Why does government spend?

There are many reasons for government spending. These can be

To Provide Public goods

Public good is that good, consumption by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good. These goods are of importance to the general public and hence are provided by the government. Example defence, street lighting etc.

To provide Merit goods

A merit good is a commodity which is judged that an individual or society should have on the basis of a norm. The government feels that everybody should enjoy these goods irrespective of their incomeFor example, health and education. In most of the economies, governments spend a major part of their expenditure on health and education.

To maintain and promote economic growth

Public spending has an important role to play in maintain and promoting economic growth in the economy. Increases in government spending on state provided goods and services add to total domestic demand and can have multiplier effects on the final level of equilibrium national income.

Ensure welfare of the state

One of the government’s main objective is to provide reduce the gap between rich and poor and thus government provides services like health and education to the economically weaker sections of the society free of cost or at a subsidised rates. The social security system also tries to provide a safety-net for those who suffer unexpected falls in income arising from unemployment, separation and bereavement.

USEFUL LINKS FOR FURTHER STUDY

• Article on BBC 'What the budget has in store'
• US Government Spending data

Economic Objectives of the Government

Most of the governments round the world have four main objectives. These are

• Keep inflation under control
• Maintain a low level of unemployment
• Achieve a high level of economic growth rate
• Maintain a healthy balance of payments.

Government spending or government expenditure is classified by economists into three main types.

• Government purchases of goods and services for current use are classed as government consumption.
• Government purchases of goods and services intended to create future benefits, such as infrastructure investment or research spending, are classed as government investment.
• Government expenditures that are not purchases of goods and services, and instead just represent transfers of money, such as social security payments, are called transfer payments.

Public Limited Companies and Stock Exchange

Public Limited Companies and Stock Exchange

This short video gives an insight into the forming of a Public LImited Company and the process of listing it on the Stock Exchange.

Public Limited company

Limited companies which can sell share on the stock exchange are Public Limited companies. These companies usually write PLC after their names. Minimum value of shares to be issued (in UK) is £50,000.

Advantages

• There is limited liability for the shareholders.
• The business has separate legal entity. There is continuity even if any of the shareholders die.
• These businesses can raise large capital sum as there is no limit to the number of shareholders.
• The shares of the business are freely transferable providing more liquidity to its shareholders .

Disadvantages

• There are lot of legal formalities required for forming a public limited company. It is costly and time consuming.
• In order to protect the interest of the ordinary investor there are strict controls and regulations to comply. These companies have to publish their accounts.
• The original owners may lose control.
• Public Limited companies are huge in size and may face management problems such as slow decision making and industrial relations problems.

• Public Limited Companies and Stock Exchange

  This short video gives an insight into the forming of a Public LImited Company and the process of listing it on the Stock Exchange.

Limited companies

Also known as Joint stock companies. These are business where a number of owner(shareholder) pool in their resources to do a common business and to share the profits and losses proportionally.
In a limited company, the debts of the company are separate from those of the shareholders. As a result, should the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors. Ownership in the limited company can be easily transferred, and many of these companies have been passed down through generations.

Difference between Limited companies and partnership

Limited companies can issue shares whereas partnership business cannot.

Shareholders enjoy limited liability in Limited companies. It means that if the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors. Whereas partnership business does not have limited liability except for limited partnerships.

Separate Identity: Limited companies are considered as human beings in the eyes of the law. They are born and die in the eyes of law. They can sue and get sued on their own name.

Continuity: There is continuity of existence in limited companies and are their existence is not affected by the death, bankruptcy or sickness of their owner. This is not the case in Partnership or sole trader businesses.

There are two main types of Limited companies. These are:

• Private Limited Company
• Public Limited Company

• Private limited Companies

  These are closely held businesses usually by family, friends and relatives.
  Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering.
  Shareholders may not be able to sell their shares without the agreement of the other shareholders.

  Advantages

  Limited Liability: It means that if the company experience financial distress because of normal business activity, the personal assets of shareholders will not be at risk of being seized by creditors.
  Continuity of existence: business not affected by the status of the owner.
  Minimum number of shareholders need to start the business are only2.
  More capital can be raised as the maximum number of shareholders allowed is 50.
  Scope of expansion is higher because easy to raise capital from financial institutions and the advantage of limited liability.

  Disadvantages

  Growth may be limited because maximum shareholders allowed are only 50.
  The shares in a private limited company cannot be sold or transferred to anyone else without the agreement of other shareholders.

IGCSE -GCE O LEVEL Partnership Deed, Economics

Partnership Deed

Before starting a partnership business, all the partners have to draw up a legal document called a Partnership Deed of Agreement.

It usually contains the following information:

• Names of included parties - includes all names of people participating in this contract
• Commencement of partnership- includes when the partnership should begin. The date of the contract is assumed as this date, if none is given.
• Duration of partnership - includes how long the partnership should last. It is automatically assumed that the death of one of the contracting parties breaks the contract, unless otherwise stated.
• Business to be done - includes exactly what will be done in this partnership. This section should be very particular to avoid confusion and loopholes.
• Name of firm - includes the name of the business entity.
• Initial investments - includes how much each partner will invest immediately or by installments.
• Division of profits and losses - includes what percentages of profits and losses each partner will receive. If it is not a limited partnership, then there is unlimited liability (each partner is responsible for all partners' debts, including their own).
• Ending of the business - includes what happens when the business winds down. Usually this includes three parts: 1) All assets are turned into cash and divided among the members in a certain proportion; 2) one partner may purchase the others' shares at their value; 3) all property is divided among the members in their proper proportions.
• Date of writing - includes simply the date that the contract was written.

What is a Sole trader?What is a Partnership?

What is a Sole trader?

The sole trader iis the oldest and most popular type of business. It is a form of business where there is only one owner who manages and controls the business.

A sole proprietorship, is a type of business entity which legally has no separate existence from its owner. Hence, the limitations of liability enjoyed by a corporation and limited liability partnerships do not apply to sole proprietors. All debts of the business are debts of the owner. It is a "sole" proprietor in the sense that the owner has no partners.

A sole proprietorship essentially means a person does business in his or her own name and there is only one owner. A sole proprietorship is not a corporation; it does not pay corporate taxes, but rather the person who organized the business pays personal income taxes on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity would have to.

A sole proprietor may do business with a trade name other than his or her legal name. In some jurisdictions, for example the United States, the sole proprietor is required to register the trade name or "Doing Business As" with a government agency. This also allows the proprietor to open a business account with banking institutions.

Advantages to a Sole Proprietor

An entrepreneur may opt for the sole proprietorship legal structure because no additional work must be done to start the business. In most cases, there are no legal formalities to forming or dissolving a business.

A sole proprietor is not separate from the individual; what the business makes, so does the individual. At the same time, all of the individual's non-protected assets (e.g homestead or qualified retirement accounts) are at risk. There is not necessarily better control or business administration possible with a sole proprietorship, only increased risks. For example, a single member corporation or limited company still only has one owner, who can make decisions quickly without having to consult others, but has the advantage of limited liability.

Furthermore, in most jurisdictions, