- where after-sales service is particularly important: durable consumer goods
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10. Marketing; key marketing concepts; market research, sales


promotion, advertising
Marketing: is a fundamental business philosophy. It is the management process which identifies
and meets customer requirements efficiently and profitably. The primacy of customers is the
basic principle. It is generally accepted that:
- customers needs are seen as the starting point for all marketing activity
- marketing managers try to identify these needs and then develop products, while at the same
time ensuring the achievements of profit or other organisational objectives.

The production oriented firm concentrates on e fficient, low cost production, in the
expectation that the goods will find market provided the price is low enough. Hence, the firm
strives for productive efficiency rather than responding to customer need. The product oriented
firm produces high quality goods and expect customers to buy them.
The sales oriented firm focuses on the skills of selling rather than on the needs of the buyer. It
produces a product and then considers how customers can be persuaded to buy it.
The market oriented firms starts with the customer and his need. This firm seek to produce
what the customer wants rather than sell what the firm has produced. It places the customer at the
centre and devises an integrated strategy to satisfy the customer to the mutual advantage of buyer
and seller.
3 important elements:
a.) customer orientation: organisation has a sufficient understanding of its target buyers that allow
it to create superior value.
b.) competitor orientation: the firm is aware of the short-term strength and weakness and long-
term capabilities and strategies of current and potential competitors
c.) interfunctional co-ordination: firm uses its resources in creating superior value for target
customers. It requires that the firm integrates effectively its resources and to adapts them to meet
customers needs.

Key marketing concepts:


1. Need: refers to sg which is deep rooted in an individuals personality. There are several types
of needs. According to Maslow: first, people want to satisfy their basic, physiological needs, and
after that they seek to satisfy other types of needs (security, appreciation, belong to sg, love, self-
realisation/fulfilment) The aim of a company to identify these needs and than to satisfy them.

2. Exchange: goods and services can be acquired on t he basis of exchange. Exchange implies
that each party gives sg of value to the other party.

3. Value: In exchange between a firm and its customers, one party generally expects to receive sg
that has value from the other party, in return he gives sg that the other party values.
- for the supplier, value may be represented by a payment received
- for customers value is represented by the ratio of perceived benefits to price paid.

4. Customer: is a person who makes the decision to purchase a product and pays for it. In fact,
products are often bought by one person for consumption by another; therefore the customer and
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consumer need not be the same person.

5. Market: in an international context, may perhaps be a country, but it also be a region within a
country, or a group of several countries. Equally, it may be a defined segment of consumers or
industrial users within one particular country or several similar segments across a number of
countries.
6. Segmentation, targeting and positioning: Different customers within a market have different
needs. So a company would have to adapts its offering to meet the needs of each individual. It
targets its product at a clearly defined group in a society and positions its product so that it meet
the needs of that group.

It has 3 steps:
- segmentation: A segment represents a subsection of a market where people share similar needs.
A segmentation is the dividing the market into distinct groups of buyers who might call for
separate products. People or firms within a market can be segmented according to a number of
criteria, including socio-economic(income, occupation, education), demographic (dividing the
market into groups based on va riables like age, sex, family size, religion)geographic (dividing
market into different geographical unit), life-style and behavioural factors(buyers are divided into
groups based on their knowledge, attitudes).
- Targeting: a target market is the segment towards which a business directs its strategies. The
choice of a target segment will involve the company looking inwardly at its strength and
weaknesses and outwardly at the opportunities and threats in its environment. The company will
examine whether each segment is growing or declining. (examine the demographic and the
economic environment)
- Positioning: it is necessary to define the location of a product relative to other products in the
same marketplace and then to promote it in such a way as to reinforce or change its position.
- A company could simply copy the other competitors in the market by imitating their
marketing
programme.
- It could seek to differentiate itself from the competition slightly.

7. Marketing Mix: the combination of factors that influence sales and be controlled by a
company.
a.) Product: planning and development of products or services that customers require (quality,
colour, size, packaging, features, guarantees and after sales services, name)
b.) Price: stands for the amount of money customers have to pay to obtain the product (level,
discount, payment terms, credit facilities, allowances)
c.) Place: stands for the companys activities that make the product available to target consumers.
The distribution of product through appropriate channels (location, coverage, logistics)
d.) Promotion: stands for activities that communicate the merits (rdem) of the product and
persuade target customer to buy it. It includes: advertising, personal selling, sales promotion,
direct mailing, public relations

Marketing research
It involves the systematic and objective collection, analysis and evaluation of information relating
to markets and marketing. Marketing research can be divided into the following elements:
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 36

1. Market research: Gathering information of the market for the particular product (size,
geography of the market, future potential market, customer behaviour, market segments)
2. Product research: data about aspects of and desires for the products
- evaluation of strength and weakness of existing products
- investigation of new users for existing products
- product development
3. Sales research:
- evaluation of sales methods
- measurement of effectiveness
- analysis of distribution systems
4. Promotion research: analysis of effectiveness of promotional activities; media research
5. Business economics: research into macro- and microeconomic environment
6. Export marketing research: application of domestic marketing research to foreign markets
7. Motivation research: analysis of motives of the consumer
8. Competitor research: activity of competitors, market share, trends
The research process:
1.) Definition of the problem: it is necessary to clarify the type of information required, why is
it required, and what questions has to be answered

2.) Investigation of secondary sources of data: Secondary research refers to the use of further
analysis of data collected for another purpose. The main source: government publications,
research organisations, trade associations and professional bodies. It is cheaper than primary
research but the data may suffer from 2 defects: it could be dated and it was collected for another
purpose, so it should be handled with care.

3.) Selection of primary data collection methods: There are 3 basic techniques to collect
primary data. In making this choice we should take into consideration the relative costs, the time
available, the type of information required, the type of people to be investigated, and the degree
of accuracy needed.
a.) Observation: market researchers observe how people behave. Observation takes the form
of audits (e.g. stock checks), recording devices (e.g. record viewing figures for television
channels) and watching. It is an expensive technique and provides only limited information.
b.) Experiments is used to test and assess the response of customers to changes. This might
involve changes in the product, or in packing, advertising, price and distribution arrangements.
Test Marketing is in essence an experience. It involves a limited launch of a product to test
reaction both to the product and to the way in which it is marketed. Its advantage: reducing
marketing costs and targeting a particular area before the national launch. Problems: relate to
the choice of the participants and the difficulties of controlling random variables.
c.) Survey: (of customer opinions).
- The advantage: flexible, yields a wide range of data and generated information on customer
opinions.
- It can be delivered in a number of ways: personal interviewing, postal survey, telephone
survey, panel survey (the opinions and behaviour of a regular group of people is obtained)

4.) Decide o details of research techniques: include the formulation of questionnaires and
deciding on sampling methods
a.) Questionnaires:
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- closed questions: highly structured questions designed to attract a limited range of responses
- opened questions: unstructured ones to which people are invited to answer more freely
Questions should be precise and clear, follow a logical sequence in questions
b.) Sampling: sample survey
It involves less than the whole population and it has advantages in that it reduces costs; saves
time; requires fewer resources. It is expected that a sample survey will provide information
which valid for the population as a whole but this depends on the size of the sample and how it
is selected. The larger the sample the more reliable it will be. After deciding the size of the
sample we should choose the method of selecting the sample:
Random and quasi-random methods
Non-random methods include:

5.) Analysis, interpretation and evaluation of the data: After collecting data it is necessary to
draw conclusions from it which can be of value in designing marketing strategy.

6.) Recommendation for action


The final part of the research process consists of recommending the strategy to be pursued in
relation to the product and marketing effort.

Promotion
Promotion: is series of techniques for informing, influencing and persuading customers. Aim:
increasing sales of specific goods and services.
Forms:
1.) Advertising: is one-way communication to promote the sale of goods via paid-for
advertisements in the media.
2.) Publicity: is a promotion via press releases to the news media. Press releases are issued in the
expectation that they will be given editorial mention at no charge.
3.) Direct mailing: involves direct communication with customers, either in the form of a letter
addressed to the recipient (= mail shot) or an unaddressed communication (=mail drop)
4.) Packaging: is promotion through design and display. The intention is to create an impact at
the point of sale.
5.) Sales promotion: includes a range of activities such as competition, gifts, point of sale
display, leaflets, sponsorship
6.) Personal selling: is a promotional presentation made on a person-to person basis. The
significant feature of this activity is the two-way discussion between salesperson and potential
buyer.

The Promotional Mix:


The exact combination of promotional activities will vary with the product. The mix used for a
particular product will be affected by a variety of factors:
1. The nature of the product
2.The nature of the market and its customers
3. The product life cycle
4. Relative costs and availability of funds
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Firms will seek the promotional mix which is most effective in terms of achieving its objectives,
subject to the usual financial constraints.

Promotional objectives:
The main objectives are to increase sales and profits, beside them there are some particular
objectives:
- to increase awareness of the product: task is to make potential customers aware of the existence
of product.
The next step is to develop a preference of the product.
- to target particular market segments
- to position the product in relation to its main competitors.

Advertising
involves the use of various media to relay promotional messages. It is a part of the marketing
mix, being used to make a product or service known to the customers and to persuade them to
taste and buy the goods. Advertising will only be successful if the chosen message and the media
are appropriate. An inappropriate message will seriously harm the product.

There are 2 types of advertising:


- An informative advertisement: simply gives information.
- A persuasive advertising doesnt just inform (It only gives the minimum of information) but it
tries to create an image of a product. The customers believe that they try to identify with the
people in the advertisement by buying the product.

Choice of media
- newspapers - high coverage, relatively low cast, local newspaper are selective geographically
- short life, no movement or sound, problem of gaining and retaining attention
- television - high coverage; visual impact; sight, sound an motion all in one; demonstration is
possible
- high cost; conveys only limited information;
- radio:- geographically selectively; low cost,
- low attention non visual
- cinema- locally; high selectivity
- low cinema attendance
- outdoor posters: - high in coverage; high readership; low cost; comparatively long life
- only conveys small amount of information
- magazines - target selected audience; relatively long life
- but: high cost; low in flexibility, no sound or movement
- direct mail: - selectively, flexible, conveys large amount of information
- high cost, low acceptance

Specific reasons why we may use advertising:


- to announce a new product or service (a prospective buyers are presented with details of a
new product)
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 39

- to expand the market to new buyers:


- to announce of modification or a price change
- to maintain sales and to remain: the successful advertisement is continuos
- to educate customers- when the goods needs careful explanation

Sales promotions
a form of one-way communication, but unlike advertisement it doesnt involve a paid medium.
Types:
1. Consumer promotions: SP is designed to stimulate consumer purchasing, including samples,
coupons, rebates, Its aim to draw attention to product; to encourage sales, to increase use rate, to
expand off-season sales
2. Trade promotions: SP is designed to gain reseller support and to improve resellers selling
efforts, including discounts, allowances, free goods, co-operative advertising. Its aim is to
encourage the dealer to push the product; to gain shelf space, to expand distribution.

Sales promotion techniques


1. Immediate customer incentive: buyer is rewarded concurrently with purchase. E.g. free
samples, bonus pack, price promotion
2. Delayed customer incentive: purchaser has to take additional action like mailing in an
application leaflet or has to await the outcome of chance. E.g. coupons, trading stamps, cash
refund on mail order, competitions
3. Point of sale display: counter displays
4. Exhibitions
5. Sponsorship: a sponsor meets some of the expenses of the event, to which the sponsors name
is normally attached, and obtains a large amount of free advertising space.
6. Performance-related incentive: bonuses, competitions, supply bonuses

Public Relations: practice is the deliberate, planned and sustained effort to establish and
maintain understanding between an organisation and its public. The relationship between PR and
advertising is that unless people understand an organisation or its products there can be no
goodwill, and advertising may be a waste of money and so fail to sell. Thus, PR can have the
effect of making advertising work. This is because customers are more likely to be persuaded to
buy something they know about and trust.
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11. A business transaction

Enquiries
A great number of business transactions start with an enquiry, which often opens a new and
perhaps very valuable connection. Firms who are in the market for certain goods try to secure
sufficient quantities of them at the right time and on the most favourable terms. Therefore they
try to obtain as many information as they can about the goods needed.
If you have to look for your source of supply, or if you do not know exactly at what price or on
what terms you can obtain the goods, you send out an enquiry to one or more possible or likely
suppliers. It can be addressed either to a firm with whom the writer has had business connection
or to new ones, which should be more explicit and complete. You might want to see what a
material or item looks like before placing an order. Most suppliers are willing to provide samples
or patterns so that you can make a selection.

Most letters of enquiry are short and simple, but it should say clearly what is wanted. send
printed enquiry forms, eliminating the need for a letter
- the letter contains briefly and clearly what the firm is interested in, and this is all the receiver of
the letter needs to know.
- In many cases it is advisable to be a little more explicit especially when the object of the
enquiry is to obtain a special discount or advantageous terms for regular orders. Your letter must
be attractive to the supplier

A first enquiry should include:


- short introduction:
- a brief mention of how you obtained your potential suppliers name. Source may be: embassy,
chamber of commerce, exhibition, fair, advertisement, sy recommended it.
-specify what you want: a full an precise description of the goods needed (quantity, quality, price
limit, special requirement)
- Some indication of the demand in your area for the goods which the supplier deals in
- ask for concession or discount
- A closing sentence to round off the enquiry

Types of enquiry:
a.) General enquiry: asking for the latest catalogues, price lists, samples; written on postcards or
special printed forms.
b.) Special enquiry: requesting more detailed information.

Asking for an estimate or tender


Estimates are quotations to complete a job of work, e.g. installing a new heating system.
Tenders are similar quotations often used when the job is much larger, e.g. building a complete
factory. Very often, when this sort of work is for a government, or is a large undertaking, an
advertisement is placed in newspapers.
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Offers
The reply to an inquiry may be either a simple one, e.g. a short letter accompanying catalogues,
price-list etc. or it may be a detailed offer. There are two kind of offers: the unsolicited offer and
the offer in reply to an enquiry.

1.) Unsolicited offers (Sales Letters) are written on the sellers own initiative: he maybe wants to
introduce anew article, to promote sales, reduce his stock or offer his customer a line in which he
thinks that the buyer might be interested. It requires great skill to interest a customer in an article
for which he has not asked. (Advertising aimed at a carefully selected group) You must:
- Attract the readers attention: excite his curiosity and so induce him to read further
- Make him desire to have the product or service that you are offering:
- Convince him that goods/offer has special features, and that is in his interest to accept it
- Make him take action. It is good idea to enclose a s tamped and addressed envelopes,
business reply letters so that it doesnt cost him anything.

2.) Offer in a r eply to an enquiry: seller sends in reply to his customers inquiry. He should
encourage or persuade his prospective customer to do business with him.
- A simple answer, that you have the goods is not enough, because he might have made other
inquiries.
- Mention one or two selling points of your product, including perhaps any guarantees you offer
- If you dont have the goods required, but have an alternative (substitute), offer it to him
- If you dont have what the enquirer asked for, tell him, and if possible refer him elsewhere
- Make sure that you enclose current catalogues and price-lists and if prices are subject to change,
then let him know.

Certain product (machinery) may need demonstrating. In this case the company might send a
representative. They could, however, suggest that the customer visits their agent in his own
country.

Offers are usually made without engagement (ktelezetts), when the seller reserves the right to
change the conditions of the offer.

If the company makes a firm offer, it means he binds himself to deliver the offered goods in
compliance with the condition stated in the offer, provided that the order is given within a fixed
time. So he will hold the goods for a certain time until the buyer orders.

If a buyer doesnt accept the prices and terms offered by the seller, he can make a counter-
proposal with the object of obtaining better prices or terms, or a shorter time of delivery. As a
result, the seller may make concession, particularly for an introductory sale, of if the customer
places a large order.

Manufacturers and wholesalers sometimes allow discounts to be deducted from the price. They
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may allow a
- Trade discount to sellers in similar trades
- Quantity discount for orders over a certain amount
- Cash discount if payment is made within a certain time

Quotation
Sometimes they send a quotation with the offer. It must be the most explicit. All details should be
clearly set forth so that the customer knows exactly what he will get for his money. This makes a
good impression too.
- quality: a full description of the goods: as precise and complete as possible according to their
nature
- quantity of the goods in customary units.
- price: what does the quoted price cover (transport cost, packing, services); refer to Incoterms
- method of transport : sometimes a choice of methods and routes can be offered
- Terms of delivery
- time of delivery:
- prompt (offered goods are sent from stock);
- future (goods are not in stock, must be manufactured);
- partial (goods are delivered in part-shipments);
- deliveries on call (goods are placed at the buyers disposal when he needs them)
- place of delivery: point at which the goods are to be placed at the buyers disposal.
-Terms of payment: state clearly the currency you want to be paid in, and the mode of payment
(L/C, CAD, grant credit)
- Insurance: who is to take out insurance
- Validity of the offer
- Arbitration clause: it is advisable to suggest arbitration.

Tender
A firm offer to a governmental department or to a local (municipal) authority to execute exactly
specified work or to supply goods required, at a fix price.
- Invitations for Tenders are often issued by advertisement
- To enable tenderers to estimate the cost and to quote a p rice, a s pecification may be sent to
them, giving a detailed account of the work to be done and the goods to be supplied. If the
volume of the product needs, a tender-documentation is made. It contains the general rules, the
terms of technical and terms of trade as well as the date of submission. It is a deadline, so if you
submit the tender after that date, it wont be accepted.

Orders
If the sellers offer is right, and his sales letters have caught the buyers eye, an order may be
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 43

expected:
- Accuracy is essential in the placing of an order: An error in quoting a catalogue number, or
mistyped figure in a quantity column can cause trouble
- Clarity is needed: The buyer must make clear to the seller exactly what he wants. The
description of the goods precisely is not enough, there is a need for the method of transport,
packing, delivery etc. He may require some special documents for his own use to satisfy import
regulations.
- Orders are usually written on a companys official order form, which has a date and a reference
number. In most cases an accompanying letter or covering letter is also sent. Even if the order
made by telephone, it must be confirmed in writing.

Details of an export order:


1. Quality/description of the goods
2. Quantity in customary units
3. Alternative: alternative goods acceptable if exact goods required are not available
4. Documents required such as B/L, Commercial Invoices, Consular Invoices, Certificate of
Origin, etc.
5. Packing and marking
6. Shipping and forwarding
7. Terms of payment and delivery
The giving of an order doesnt constitute a contract, because the contract is an agreement to
which at least two parties are required. A supplier who receives an order is entirely free to accept,
ignore or reject it.
- If the supplier accepts an order, he acknowledges receipt of the order and this acceptance then
concludes the contract, so the acknowledgement of the order has legal significance. The
acknowledgement should close with an assurance to the customer that every care will be given to
the order or that he may rely on getting the goods he ordered exactly when and where he wants
then. Such an assurance is likely to built up goodwill.
- A seller may reject (turn down, decline) an order for various reason: shortage of labour, lack of
raw materials, industrial conflict In this case he has to give a reason, which may or may not be
the real reason for the refusal, but if you give an explanation it should be a plausible one.

Sometimes wholesalers and retailers want to see how a line will sell before placing a firm order
with the supplier. They may be able to do t his by getting goods on approval or on a s ale or
return basis. In these cases the supplier would have to know the customer well, or would want
trade references. He will specify a time limit before which the goods be returned or paid for.

Types of order:
1. trial order: when the buyer wishes to introduce a new line of goods into his local market, and
he wants to know for himself the quality of goods, he gives a trial order.
2. Repeat order: when the buyer orders the same goods on the same conditions as in the past, he
need not stipulate all the particulars in detail again, merely refers to his previous order.

Complaints, adjustments and arbitration


Non-fulfilment of the contract may be caused by the seller or the buyer or by Act of God:
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1. Act of God: When a superior force causes the damage, which cant be controlled and
unforeseeable (war, strike, riot, civil commotion, shipwreck, flood.), for which neither party can
be held responsible. When an unforeseeable circumstance arises the other party must be informed
and an official certificate of competent chamber of commerce is sent to him. When they cant
resolve the problem, they terminate the contract.

2. The seller is at fault: the most usual causes for lodging a complaint (reklamcit bejelent)
1.) Defect in quality: wrong goods were sent or goods may be of inferior quality
2.) Quantity of goods received: not enough goods or too many goods were sent. If less goods
have been delivered, the buyer may refuse to accept them altogether or may accept them as a
partial delivery and ask the delivery of the rest of the consignment. He may pay for what has been
delivered and cancel the rest of the order.
3.) Delay in delivery:
- buyer may buy the goods elsewhere at the sellers cost and claim compensation for the loss
caused by the delay (covering purchase)
- in case of non-observe of delivery date the seller has to pay penalty. Contract usually include a
penalty clause to protect parties against loss of damage.
4.) Unsuitable or faulty packing: can cause damage to the goods in transit; broken cases may be
pilfered. In this case the insurance companies wont accept responsibility. The buyer may accept
damaged goods if the supplier offers a discount, but if the goods are badly damaged they may be
unsaleable, and in this case the buyer will demand replacements.
5.) Other defects: documents arent in order, there is a mistake in the invoice, discrepancy
between the documents and L/C.
6.) damage: this is usually a matter for the insurance agent , who must investigate what
happened.

3. The buyer may be at fault:


1.) he may refuse to accept the goods without sufficient grounds or may cause difficulties by
omitting to give transport instructions in time. In this case the seller may store the goods at the
buyers expense, or he is free to dispose of them after a certain period of time, and claim damages
if he has to sell the goods at a lower price.
2. refuses to pay though he has already accepted the goods. In this case it is necessary to force
payment by sending reminders.

Adjustment (intzkeds)
The response to a complaint should always be polite. If you write an adjustment you should
1. express regret for any inconvenience caused by your mistake
2. assure the buyer that you will correct the mistake
3. offer any other remedy
4. explain the reasons for the delay, damage, wrong consignment, bad packing or inferior quality
- if the customer is at fault: write a tactful letter explaining why you think so
- if the error, damage or delay is not your companys fault, then you should say that it is due to
circumstances beyond your control
Offer the services of your representative, who can visit the buyer and help to arrange
replacements.
- if the order was short-shipped, you should despatch the goods which were not sent as soon as
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you can. It is good to arrange payment franco domicile, which means that all costs are paid to the
consignees warehouse. This can be a sign of goodwill and may prevent customer from changing
his supplier.
Arbitration: (brsgi eljrs)
The endeavour of every foreign trading companies is to prevent any complaints or disputes
arising out of the contracts or commercial transactions. If a dispute arises, parties to the contract
should always settle it in a friendly, satisfactory way. It may happened that disputes cant be
settled in a friendly way, then the parties are obliged to resort to law or to refer the matter to an
arbitration court or arbitration tribunal.

Arbitration Court: (vlasztott brsg) are independent bodies attached to chambers of


commerce and similar institution (Commodity Exchange), whose aim is to decide disputes
resulting from business contract in a rapid, simple and expert way and at the lowest costs
possible.
- International agreements (New York Convention of 1958) have been signed by a great number
of countries in order to make the awards of arbitration courts enforceable abroad.
- Arbitration must be agreed on i nitially, it cant be imposed afterwards. An arbitration clause
must be inserted in the contract. An agreement to refer a matter to arbitration doesnt prevent
either party taking legal proceedings instead.
- When there is a dispute both parties choose an arbitrator selected from the list of arbitrators, and
they will decide the dispute. Where there is more than one arbitrator, an umpire is appointed. His
decision is final is the arbitrators fail to agree. The decision of the arbitrator is called the award.
The award of arbitration is final.

Pricing and sales


Price is all around us. We pay:
- Rent for our apartment
- Tuition for our education
- Fee to our doctor or dentist
- Fare to airline, taxi and bus companies
- Rate to the local services
- Charges and interest for the money we borrow from a bank
- Toll for driving our car on a motorway
- Premium to the company that insures us
- Honorarium to a guest speaker
- Bribe to a government official to help some character steal.
- Dues to trade union
- Retainer to our regular lawyer to cover his services
- Salary: price of an executive
- Commission: price of a salesperson
- Wage: price of a worker

Factors to consider when setting prices: (before a company quotes a price for goods)
1. Calculate in advance the overall costs: total costs of production cost, shipping, insurance etc.
From these figures you can work out the unit cost. Profit margin, at least 10%. So when a
company gives a quotation for a model, a they have built into the price their overall costs and
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 46

profit margin.

2. Law of supply and demand also affects the price of goods: if a product is in demand and not
many firms can supply the product, then the company can charge a higher unit price. Making
goods in large quantities is comparatively cheaper than producing goods in small quantities. If
there is a big demand for a model, a company can produce it in large quantities and they should
be able to quote a lower unit price.
Two departments in a company deal with pricing and selling goods:
- Accounts Department: handle the forms involved in charging for goods (invoice and
statement)
- Sales Department: handle the basic forms involved in selling goods (order, delivery or advice
note)

Export sales contract


In the formulation of the contract, after several negotiations, particular care should be taken
regarding the preparation of its term. An export sales contract also has regard to the cargo
delivery terms reflecting the contract of carriage, insurance, and finance arrangements.

Details of a typical export contract:


1. The exporters (sellers) and the importers (buyers) registered name and address
2. Purpose of the contract
3. The number and quantity of goods precisely and fully described
4 Price: It can be in the sellers currency or in some other currency which is not likely to vary in
value significantly throughout the contract duration.
5. Terms of delivery: the correct Incoterms 2000 should be selected
6. Terms of payment: which requires careful consideration.
7. Delivery date/shipment date period: seller should check whether the delivery date quoted is
realistic, and the shipping or air freight space is available on the date or period specified.
8. Methods of shipment: (container, cargo wagon, Ro/Ro or air freight). An increased volume of
trade is now conveyed under combined transport operation arrangements.
9. Method of packing: It is desirable both parties agree on the packing specification to ensure no
dispute later arises regarding packing.
10. Cargo insurance policy or certificate terms
11. Import or export licence details or other instructions: the period of their validity must be
reconciled with the terms of payment and delivery date.
12. Shipping/freight/documentary requirements and/or Instructions.
13. Contract conditions: sale, delivery, performance (quality) of goods, arbitration
14. Law of the country under which it will be enforced
15.Signature of both parties + date recorded

The term of the contract will vary by circumstances but it can also include agency involvement,
after-sales activities e.g. availability/supply of spares, product servicing, training,
advertising/promotion cost
A copy of the contract should be retained by each party. The export invoice contains the
contractual terms.
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The transportation (forwarding)


A forwarder (szlltmnyoz) makes transport contracts and other contracts for others goods, in
the own name but for the principals (megbz) account, on the basis of a forwarding contract, in
exchange for a premium.
They organize the transport of goods in the world in the most favourable way for the principal,
utilizing their knowledgement about the market and their connections.
Employing a forwarder agency means an additional cost for the company, but in case of regular
transports, for long distance it also means a saving in the transport costs because the forwarder
may find the cheapest a nd most convenient solution for the transportation of goods to a given
place.
Over these forwarders get some reductions in price because of the bigger quantity of goods
transported, and a restitution of freight in the end of the year from the carrying companies, in case
of orders in great volume, and from this restitutions forwarders give a percentage to their
principals.

Basic duties of forwarders:


commercial and organizational activity by which goods get to the buyers
search for new technics, ways, possibilities of forwarding
makes the necessary contracts
fill in the necessary documents
gather together and distribute goods according to the directions and the methods of transport
store goods temporarely
logistic activity
give advices

Insurance

Importance of insurance
All individual and organisation face a wide variety of risks, but only some of them actually suffer
a loss during the course of a year. To offset the possible effect of loss, all those at risk can
contribute a small sum of money (premium) to a fund operated by an insurer company. Managed
efficiently, the fund will be sufficient to compensate (indemnify) those who suffer a loss. The
result of this, the risks are spread/shared between the many people and organisation that ha ve
contributed to the insurance pool.

Many businesses wouldnt be formed if they had to face all the risks of the enterprise. So the
insurance relieves business people from some of the risks they face. Much of the money collected
by insurance companies in premium is invested in industry, thus giving resources and
encouragement to economic activity.

Uninsurable risks
The success of insurance is based on a statistical analysis. From statistical records of claims
underwriters can calculate the probability of a loss occurring and fix the appropriate premium.
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They have to judge correctly how much they should charge to cover a particular risk, if they are
to have sufficient money in the pool to pay compensations
Examles of uninsurable risks:.
- when the probability of loss is inevitable (loss/damage caused by inherent vice or delay)
- where there is insufficient past experience to assess the premium
- if the proposer doesnt have insurable interest
- against fair wear and tear such as rust and corrosion
- loss, damage or expense attributable to wilful misconduct
- inadequate packing

Basic principles of insurance


a.) insurable interest:
- only the person who stands to suffer financial loss or liability can insure against a particular
risk
- to have insurable interest, the insured must own, or be responsible for the article to be
insured.
b.) utmost good faith (legnagyobb jhiszemsg)
- It requires parties to an insurance contract to be truthful: insured must disclose all relevant
facts to the
insurer, insurers must honour all the promises in their policy.
c.) indemnity (biztostk)
- the insurance principle by which policyholders are compensated for the loss incurred
- insured shouldnt profit it if the event insured takes place
- if the insured overinsures an item, in the event of loss he will only be compensated for the
true value
- if an item is underinsured, the policyholder will only receive a proportion of the loss.
- contribution: it applies when more than one insurer is liable for a loss.
- subrogation (helybe lps) Having received the compensation from the insurer, the insured
has no
further rights over the item insured.
d.) proximate cause (kzvetlen ok):
- It states that the insurer is liable not only for a loss caused directly by a risk insured against,
but also
what is directly related to it.

Policy: is the evidence of the contract of insurance between the insurers and the insured. The
insured pays the insurer a certain premium and the insurer undertakes to compensate him if a
loss or damage should occur.
Proposal form: the form on which you apply for insurance cover. The question on which must
be answered truthfully. All information that may assist the insurers in judging the risk
correctly must be given.
Premium: is a regular payment that has to be made by the insured under the terms of a policy. If
the premium isnt pay when due, the policy lapses, so it becomes void and the insured loses
all rights in connection with it.
Insurable risks: include such items as fire, burglary, storm, collision, explosion, breakage, theft,
pilferage and marine disaster.
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Claim: a sum of money demanded under an insurance agreement for loss or damage. If an
insured person suffers a loss as a result of the peril against which he has insured, he is
entitled to be indemnified for the loss. The correct procedure is to make a claim on t he
appropriate claim form, which will then be considered by the insurance company.
Reinsurance: is the sharing of a large risk among two or more insurers, each of whom takes
responsibility for a fixed part of any loss, and receives a like proportion of the premium.
Insured sum is usually not equal to the sum given in the invoice, but is increased by the
expenses and charges the seller has to pay according to the terms of sale. It includes the
imaginary profit: the profit the buyer expect to make if the goods reach him safely and in
good condition.
Certificate of insurance: a document issued in place of a policy. It shows the value and details
of the shipment and the risk covered. It is required when the exporter takes out open cover
with an insurer for the whole of its trade.

Types of insurance
1.) Liability insurance: It protects the insured person against his liability to pay compensation
for losses caused to others by his own actions or negligence, or the actions of these (e.g. his
employees) for whom he is responsible.
Product liability: the manufacturers are liable for their products and should compensate their
customers for any injuries their products cause.

2.) Life assurance: covers an event that will happen death.


-whole life policy: provides payment after the death of the insured with the idea of providing for
the dependants of the deceased
- endowment policy: provides for the payment of a basic sum at a certain age or on death of the
insured, whichever occurs first. This provides not only for dependants, but a useful sum of money
for the insured if he survives the period.

3.) Export credit insurance: offers protection to exporters of goods/services who sell their
products on credit terms. The exporter is insured against losses arising from a wide range of risks,
which may be categorised into commercial risks or political risks. Many private export credit
insurers offer cover for commercial risks only; these would generally include:
- insolvency of the purchaser
- default on payment by a private purchaser at the end of the credit period
- non-acceptance of goods delivered to the purchaser, where such goods comply with any
contracts in
existence.
4.) Marine insurance: covers loss or damage to the goods during sea transport.
The main sections of marine insurance are hull, freight, shipowners liability and cargo insurance.

5.) Cargo insurance: Goods in transit are exposed to various risks, which may result in a total or
partial loss of or damage to the goods. So for the owner of the goods it could cause a great
financial consequences. To avoid that, he can protect himself against the risk by taking out an
insurance on the goods.

Main types of cargo insurance:


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- F.P.A. (Free of Particular Average). means that the insurer will not indemnify for any partial
loss or damage due to minor perils (seawater damage). The cargo is only covered against a total
loss and partial loss due to major perils (sinking, collision, fire).
- W.P.A. (With Particular Average): means that the cargo is covered against total and partial loss
due to minor or major perils. (fabrics, carpets)
- A.A.R. (Against all risks): gives the fullest possible cover, but only against those risks actually
stated in the policy.

Premium rates are determined by factors:


1. mode of transport: e.g. the carrying vessel: age, classification, flag, ownership, management
of the ship
2. nature of the packing used: This has to be related to the mode of transport and its adequacy
as a form of protection to the cargo. Container shipments tend to require less packing.
3. type of the merchandise involved: some of them are more vulnerable to damage than others
4. nature of the transit and related warehouse accommodation: the shorter the transit time,
the less vulnerable the cargo to damage. The mode of transport involved influence premium
determination.
5. the type of cover needed: the more extensive the cover required, the higher the premium rate.
The extent of cover depends on terms of delivery.
6. the volume of cargo involved: a substantial quantity shipment of export cargo may obtain a
more favourable premium, but much depends on the circumstances: transport mode and type of
packing.
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12. Forms of trade control, protectionism

The aim of trade restrictions and protectionism:


- to protect domestic industries from international competition e.g. to protect infant industry.
Such an industry couldnt survive if it were expected to compete with the imports of countries
already established in the industry. And to protect declining industries and safeguard job or
maintain a high level of employment.
- to protect domestic industries against unfair international competition: the prevention of
dumping: when a firm tries to sell goods at a lower price in a foreign country than in the home
market.
- they are used to stimulate domestic activity and to correct balance of payment deficit.
- to raise revenue (especially tariff)

But:
- if protection of domestic industries is carried too far, it will restrict the level of specialisation
and will therefore limit the amount of total world output
- trade barriers increase the prices of imports and consumers may have to pay more for the goods
produced by their own domestic industries
- many domestic industries, which operate behind tariff walls are protected from foreign
competition and this may lead to inefficiency, reduced output, higher prices

Fore these and other reasons, the GATT aims to reduce or abolish tariffs, quotas and non-tariff
barriers, and to promote and develop freer world trade.

Forms of trade control


There are numerous ways in which a country may impose trade barriers. They can be
distinguished:
- tariff barriers: which affect prices
- non-tariff barriers: may effect either price or quantity directly:

I. Tariff barriers: Tariff = Customs Duty


The most common type of trade control. It is a governmental tax levied on a good shipped
internationally. Affect prices.
It serves 2 purposes:
- they raise money for the government to finance expenditures. This function isnt so important
for large industrial countries, but tariffs can be a major source of revenue in many low developed
countries.
- increase the price of imports artificially

Types:
a.) Export tariff: when it is collected by the exporting country
b.) transit tariff: if it is collected by a country through which the goods have passed.
c.) import tariff: is collected by the importing country. It is the most common type. It increases
the price of imported goods and the domestic goods will gain a relative price advantage. It is a
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deliberate attempt to restrict imports.


d.) Countervailing duty: is imposed on imports that benefit from a subsidy paid by the
government of the exporting country.
e.) Anti-dumping duty: is imposed on imports with the aim to reduce or stop imports of goods
for sale at a price lower than in the country in which they were manufactured.

Tariff can be levied in some ways:


- ad valorem duty: the tariff may be assessed as a percentage of the value of the item
- specify duty: tariff assessed according to weight, volume or other unit of measurement.
- compound duty: combination of the ad valorem and specific duty; both of them are charged on
the same product.

II./a.) Non-tariff barriers: direct price influences:


1.) Subsidy: a grant given by government to encourage the production or consumption of a
particular good or service. The competitiveness of subsidised goods can be increased in foreign
markets, because subsidy allows to sell at lower price and reduces competition.
The use of the subsidy is very controversial, because the foreign companies frequently claim that
they face unfair competition from subsidised production. It can distort normal commercial
activities and hinder the achievements of GATT purposes.
The aim: government sometimes make direct payments to producers to compensate them for
losses incurred from selling abroad.
But there are other ways in which the governments can provide assistance to their producers to
make it cheaper or more profitable for companies to sell overseas:
- providing information
- sponsoring trade expositions/exhibition/fairs
- establishing foreign contacts

2.) special fees: excessive charges for import related documents (for consular and customs
clearance and documentation)

3.) Customs deposits: are required to be placed in advance of shipment, and the minimum price
levels at which goods can be sold after they have customs clearance.

II/b.) Non-tariff barriers: quantity controls


1.) Quotas (kontingensek): the most common and type of import or export restriction based on
the quantity.
The import quota limits the quantitative amount of a product allowed to be imported in a given
year.
Export quotas may be established to assure domestic consumers of a sufficient supply of goods
at a lower price, to prevent depletion of natural resources, or to attempt to raise an export price by
restricting supply in foreign markets.

2.) Embargo: a specific type of quota that prohibits all trade. They are generally imposed for
political purposes and the effect may be economic. They may be placed on e ither imports or
exports, on w hole categories of products regardless of destination, or on specified products to
specific countries or on all products to given countries.
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3.) Boycott: prohibition of all trade with certain selected companies, usually those have traded
with political enemies.

4.) Voluntary export restrictions: agreement between two countries. One country agrees to
limit exports of particular goods to another country for a specific period of time.

5.) Buy Local legislation: Most governments give preference to domestic producers in their
purchase of goods, sometimes in the form of content restrictions (a certain percentage of the
product must be of local origin).

III. Other types of non-tariff trade barriers


1.) Standards: countries have set classification, labelling and testing standards in a manner that
allows the sale of domestic products, but prohibit that of foreign-made one. The ostensible
purpose: protecting the safety or health of the domestic population.
2.) Specific permission requirements: many countries require that potential exporters or
importers secure permission from governmental authorities before executing contracts. This
procedure is known as licensing arrangement. To gain a l icence a co mpany may have to send
samples abroad in advance. Requiring licenses may not only restrict imports or exports directly
by denial of permission, but also result in further deterrence of trade, because of costs, time
uncertainty involved in the process.
3.) Administrative delays: there may be intentional administrative delays on entry, which create
uncertainty and raise the cost of carrying inventory.
4.) Reciprocal requirements: It can occur that the importer is short of foreign exchange to
purchase what he wants. The barter transaction, referred to counter-trade often require exporters
to find markets for goods, thus may companies this type of business.
5.) Restrictions on services: Trade restrictions are usually associated with governmental
interference in the international movement of goods. Many countries depend substantially on
revenue from the foreign sale of such services as transportation, insurance, consulting, banking.
These services account for about 30% of the value of all international trade. Countries engage in
discrimination that favours their own companies.
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13. Export, import

Transport
Transport is a form of communication; a means of making contact between two distant points. It
provides services that enable workers to go to and from work, raw materials to reach the producer
and finished products to be distributed. An efficient transport system reduces the amount of
capital needed to be tied up i n stocks, because new supplies can be obtained quickly. It also
makes international trade possible.

Modes of transport
Each type of transport has its special uses. Transport users will take the following factors into
account when choosing the form of transport to use:
1. the nature of the goods
2. how urgently the consignment is needed
3. the value of each item
4. cost of the transport
5. distance the consignment must be transported
6. the size and weight of the load
7. convenient position of terminals, e.g. station, docks and airport
8. possibility of combining loads to reduce costs
9. the reputation of the carrier

1.)Road transport
Advantages:
- door-to-door service provides maximum flexibility: goods are loaded at one point and neednt
be touched until they reach their final destination. So delivery is made direct to the consignees
premises.
- fast over short distances of less than 200 miles i.e. directness of the journey
- the risk of damage reduced by lack of need for transhipment
- can reach places inaccessible to other forms of transport.
- less tied to a rigid timetable than railways
- suitable for speedy direct delivery of perishable goods
- Other forms of transport rely on road transport to connect with terminals such as dock, airport,
station.

Disadvantage:
- expensive to operate in large congested cities
- subject to mechanical breakdown
- affected by adverse weather conditions
- loads are limited in size and weight
- some roads unsuitable for very large vehicles (mainly in Europe)
- slower than railways over long distances.
- wastes resources if lorry returns empty (res visszfuvar)
- Problem of congestion (torlds).
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- cause a lot of pollution,

2.)Rail transport:
For a c entury the railways were supreme in inland carriage, but today in most countries the
railways lose market. Since the mid 1950s, considerable sums of money have been spent on
railway modernisation all over the world in order to became profitable sector.

Advantages:
- fast when actually moving, because it has private ways, which is kept clear.
- for long distance, more than 200 miles, it is more economical.
- less labour-intensive than road transport: (1 driver, 2 guards)
- more economical in fuel use
- especially suited for container transport

Disadvantages:
- terminal problem: goods must be loaded and unloaded at terminals to complete their journey to
the buyers
by road vehicle
- routes determined by railway lines and stations
- traffic density: railways operate ideally when the train is full.
- equipment costs are very high
- less economical than road transport for journey less than 200 miles
- there is more handling, and therefore greater risk of damage
- The risk of pilferage is greater.

The Freightliner Service:


It is an integration of road and rail transport. Containerisation: standard sizes of containers are
loaded direct from road transport on t o special train bogies, and at their destination they are
unloaded in a similar manner. The simplified handling results in:
- speedier and more economical
- reduced losses from damage or theft
- direct links with terminals such as ports

3.) Sea transport:


It is particularly important for those countries which are situated in an island or close to the sea,
because it provides them main link to overseas markets and it contributes to the balance of
payment (invisible income)

Four basic types of ships:


1. passenger liners: are built primarily for passenger travel. They carry some cargo. The fright
costs is high, that is why mainly high value cargoes are transported by this kind of ship
2. cargo liners: are built to deliver cargoes, and sometimes carry also a few passengers. They
operate on fixed routs and keep to a regular timetable. The vessel will sail from port to port on
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time, even if some cargoes havent arrived in time.


3. tramp ships: have no timetable and set routs. They carry any type of cargo, mainly bulk
cargoes to any port in the world. E.g. coal, grain, timber, sugar, ores, fertilisers are carried in
complete shiploads and many of them is seasonal. The ships are chartered through a charter party
agreement on time or voyage basis.
4. special freighters are purpose-built ships, which can carry special cargoes:
- container ships: semi-container ships carry both containers and general cargoes; full-container
ships carry exclusively containers
- bulk carriers: carry mainly ore and grain
- tankers: oil and other bulk liquids
- ferries: carry some kind of vehicles, wagons
Shipping is divided into 2 main classes:
1. Liner services and conferences:
Cargo liner companies provide regular traffic between ports in different parts of the world. They
are called Liner Conference, which is an organisation whereby a number of shipowners offer
their services on a given sea route on conditions agreed by the members.
Liner freight rates are quoted on a basis of weight or measurement at ships option. If the goods
are heavy (iron and steel), the freight is usually calculated according to weight. But if the goods
are light (fruit) or made of light materials (furniture) the freight is calculated according to
volume.
The deferred rebate (hsg rabat) is a device to ensure that shippers will continue to support a
conference. A shipper who ships exclusively by conference vessel can claim a rebate. In this way
the shipper has an inducement to remain loyal to the conference.

2. Chartered vessels: are used to carry such bulk cargoes as coal, grain, timber. They do not
follow fixed routes but go wherever they are needed, so they can be at the port when cargo is
required to be moved. A company wanting to charter a ship will apply to one of the world freight
markets such as the Baltic Exchange in London. This market provides a market place for the sale
of ships and the chartering of vessels or space on them. The rates are not pre-determined, but are
based on economic forces of supply and demand.
A charter party: is a contract by which the shipowner agrees to place the entire ship or a part of
it at the disposal of the charterer for the carriage of goods.

4.) Air transport


The youngest but most highly technical form of transport. Flights now go to almost every major
city in the world. It is used when the goods are urgently required or it has high value.
Adventages:
- fastest form of transport and shorter transit time reduces insurance cost
- operates to timetable, mostly on direct routes
- reduces risk of damage or pilferage (less damage in loading and unloading)
- packaging costs reduced
- particularly effective over long distances
- containers are now being used to speed up cargo loading and unloading facilities.

Disadvantages:
- high operational costs result in high freight rates
- weight and size of cargo is limited
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- sometimes affected by adverse weather condition


- relies on other forms of transport to and from airport
- not suitable for short distances
- causes noise and pollution

5.) Inland waterways (canals and rivers)


Despite the glorious past of the great canal era, this form of transport has largely been replaced
by road and rail transport.
Advantages: smoothness of movement and it is the cheapest form of transport. But these
advantages are generally outweighed by the main disadvantage which is slowness. It is important
for landlocked countries.

6.) Pipelines
It is possible to transport without using a vehicle by transfer via pipelines. They are used to
transport liquids such as oil, water as well as gas, electricity, telephone and data-lines. In case of
oil, the pipelines link the oil refinery (finomt) with various distribution depots.
Advantage:
- low cost of distribution with virtually no labour content in the distribution network
- a 24-hour availability of the pipeline and its low maintenance
- from an environmental point of view: no noise or fumes, but: during installation it cause little
disruption.
Disadventages:
- high costs of installing the pipeline system.

Transport documents
A transport document is a document that indicates loading on bo ard or dispatch or taking in
charge. Its functions are to provide evidence of a contract of carriage, evidence of receipt of the
goods (by the carrier) and, in some cases, they are also documents of title, giving the holder of
the documents title to the possession of the goods. They are necessary to prove the executing of
an order.

1.) Bill of lading


A transport document for goods shipped by sea, in which the shipowner acknowledges the receipt
of the goods and binds himself to deliver them to their destination under the terms agreed upon.

It can perform their 3 function.


a.) evidence of a contract of carriage between the shipping company and the exporter/buyer to
transport the goods by sea.
b.) receipt for the goods, and provides some details about the condition of goods received.
c.) document of title to the goods: the holder of the B/L has the right to possess the goods. Title
to the goods can be transferred by the sender by endorsement.

Types:
a.) Shipped on Board B/L: acknowledges that the goods have been actually received on board
b.) Received for Shipment B/L: acknowledges that the goods are in the care of the shipowner
for carriage on a ship, but doesnt say that the goods on board.
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c.) Through B/L, Combined transport B/L: it is used in containerised transport, the goods are
carried by 2 or more modes of transport

2.) Sea waybill or liner waybill:


A waybill is a list of goods carried. A sea waybill is a transport document which gives details of a
consignment of goods, and it acts as:
- contract between the shipping company and the exporter
- receipt by the shipping company for the goods received, and so provides evidence of shipment
The shipping company will deliver the goods to the consignee named in the bill, without the
consignee having to give the shipping company an original copy of the waybill.
It is used:
- if the exporter is sending goods to an overseas subsidiary
- if the exporter sells goods on open account terms

3.) Air waybill:


A waybill for goods transported by air: the contract of carriage, receipt by the airline for goods
received into custody. It is not a document of title.
The airline will hand the goods to the consignee at the airport of destination without the
consignee having to present an original copy of the waybill.

4.) Road consignment note or truck receipt:


It is a receipt issued by a carrier for goods that are to be transported by road. The goods will be
delivered to the consignee named in the note at the place of delivery given in the note.
- acts as both a receipt and as a delivery note
- non-negotiable, is not a document of title
- the note also specifies the name and address of the sender and the consignee, the place of
delivery and the place and date of taking in charge by the carrier.
CMR note is an internationally-approved transport document for the carriage of goods by road
through those countries that are party to the CMR.

Packing and marking


The purpose of packing is to protect from damage or loss goods in transit from the factory or
warehouse until they arrive in the hands of customers overseas. It is especially important in
foreign trade, where goods are exposed to great risk. Such risks occur at five main points:
1. when the goods are being loaded and unloaded
2. when they are being handled at the docks, airports, railheads...
3. during the voyage itself, by, sea, road, rail or air
4. when they are being transported to their final destination

The packing must be appropriate to the type of goods to be carried. The customer can also add
packing instructions. T here are various factors influencing the nature of packaging for an
international consignment:
1. value of the goods: the high-value consignment usually attracts more extensive packing
2. method of transport: The more handling the goods must endure, the stronger the packaging
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required.
3. nature of the cargo: Cargo shipped in bulk requires little or no pa cking (grain, ores, coal),
while general merchandise needs adequate packing. (apples can be consigned in cases, boxes,
cartons)
4. customs regulations in the foreign country: it should compliance with Customs or statutory
requirements
5. climatic condition: variation in temperature during the course of the transit.
6. insurance acceptance conditions: Some cargoes (fragile) may be subject to a p rescribed
packing specification.
7. the size of the cargo and its weight: reduction of overall measurements in order to save
freight cost.
8. marketing considerations: the package should fit into the overall marketing concept.
9. facilities available at the terminal: lifting equipment; not all airports have Customs clearance
facilities
10. type and size of container, cargo wagon, pallet, Ro/Ro vehicle or aircraft
11. marking of cargo packaging: each package must bear a marking code and use a symbol to
ease handling.
12. cost of packaging

Marking of cargo
All exports have to be marked in order to identify the goods, the customer to whom they are
being sent, and its destination, and to give instructions for handling. Sometimes customers
stipulated how the goods are to be marked. These usually consists of:
- initials of the firm to whom the goods are being sent
- name of destination
- customers ordering number is advisable to be included in a mark.
- number of consignments

In the package there are sometimes additional remarks, special directions or warming regarding
manner of handling, loading, which are accepted internationally. These are used to facilitate
handling and overcome language problems. For ex. fragile, this side up, ha ndle with care.
Poisonous or dangerous goods is sometimes marked with a skull and crossbones.

Brand:
It is a makers name, a trade or sign, usually officially registered and protected. It is put on goods
to make it easy for buyers to recognise the make or quality. Branded goods are marked with the
name of the producer or some other brand name chosen by him, and usually put in special
packaging before leaving the factory. The object is to make particular brand of goods easily
recognisable and distinguishable from other brands in the shops.
A trade mark is a special mark that is placed on a particular brand of article or commodity to
distinguish it from similar goods sold by other producers. A registered trade mark becomes the
property of the person or organisation in whose name it is registered, and no other producer may
us it without the owners permission. The well-known trade makes: Coca Cola, Adidas, Puma.

Containerisation:
it is a method of distributing merchandise in a unitised form thereby permitting an inter-modal
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transport system to be evolved providing a possible combination of rail, road, sea transport.
A container is a large pressed steel box capable of carrying 20 t o 30 tonnes of cargoes. It is
packed at the factory warehouse and delivered to the container terminal by rail or road and
deposited in the container parking area in the docks or airport.
Advantage:
- door-to-door service from the factory production site to the retail distributors store.
- no intermediate handling at terminal transhipment points (road/rail terminals, seaport)
- reduce the risk of cargo to be damaged or lost.
- less packing needs for containerised consignment. This produces considerable cost savings
of the
international transit and raises service quality.
- provision of through documentation or combined transport B/L.

Risks in the international commerce


Types of risks:
1. Political risks: they are in connection with factors independent from the parts of the export
affair, which they cant influence. For ex. the risk of a revolution, or the uncertainty of the
political system of the buyers country, or the risk of a crisis in the economy of the buyers
country
2. Commercial risks: they are in connection with factors which dipendend on the partners of the
export sales contract:
the risk that the buyer does not pay the goods
the risk that the buyer becomes insolvent
3. Risk of the goods: the risks in connection with the quality of the goods
4. Price risk: the risk that the prices of the goods will change in a short time. For example the
reseller buys goods in a big volume, but during this period prices decreas and he can sell them
with a loss only
5. Risk of the rate of exchange: the risk that the rate of the currency of the export sales contract
becomes depreciated
6. Transport risk:
the risk that the goods get lost completely or in part during the transport
the risk that the goods become damaged during the transport because of a wrong treatment
during the trans-shipment of the goods, or a wrong fixing or unfavorable weather conditions

Protection against risks


1. Companies can insure themselves by self insurance: they form a risk fund from the profit of
the companies

2. Companies can defend themselves with different types of insurances, throwing the
responsability upon an insurance company or a bank, in exchange for a premium:

1.) Export credit insurance: offers protection to exporters of goods/services who sell their
products on credit terms. The exporter is insured against losses arising from a wide range of risks,
which may be categorised into commercial risks or political risks. Many private export credit
insurers offer cover for commercial risks only; these would generally include:
- insolvency of the purchaser
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- default on payment by a private purchaser at the end of the credit period


- non-acceptance of goods delivered to the purchaser, where such goods comply with any
contracts in
existence.

2.) Marine insurance: covers loss or damage to the goods during sea transport. The main
sections of marine insurance are hull, freight, shipowners liability and cargo insurance.

3.) Cargo insurance: Goods in transit are exposed to various risks, which may result in a total or
partial loss of or damage to the goods. So for the owner of the goods it could cause a great
financial consequences. To avoid that, he can protect himself against the risk by taking out an
insurance on the goods.

Main types of cargo insurance:


- F.P.A. (Free of Particular Average). means that the insurer will not indemnify for any partial
loss or damage due to minor perils (seawater damage). The cargo is only covered against a total
loss and partial loss due to major perils (sinking, collision, fire).
- W.P.A. (With Particular Average): means that the cargo is covered against total and partial loss
due to minor or major perils. (fabrics, carpets)
- A.A.R. (Against all risks): gives the fullest possible cover, but only against those risks actually
stated in the policy.

Incoterms
The purpose of Incoterms is to provide a set of international rules for the interpretation of the
most commonly used trade terms in foreign trade. Thus the uncertainties of different
interpretations of such terms in different countries can be avoided or at least reduced to a
considerable degree.
The ICC International Chamber of Commerce first published a set of international rules for the
interpretation of trade terms in 1936. Last amendments were made in 2000. Incoterms describes
how the responsibilities and costs are shared by the seller and the buyer and who pays what, who
is responsible for arranging transport.
- Group E: the seller makes the goods available to the buyer at the sellers own premises: EXW
- Group F: the seller is called upon to deliver the goods to a carrier appointed by the buyer: FCA,
FAS, FOB
-Group C: the seller has to contract for carriage, but without assuming the risk of loss or damage
to the goods or additional costs due to events occurring after shipment despatch: CFR, CIF,
CPT, CIP
-Group D: the seller has to bear the costs and risks needed to bring the goods to the country of
destination: DAF, DES, DEQ, DDU, DDP

EXW: Ex Works (zembl): the seller makes the goods available to the buyer at the sales own
premises, the buyer must take delivery from the exporters factory and pay all the costs of freight,
insurance and other expense items to get the goods transported from the suppliers factory to their
destination.
FCA: Free Carrier: (Kltsgmentesen a f uvaroznak): Seller fulfils his obligation, when he
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delivered the goods to the first carrier. The goods are cleared for export.

FAS: Free Alongside Ship (Kltsgmentesen a haj oldalhoz): the seller delivers the goods
alongside the ship at the port of loading named in the contract, the buyer chooses the carrier to
transfer the goods to their destination, pays for the cost of freight from the point of shipment,
including the cost of loading the goods on bo ard the ship if loading costs are separate from
freight charges.

FOB: Free on board (Kltsgmentesen a haj fedlzetre): the seller delivers the goods on
board the ship that the buyer has specified, and pays freight to the named port of shipment on
board at the port of loading, the buyer nominates the carrier to transfer the goods, gives the seller
the details of ship and sailing time or the airline, flight number, flight date, pays freight cost from
this point, including costs of unloading at the place of destination

CFR: Cost and Freight (Kltsg s fuvardj): the seller delivers the goods on board, pays for
the cost of freight to the place of shipment, pays for the cost of loading the goods if the loading
charge is separate from the freight charge. The buyer pays for the insurance of the goods from the
time they are taken on board. He bears the risk of loss of or damage to the goods.

CIF: Cost, Insurance Freight: (Kltsg, biztosts s fuvardj): the seller arranges for
insurance of the goods from the port of shipment to the port of destination. He takes out an
insurance in favour of the buyer in the event of loss of damage to the goods during shipment. The
buyer doesnt have to pay for insurance of the goods between the port of shipment and the port of
destination.

CPT: Carriage paid to: (Fuvarozs fizetve) The seller pays the freight cost to a n amed
destination but not insurance costs.

CIP: Carriage and Insurance paid to: (Fuvarozs s biztosts fizetve): the seller pay all the
costs of freight, packing and insurance to a named destination (used for a multi-modal transport)
He has to take out an insurance in favour of the buyer for the minimum condition.

DAF: Delivered at Frontier: (Hatrra szlltva):

DES: Delivered ex Ship: (Hajrl szlltva):

DEQ: Delivered ex Quay: (Rakparton tadva):

DDU: Delivered Duty Unpaid: (Vmfizets nlkl leszlltva) duty, tax arent paid

DDP: Delivered duty paid: (Vmfizetve leszlltva): The seller must pay the cost of delivering
the goods to the named destination, having paid import duties on t he goods. The seller must
therefore obtain the import licence, pay import duties or taxes, arrange and pay insurance and
provide document that will enable the buyer to take delivery. It is the sellers maximum
obligation. The buyers responsibility is to take delivery of the goods at the named destination.
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Customs regulation in Hungary


Customs law: Statutory and regulatory provisions concerning the import and export of goods. It
came into force in 1 april 1996.
Customs territory: the national territory including customs free zones.
Customs free zones: these are parts of the state territory where any goods introduced are
generally regarded as import duties and taxes are concerned, as being outside the customs
territory and are not subject to the usual customs control.
Customs security: to cover the situations where duty has not paid although the goods involved
are liable. Customs security may take the form of cash, a b ank garantee overgaranteed by a
domestic bank, dock warrant made available to the customs authority.
Customs value:
1. Transaction value, which is actually paid for the goods when theyre sold
2. Transaction value of an identical or similar goods in the same country and at the same time
3. Deductive or computed value
Customs tariffs: the Hungarian customs nomenclature is based on a harmonised system
incorporated into the subheadings of the EUs Combined Nomenclature.
Columns: customs tariffs for preferential and most favored nation treatment, the EU, the EFTA,
the CEFTA
Types of customs clearance:
1. Clearance for Home Use: goods remain permanently in Hungary. Payment of any import
duties and taxes
2. Customs Tranzit: goods transported under customs control from one customs office to
another
3. Customs warehousing: goods are stored under customs control in a designated place, a
customs warehouse, without payment of import duties and taxes. There are public and private
warehouses.
4. Temporary administration: goods can be brought into a customs teritory conditionally
relieved from payment of import duties and taxes, such goods must be imported for specific
purposes and must be intended for re-exportation within a specified period without having any
change expect normal depreciation due to the use made of the goods.
Payment of customs duty:
immediate payment
deferred payment
exemption from customs duty: return goods sent back in an unchanged condition
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14. International integrations

1. International Monetary Fund (IMF)


Its aim is to oversee and promote international monetary co-operation and the growth of world-
trade, to ensure the the smooth functioning of the fixed exchange-rate system. This system
minimises the need for countries to devalve and revalve their currencies by providing them with
credit facilities. Member countries subscribe by lending their currencies to the IMF, the IMF then
re-lends these funds to help countries.

Drawing rights: to buy limited supplies of foreign currencies from a reserve collected and
managed by the Fund
Special Drawing Right (SDR): international reserve currency system. Each member is allocated
a specified annual ammount of SDRs in proportion to their quota. SDR drawings do not require
consultation with the Fund, do not have conditionality attached and are not subject to repaiment.
It is a new unit of account, a basket of 5 major currencies.

2. The World Bank


International Bank for reconstruction and Development. Its a result of the Bretton Woods
Agreement in 1944 to aid countries suffering from the destruction of the sec. world war.
The World Bank lends resources to nations who subscribe in proportion to their economic
importance. Makes international loans to countries whose projects are economically important
but who cant get private loans at law interest rates. In addition lends resources directly to
governments or to private concerns if the government guarantees the loan.

3. GATT: General Agreement on Tariffs and Trade


The most important trade-liberalisation activity in the post-World War period has been through
GATT, which began in 1947 with 23 members. It was a multilateral treaty. GATT gave the world
a basic set of rules under which trade negotiations take place and a mechanism for ensuring these
rules are implemented.
It functioned as the principal international body concerned with negotiating the reduction of trade
barriers and with international trade relations. Its main aim was to reduce the trade barriers and to
reach further liberalisation of world trade.
GATT was conceived as an interim measure that put into effect the commercial-policy provisions
of the ITO (International Trade Organisation). In the end the ITO was stillborn, leaving GATT as
the only international instrument governing the conduct of the world trade. The GATT entered
into force in 1948.

GATT principles:
1. Protection only through tariffs, and countries should work to lower trade barriers
2. Trade without discrimination, which is embodied in the most-favoured-nation clause, which
requires that if a country grants a trade reduction to one country, it must grant the same
concession to all other countries. All trade barriers should be applied on a non-discriminatory
basis, i.e. all nations should enjoy the most-favoured-nation status.
3. When a country increases its tariff above agreed-upon levels, it must compensate its trading
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partners for their economic injury


4. Trade conflicts should be settled by consultations and arbitration

GATT-Rounds
There were important rounds, which were named for the place in which begins. These have led to
a number of multinational reductions in tariffs and non-tariff barriers for its members.
1.) The Short-Term Arrangement (1961). This permitted the negotiation of quota restriction
affecting the exports of cotton-producing countries.
2.) The Kennedy Round was held in Genova between (1964-1967): The result of this round that
the average level of world tariffs on industrial products were reduced by 30%,the 50% target cut
in tariff levels was achieved in many areas.
3.) A New Chapter (1965) An additional chapter to the GATT on Trade and Development was
adopted, which required developed countries to give high priority to the reduction of trade
barriers to products of developing countries.
4.) The Tokyo Round (1973-1979): it resulted in overall reduction in tariffs.
5.) The Uruguay Round (1986-1994): There were negotiations on trade in goods, especially in
the following area: tariffs and non-tariff barriers, subsidies, tropical products, agriculture and
textiles.

4. World Trade Organisation (WTO, 1995)


It is the successor to GATT. It was established in 1995. Its main function is to ensure that trade
flows as smoothly, predictably and freely as possible. (This is its overriding objective.)

Differences from GATT:


1.) More global in its membership: All members of the GATT automatically became WTO
members upon a cceptance of the Uruguay Round Agreements and submission of commitments
on trade in goods and services. The WTO has more than 130 members, accounting for over 90%
of world trade, over 30 others are negotiated members. But China is not yet a member.
2.) It has a w ider scope bringing into the multilateral trading system new areas like trade in
service, the protection of intellectual property and investment.
3) Full-fledged international organisation in its own right, while GATT was basically a
provisional treaty.
4.) It administers a u nified package of agreements to which all members are committed.
GATT framework includes many important side agreements (anti-dumping measures and
subsidies) whose membership is limited to a few countries.
5.) It contains a m uch improved version of the original GATT rules. Under new WTO
agreements, the general principles are extended to important areas as trade in services,
intellectual property and investment measures.
6.) It reverses policies of protection in certain sensitive areas, which were more or less tolerated
in the GATT. Under various agreements, export restrictions on t extiles and clothing are
dismantled (lebont), trade in agriculture reformed and the so-called voluntary export restraints are
phased out.

Functions:
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1.) The WTO administers trade agreements (mainly the 28 agreements contained in the Final
Act of the Uruguay Round)
2.) Acting as a forum for trade negotiations, where countries continuously negotiate exchanges
of trade concessions to further lower trade barriers all over the world.
3.) It oversees the implementation of the significant tariff cuts and reduction of non-tariff
measures agreed to in the negotiations
4.) Reviewing national policies: Watchdog of international trade, regularly examining the trade
regimes of individual members. Members are require to notify in detail various trade measures
and statistics, which are maintained by the WTO in a large database.
5.) Setting trade disputes: When conflicts arise among members, the WTO provides several
conciliation mechanism for finding an amicable solution. Trade disputes that cant be solved
through bilateral talks are adjudicated under the WTO dispute settlement court.
6.) Management consultant for world trade. Its economists examine the global economy and
provide studies on the main trade issues of the day.
7.) Assisting developing countries in trade policy issues, through technical assistance and
trading programmes: (The Secretariat assists developing countries in the implementation of
the Uruguay Round.)
8.) Co-operating with other international organisations.

Latest results
In 1997 an agreement was reached on the liberalisation of global telecommunications trade from
1998. It is a vital contribution to preparing the world economy for the 21 st century. The Central-
East European countries start telecoms liberalisation between 2000 a nd 2005. In Hungary this
market will be liberalised from 2002.

5. The European Union


It is a unique grouping of 15 member states. With a population of over 300 million, it is one of
the largest integration in the world. The aims of the Union are essentially economic, but there is
also political and social aim of creating an ever closer union among the peoples of Europe.

Evolution to integration
1951: 6 countries signed the Treaty of Paris creating the European Coal and Steel
Community (ECSC) (Belgium, Luxembourg, the Netherlands, West Germany, France, Italy). It
was the first step to European integration and peace by pooling all their coal and steel production
under this single organisation.
1957: Treaty of Rome: The European Economic Community (EEC) was created by the 6
countries. The aim was to promote the continued and balanced expansion of the members
economies by their progressive harmonisation and integration. The preamble to the treaty
included among the basic objectives of the EC:
- growing unity among European members
- the improvement of their working and living conditions
- the progressive abolition of restrictions on trade
- the development of the prosperity of overseas countries
The initial steps towards the attainments of these objectives were
- the creation of a customs union
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- abolition of internal tariffs and other barriers to trade and establishment of a common
external tariff
- the adoption of common agricultural and transport policies
- free movement of labour, capital and services between the member states
- the elimination of distortions of competition within the internal market
- the creation of European Social Fund to improve employment opportunities for workers
- establishment of the European Investment Bank to facilitate economic expansion
- association of overseas developing countries which with the Community in order to increase
trade
1957 an other treaty was signed creating the European Atomic Energy Community
(EURATOM)
1967: The Merger Treaty: by which the ECSC, the EEC and the Euratom merged to form the
European Community
1979 European Monetary System was organised laying the ground work for a single currency

Accessions to the Community


1973 Britain, Denmark and the Irish Republic joined the EC
1981 Greece
1986 Portugal and Spain
1990 East Germany reunified with West Germany, joining the EC
1995 Austria, Finland and Sweden
1994 Norway rejected EU membership in a referendum and associate membership was
extended to countries of the former Warsaw Treaty such as Estonia and Hungary.
Major Treaty amendments:
1986 Single European Act was signed. The result was a detailed legal framework establishing
a true single market in goods, capital and services, and the guarantee of the free movement of
people by the end of 1992.
1992 Maastricht Treaty, it entered into force in 1993 creating the European Union.
1997 Amsterdam Treaty: It is an updating of the Maastricht Treaty. Among the decisions
taken were:
- transfer of some justice and home affairs issues top the first pillar
- revision to decision making process. In some cases the co-decision process is used
- incorporation of Social Chapter
- it includes an employment chapter to make job creation a formal EU goal, and to increase co-
operation in foreign policy, asylum policy and crime-busting.

institutions

European Council (Eurpa Tancs):


It is made up of the Heads of State or Government and the President of the European
Commission and assisted by the Foreign Ministers and the member of the Commission.
It meets twice a year in the capital of the member country whose head of state is currently the
president of the Council of Ministers. (Sweden)
Task: - discussing issues relating to the EU, especially foreign affairs
- it doesnt make laws
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- It makes key political decisions on of the most important, most sensitive, most
controversial, and
most difficult matters
- It sets the broad guidelines for the future action

Council of the European Union = Council of Ministers, based in Brussels. (Tancs)


A supranational and intergovernmental institution. The main decision-making body. It is
composed of one representative (usually ministers) from the government of each member state,
who are responsible to their national parliaments and public opinion.
It sets its political objectives, co-ordinate their national policies and resolve differences between
themselves and with other institutions. It is entrusted with deciding major policy issues for the
EU, which includes approving the Commissions proposed policies. It also makes the final
decision on all EU legislation.

The Maastricht Treaty groups its activities into three separate areas:
- community activities: it ensures that the objectives laid down by the treaties are attained by co-
ordinating the general economic policies of the member states and by adopting proposals from
the Commission. The decision-making process relating to the common policies involve the
Parliament in varying degree.
- under common foreign and security policy it defines common positions and adopts joint
actions, and the Presidency of the Council is responsible for implementing such measures as
representative of the EU.
- justice and home affairs: it acts mainly through joint actions and by drawing up conventions,
which recommends the member state adopt. The Council plays a predominant part in the last 2
areas on intergovernmental co-operation.

3 types of voting process:


- vote is taken by simple majority in minor issues
- consensus or unanimity: every member state has to agree, it is used in the questions of great
importance.
- qualified majority is constituted by 62 votes out of 87 if the decision is taken on a Commission
proposal, and the 62 votes must be cast by at least 10 member states in a few specific cases: Each
country has a number of vetoes related to the size of its population. E.g. Germany, France, Italy,
UK have 10 votes

European Commission, Brussels (Bizottsg)


It is the EUs civil service Its commissioners are nominated by the governments of the EU
countries for 5-year renewable terms, consist of a president, 6 vi ce presidents and 13 ot her
members. EP is consulted before the member states appoint the President of the Commission, and
the full Commission has to be approved by EP before it is formally appointed. Only the EP has
the right to censure the Commission.
Its duties:
- Initiator of EU policies and laws. It has the sole right to initiate legislation and it can exert its
influence at every stage of the process leading up to a new law. In the area of intergovernmental
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 69

co-operation, it h as the same rights as the individual member states with regard to making
proposals.
- Executive functions: it has a duty of supervision and implementation of EU policies. This
involves issuing rules for the implementation of certain treaty articles and administering budget
appropriations earmarked for Union operations and the financial funds.
- Guardian of the legal framework: it shares with the Court of Justice responsibility for
ensuring that EU law is respected. It is an impartial body which sees to it th at member states
adhere to treaties and laws, comply with EU rules and treaty provisions and decisions based on
Treaties are correctly applied. If any member state doesnt fulfil its obligation, the Commission
first asks this country to do it - but if necessary it may refer matters to the Court of Justice.
- External representative and negotiator: it represents the EU in many of its external relations.
It conducts the EUs external trade relations.
- Mediator and conciliator: The EU decision-making process are often characterised by
tensions and struggles between many different national, political interest.

European Parliament
is elected by direct universal suffrage (ltalnos vlasztjog). It sits in Strasbourg It comprises
626 members (MEPs), which are elected for 5 years. The last election was in 1999. T he
representatives are seated in Parliament by political party, not nationality and they adhere to
political and economic views rather than to wishes of the individual governments. Different
countries representatives who have similar political leanings often form coalitions.

Tasks:
- it is a political driving force, generating various initiatives for the development of Community
policy
- it is a supervisory body: it has supervisory power over the Commission and Council.
- it has veto power over the EUs budget. Together, Parliament and the Council form the
budgetary authority. It votes on t he adoption of the annual budget and oversees its
implementation.
- it consults on all EU legislation: Union legislation is formulated by a three-way process: the
Commission proposes legislative instruments, while Parliament and the Council share the power
to enact them
- 1986 Single European Act increased its powers with regard to legislation by introducing the co-
operation procedure
- 1992 The Maastricht Treaty took a further step towards giving greater legislative powers to the
Parliament. It introduces a new co-decision procedure in a number of important areas, which
gives it the power to adopt regulations and directives together with the Council.

Court of Justice, sits in Luxembourg (Brsg)


It is the chief judicial body of the EU. It is composed of one representative from each member
state. There are 15 judges assisted by 9 Advocates-General (fgysz), who submit reasoned
opinions to the court on the cases on which it must give a ruling. The judges are appointed by
agreement with the national governments for a renewable term of 6 years. Their independence is
guaranteed.
- it interprets the provisions of EU law
- It attempts to ensure that the application of the law is consistent and uniform in all member
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states
- It arbitrates in disputes between the member states and EU constitutions, and also between the
institutions themselves. Only the most important cases are dealt with the Court (sitting in plenary
session)

European Court of Auditors is located in Luxembourg


It consists of 15 members appointed by unanimous decision of the Council after consultation of
Parliament. T he President is elected by the members from among themselves for a t hree-year
renewable term. It is the taxpayers representative and it checks that all Union revenue has been
collected and expenditure incurred in a lawful and regular manner.
- It makes an annual report and special report (about issues in connection with the budget)
- It delivers opinions at the request of the other institutions.
- On its own initiative, it may at any time submit its observations on specific questions
- The Maastricht Treaty conferred full institutional status on the Court of Auditors and gave it an
additional responsibility: to provide EP and the Council with a statement of assurance as to the
reliability of the accounts and the legality an regularity of the underlying transactions.

Ancillary bodies subsidiary institutions


1. Economic and Social Committee, meets in Brussels:
It is made up of 222 r epresentatives of various types of economic and social interest. The
representatives are drawn from the member states and are divided into more or less equally sized
groups:
- employers: are drawn from industry
- workers: are officials of national trade unions
- various interests: associated either with agriculture or professions.
Its role is primarily to make policy recommendations and to offer opinions on pr oposed
legislation, especially in the social and economic spheres.

2. Committee of the Regions is located in Brussels


It consists of 222 m embers, plus an equal number of alternate members, representing regional
and local authorities. Members and alternates serve a four-year term
EU consultative body, aims to give regional government a voice in the EU decision-making
process. The COR must be consulted on a ll proposals having an impact on t he regions. In a
number of issues where regional interests are involved (notably education, youth, culture, public
health, economic and social cohesion) the Council or the Commission has to consult with this
Committee.

3. European Investment Bank its headquarter is in Luxembourg


The financial institution of the EU. It provides long-term loans and finances capital investments
in support of the Unions objectives
The EIB has legal personality and is financially independent. Its members are the member states
of EU. Its priority objective is to contribute to the balanced development of the EU. It facilitates
the financing of projects to protect the environment, to secure the availability of energy supplies
and to enhance the international competitiveness of industry and small businesses. It gives loans
to countries in Africa, the Caribbean, the pacific, the Mediterranean, Central and Eastern Europe,
Latin America and Asia.
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The Treaty of Maastricht, was approved in December 1991


It calls for establishing European economic and monetary union (EMU) and political union with
a common European currency by 1999. It created the EU, encompassing the Community and new
intergovernmental arrangements on justice and home affairs and on foreign and security policy:
- It embodies principal of subsidiarity, under which action is taken at Community level only if
objectives cant be achieved by the member states acting alone.
- introduce the concept of Union citizenship, complementing existing national citizenship and
conferring new rights for citizens of the Union to vote in election to the EP and local elections in
whichever member state they live. It confers the right to live and work anywhere in the union.
- The EU has become more democratic: while the Commission remains the starting point of the
decision-making process, the powers of the EP were increased, in particular by introducing the
co-decision procedure and by extending the scope of the co-operation procedure; and finally the
use of qualified-majority voting in the Council was extended to new areas.
- provide a timetable for progress towards economic and monetary union
- provide for establishment of a common foreign security policy conducted on a n
intergovernmental basis

1. European Economic and Monetary Union:


In 1979 EMS, the European Monetary System was set up to create a zone of monetary stability in
Europe, in which the unpredictable currency fluctuation would be eliminated and its ultimate goal
is the economic and monetary union. It contains a 3-stage programme with the aim of economic
and monetary union, and single currency. It requires that each country gives up s ome of its
independence in the economic policies:
1.) Stage 1. (began in July 1990):
The objectives were
- to complete the Single European Market by 1 January 1993
- to reduce exchange-rate fluctuation progressively
- to increase convergence of economic and monetary policy within the existing institutional
framework
- to improve co-operation between member states central banks
2.) Stage 2. (began in January 1994):
A European Monetary Institute was established in Frankfurt to help develop the conditions
necessary for the transition to the next stage
3.) Stage 3.
Objectives are
- to strengthen the co-operation of monetary policies with a view to ensuring that the member
states meet the convergence requirements for a single currency
- to make preparations for the European System of Central Banks (ESCB), which replaces the
EMI and for the conduct of a single monetary policy and the creation of a single currency in
the third stage.
4.) Stage 4
In the final stage the exchange rates of the member states currencies will be fixed irrevocably.
The single currency (Euro) will replace national currencies. The target date is 1 st January 1999.
The European Central Bank will assume responsibility for a single European monetary policy.
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The Maastricht Convergence Criteria


In order to get to a common currency, members would have to bring their monetary and fiscal
policies closer together so that inflation rates, budget deficit as a percentage of GDP, and public
debts as a percentage GDP would be reasonably similar.
1.) Inflation: not to be higher than 1,5% above the average for the 3 E U members with the
lowest rates during the previous year
2.) Long-run interest rates: to be no higher than 2% above the 3 EU countries with the lowest
rates during the previous year
3.) Stability of the Exchange rate: the national currency cant be devaluating for 2 years. In a
monetary union the currencies of each country must be convertible with the currencies of other
member countries.
4.) Budget deficit: should not exceed 3% of GDP
5.) National debt: should not exceed 60% of GDP

2. Political union
involves a number of issues, e.g. a common European citizenship, joint foreign, defence,
immigration and policing policies; and the harmonisation of social policy concerning working
conditions and employees rights. Three pillars of the EU
1.) The first pillar: the three European communities: EEC, EURATOM, ECSC
2.) The second pillar: the common foreign and security policy
3.) The third pillar: co-operation in the field of justice and home affairs

The EU Budget
The budget of the EU is a reflection of the Unions policy. The general budget of EU is financed
by means of revenue which it receives as of right.

This revenue comprises: (source)


1. A proportion of the VAT collected in the member states
2. A resource based on the GNP of the member countries. Each of the Member States contributes
to this
resource according to its prosperity.
3. Customs duties on goods entering the Community
4. Agricultural duties or charges levied on product imported from outside the EU
5. Miscellaneous revenue

Spent on:
1. Agriculture roughly half of the budget is spent on CAP (48%).
2 Structural, social and regional operations. 30% of budget is devoted to improving economic and
social
cohesion.
4 Other internal policies (3%)research and technological development; administrative expenses
5 External actions (7%) e.g. economic restructuring of the countries of Central and Eastern
Europe
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The Euro
The Euro is the single European currency from 1 January 1999. The introduction of the Euro is
the third stage of the European Economic and Monetary Union. Monetary policy in the euro zone
will be managed by the European Central Bank with the primary objective of price stability. Euro
bank notes and coins will come into circulation from 1 J anuary 2002. During the transitional
period, the use of the euro will not be obligatory, but will be possible for companies and
individuals. Financial institutions are already preparing to make euro-denominated services
(cheque accounts, credit cards) available from 1 January 1999.

The Eurozone: 11 states of 15 have joined the Eurozone, the Great Britain and Denmark did not
want to introduce it, Sweden and Greece could not introduce it because they were not adequate to
the requirements of the introduction.
The most important advantage of the Euro is that we do not change the different national
currencies, we can pay anywhere in Eurozone by the Euro.

The symbol for the euro devised by the European Commission and announced at the time of
European Council in Dublin in December 1996. The symbol has now been endorsed by the
European Monetary Institute and registered with international standards agencies.

Maastricht Treaty The Treaty on E uropean Union signed in Maastricht on 7 F ebruary 1992
(following political agreement at the Maastricht European Council in December 1991). This
Treaty, which came into force in November 1993, establishes the conditions and the timetable for
the introduction of the single European currency.

The banknotes have been designed to be easily distinguished from each other. They will be
issued in 7 de nominations. All will have a dominant colour and dedicated to one of the
architectural styles of the european history.

The coins will be issued in 8 denominations. Their face will be the saim in all the state which
have adopted the Euro, but on t heir back side there will be a picture different according to the
emission country.
Independently from the pictures on them, all the coins will have a liberal circulation within the 11
member state, so a french citizen for example can buy something in Berlin paying by an Euro
coin issued in Spain.

Common policies

1) Agriculture
For every country it is a strategic field due to economical, political and cultural reasons. Thats
why the common agriculture policy (CAP) became a unique, important part of the common
market. It accounts more than half of expenditure under the budget.
CAP was given legal force in 1960. Its main aims:
1. to encourage increased productivity through the use of technology and efficient use of
resources
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2. to promote a fair standard of living for those employed in this sector


3. to stabilise markets
4. to promote security and availability of supplies
5. to ensure that reasonable prices prevailed

CAP is based on 3 fundamental principles:


1. Market unity: all the national market arrangements had to be replaced by common, uniform
market systems to ensure a unified market to prevent competitive distortion.
2. Community preference: products produced by EU farmers are given preference over products
which can be imported from the rest of the world
3. Financial solidarity: the policy is managed through the European Guidance and Guarantee
Fund (EAGGF), which finances structural measures and covers the costs of the common market
organisation

Reforming the CAP


The CAP didnt seem to be effective, because by the mid-1980s the original CAPs were proving
expensive and surpluses accumulating. From 1984 t here have been a number of changes to the
policy.
- lower intervention prices, close to the world market price, have been implemented
- 1984: quota system was introduce to avoid overproduction. The quota is apportioned among
member states who assign quotas to farm and dairies. There are penalties for exceeding the quota.
- farmers are encouraged to set-aside land (leave their fields out of production for a while)
- transitional aid is offered for farmers to move into new markets.

2.)Regional Policy
The social, historical and cultural diversity of its regions is one of the strengths, but there is also
economic diversity. There are large differences in the levels of development in the various
regions of the Union. The most prosperous regions are 3 times as rich as the 10 poorest regions in
Greece and Portugal.
There is a danger that the gap between the Unions richer and poorer regions could grow with the
completion of the single market and abolition of national frontiers, which is a very controversial
issue. More prosperous regions tend to lie at the geographical centre, at the core of EU. The more
disadvantaged regions tend to be peripheral regions, particularly in the Mediterranean south
(Greece, Southern Italy, Spain, and Portugal), but also in Ireland.
The Unions structural policy, under which regional policy is subsumed, deals more generally
with those parts of the Union that are disadvantaged, because of their geographical position, the
age of type of their industry or because of the social composition of their population. The policy
attempts to change the economic structure of areas and industries and thereby regenerate them

3.) Social Policy


The EU is involved in the social affairs of its citizens as it recognised that economic, commercial
and political integration can only be matched by a real commitment to the welfare and standard
of life of all citizens.
Social Charter was approved in 1989 b y member states excluding UK. Aim: improving the
working and living conditions of EU citizens
Main principles:
Forrs:Khalmi Adrienn, angol tanr, adrienn.kohalmi@gmail.com 75

- The right to work in the EU country of ones choice


- The freedom to choose an occupation and the right to a fair wage
- The right to social protection under prevailing national system
- The right of men and women to equal treatment
- The right of workers to information, consultation and participation
- The right to health protection and safety at the work
The European Social Fund is the EUs main tool for developing human resources and improving
the operation of the labour market throughout the Union.

4.) Environmental Policy


Many environmental problems (acid rain, global warming, rainforest depletion) are inherently
transnational and global in their impact.

The Single European Act laid out the objectives of the environmental policy:
- preservation, protection and improvement of the environment
- protection of human health
- prudent and rational utilisation of natural resources

European Environmental Agency (EEA) was set up, based in Copenhagen. Its function is
- to provide member states with comprehensive, reliable data
- to gather information on all environmental problems in Europe.
- Water quality: EU rules set out minimum water quality standards for bathing, drinking and
shellfish
water.
- Atmospheric pollution: To combat air pollution EU rules have been set to reduce level of
pollutants
coming out of vehicle emissions and industrial factories
- Wastes and recycling: It encourages the safe disposal and reuse of waste, especially nuclear
materials
and safety measures for transport of chemicals and other dangerous substances.

5.) Research and Technology: six key areas:


a.) Quality of life: to improve this funds have been established to finance medical research, age-
related health programmes and medical technology.
b.) Information technology, telecommunications: programmes concerned with:
- office system, computer-integrated manufacture an advanced information processing
methods
- computer-aided education
-developing aids to road traffic flow
c.) Industrial technology: there are programmes concerned with new technologies, particularly
in the motor industry, chemicals, textiles, aircraft
d.) Biological resources: Biotechnology includes areas such as genetics, microbiology,
biophysics
e.) Energy: clean, safe and renewable energy resources, non-nuclear types of energy, including
solar energy, wind power
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6.) Transport Policy and Trans-European Network


Transport is essential for single market, this is why the Single European Act spelled out the
measures to be taken by the Community institutions to establish a common transport market. The
result of these measures has been an emergence of a m ore open market free of unnecessary
restrictions, stimulating free competition and helping transport companies boost their
competitiveness

Development aid:
The Lom Conventions have formed the basis of co-operation between the EU and many African,
Caribbean and Pacific (ACP) countries.
Under the Lom Conventions, exports from these countries enjoy duty-free access to the EU
market and quantitative restrictions are prohibited; only in the case of a few agricultural products
there are special arrangements.
EU also provides subsidies, special loans, risk capital and low-interest loans for development
projects, particularly agriculture, infrastructure, energy and industry.

EU expansion
Association agreements establish special links with non-member countries, which includes not
only trade liberalisation, but also close economic co-operation and financial assistance.

Two categories:
1.) Agreements to maintain the special relationship that exist between some member states
and certain non-member countries. These links are considered as a legacy of their colonial ties
with Belgium, France, Italy and Netherlands.

2.) Agreements to prepare the way for possible accession: they form a kind of preliminary
stage to accession, designed to help a country that has applied for membership to bring its
economy into line with the rest of the EU, to fulfil the conditions for accession. In the European
Agreements concluded since 1989 w ith Poland, Hungary, the Czech and Slovak Republic,
Bulgaria and Romania. EU has in principle committed itself to the long-term goal of membership
for them.

EU expansion possibilities
There seems to be 3 expansion possibilities:
1. 5 little countries would be admitted around in 2004: Cyprus, Malta, Estonia, Slovenia,
Hungary. In this case the old EU institutional system could remain, and this way of expansion
does not cause too many problems to the EU.
2. The enlargement would be in 2007, with 10 new coutries: all the applicant CentralEast
European countries, with the exception of Romania and Bulgaria. By this year the reforms of the
institutional system will have been finished.
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3. The enlargement would be postponed to 2010 or 2012, by the time the applicant countries
have closed up t o the member countries. Till that time there would be made a CentralEast
European customs union agreement. it would be the worse one for Hungary.

Present problems
1. About the results of the Treaty of Nice
It made EU possible to be expanded, even up to 27 members.
Redistribution of the votes in the Council: the 4 biggest countries would get 29 votes, the
smallest ones would get 4 of them.
They have decided about the number of members in the Comission: the big countries would
give up a seat for the new countries, but this number could not pass the 27, a bove 27 a
rotating system would be introduced.
The creation of new proportions in the European Parliament is considered unfair by Hungary,
because while we would get 20 seats in the EP, for ex. Belgium which has less citizens than
us, would get 22 seats.

2. Foot and mouth disease


It is caused by a virus which has once been eradicated from the European Union. The last
outbreak occurred in Greece in 1996. There are several possibilities how the disease could come
in EU:
* the possibility of illegal meat introduction into the EU, because of price differences, of infected
animals, especially sheep/goats, or meat, meat products, milk and milk products contaminated
with foot and mouth disease virus;
* the movement of tourists and migrants 1 from infected areas which may carry infective fomites.
The is trying to cope with this problem but the only things they can do are:
to kill ill or possibly ill animals
to disinfect everything they can: wehicles, animals, sties, themselves
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15. Hungary and the EU

The Hungarian Economy

Short History
In 1981 t he Hungarian government applied for membership in the International Monetary
Fund and the World Bank. The negotiations were completed unusually rapidly and Hungary
was admitted into both organisations in 1982. IMF membership provided a means for avoiding
the acute payment crisis, while the World Bank was expected by the Hungarian government to
provide additional funds for development investments.

In 1988, s till at the beginning of the large-scale changes, Hungary concluded a trade and
economic co-operation agreement with the European Community. In the non-preferential
agreement Hungary recognised the European Community, while the EC undertook to break down
the quantitative restrictions against Hungary. The situation was changing so fast that the
agreements were unable to move in pace with the times.
In the framework of the PHARE programme the European Community undertook to speed up
the translation of the trade agreements concluded with the Eastern-European countries into
practice. In Hungary's case, for example, the quantitative restrictions were cancelled as soon as in
1990, instead of 1995, the general customs preferences (GSP) were extended and the prospect of
loans with favourable conditions were held out.

The rapid transformation led the European Community to propose the idea of an association
agreement with Hungary, Czechoslovakia and Poland at the Dublin summit in April, 1990.
In barely one and a half years the Hungarian government reached an agreement with the EC. In
July, 1990 P rime Minister handed over the Hungarian scheme [ski:m] of association to Jaques
Delors, the president of the Brussels committee and already by late November, 1991, t he
agreement was signed. The association agreement itself entered into force on February 1, 1994,
following the ratification process. The association agreement stipulates not only industrial free
trade and the easing of trade of agricultural goods, but it also stipulates the liberalisation of
current payments, the observation of certain rules of competition law, law harmonisation, and
even the easing of certain regulations concerning employment.
The negotiations started in 1998 between the EU and Hungary in Bruxelles.

In December, 1993 the Hungarian government announced its intention to join the OECD and the
negotiations already began in half a year. In March, 1996, following the end of the OECD-
examination on t ax-policy and foreign exchange management, the OECD accepted Hungary's
membership application and the Hungarian government signed the accession document on March
29, 1996.
With Hungary's admittance into the club of the advanced countries, Hungary can take part in the
process of economic policy co-ordination of the advanced countries and it can use the advice of
OECD experts.
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In addition to membership in international financial, economic and integration organisations, it


was all too natural that Hungary wanted to join NATO. NATO has set as its aim the guarding,
enforcement and collective protection of democratic values. After joining NATO in March, 1999,
Hungary attaches special significance to its membership in the European Union. Accession to the
Union means accepting common values on t he one hand and the guarantee of the country's
security in economic and social terms, on the other.

The Hungarian economy in numbers


Three characteristics defined 1999: economic growth was considerable and macroeconomic
equilibrium indices essentially improved, in spite of signs of a global financial crisis and a certain
weakness in important export markets. GDP grew by 4.3 per cent, twice the average EU rate, and
the balance of payments deficit fell from $2.3 billion in 1998 to around $2 billion. The foreign
trade balance alone deteriorated, but a deficit which was less than $3 billion was accompanied by
a significant improvement in the balance of payments.
By the end of 1999 economic performance had reached the 1989 standard in all essential aspects.

That was another positive point: The net inflow of operating capital in 1999 w as $1.4 bi llion,
$450 million more than in the previous year. After nine years of decline and a brief period of
stagnation, employment started to grow again in 1998 ( by 55,000, or 1.4 pe r cent). The
unemployment rate declined by a full percentage point to 7 per cent, as against the 8.9 per cent
average for the EU.

But there are also major risks associated with this good news. It will prove very difficult to repeat
last year's 4.5 per cent reduction in the rate of inflation. An acute difference between Hungary's
"off-shore" area and the country's customs area persists, which is manifest in differences between
GDP and national income.

The relation of Hungary and the EU

Short history
Diplomatic relations between Hungary and the European Communities were established in
August 1988 f ollowed by the Europe Agreement signed in Brussels on December 16, 1991 ,
establishing an associated status for Hungary to EC. Hungary was one of the first target-countries
of the Communities PHARE program started in 1990 that has since provided more than 1 billion
Euro, as a non-repayable financial assistance, for economic development and restructuring,
environmental investments, public administration, human resources development and other tasks
serving the aim of preparation for membership.
Apart from Phare, the European Union provides assistance through the Instrument for Structural
Policies for Pre-Accession (ISPA) from year 2000. This programme helps the candidates to
prepare themselves for the absorption of the Unions structural funds with special regard to
environmental and infrastructure development. The Special Accession Programme for
Agriculture and Rural Development (SAPARD) is aimed at the efficient utilisation of the
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European agricultural guarantee funds and the creation of a sustainable agricultural and rural
development strategy. In the period between 2000-2006, Hungary will receive an annual amount
of nearly 140M Euro from the two programmes.

Applying the Europe Agreement


The Europe Agreement provides legal foundations for relations between Hungary and the EU
and has special significance in the process of the countrys accession. In bilateral trade, it
provides for asymmetric schedules for liberalisation of industrial trade and introduction of
preferences for agricultural products to be completed by 2001.
Obligations and tasks stipulated in the Europe Agreement have been implemented satisfactorily
by both sides. Hungary considers this process as part of the framework of adopted national
strategies and programmes.

The accession negotiations


The European Commission published its opinion about the associated countries (Avis) in
December 1997. The conclusions stated that Hungary, along with the Czech Republic, Estonia,
Poland, Slovenia, could be in the position to satisfy all the conditions of membership in the
medium term if they maintain and strongly sustain their efforts of preparation and had therefore
been found eligible for accession negotiations. The talks started in March 1998 and by this,
Hungary was admitted to the first circle of candidates and the process of its accession entered a
new, decisive stage.
Before substantive negotiations started, screening of the acquis communautaire had taken place
with the purpose of identifying of divergences between the community law and Hungarian legal
regulations. After the screening, substantive negotiations started about practically all the chapters
of the acquis. Nearly two thirds of temporary concessions or exemptions from the EU rules
(derogations) asked by Hungary during the talks were limited to three sectors, namely
agriculture, environment protection and transport.

The EUs preparations for enlargement and the Hungarian position


The Berlin and Helsinki meetings of the European Council in 1999 adopted major decisions to
prepare the Union for the next round of admitting new members. Berlin approved the financial
provisions facilitating enlargement, while Helsinki undertook the political commitment to reform
EU institutions and decision making process to suit the requirements of an enlarged Union.
Hungary, on its part, wishes to join an efficient and well-functioning European Union. We are of
the view that the Nice European Council successfully outlined the framework for the new
institutional system. Consequently, a major obstacle on the road leading to the accession of the
most prepared candidates has been removed. It is equally important that, besides confirming
again the principle of differentiation, a clear road map for the further stages of negotiations has
been approved committing both the Union and the candidates to a concrete timetable.
Hungary strongly hopes that the momentum generated in Nice will be maintained allowing the
talks to be completed by the stipulated deadline. Having received consistently high marks in the
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Commissions Regular Reports, Hungary is determined to speed up and complete its preparation
for membership by the end of 2002 and expects to join the Union among the first new members.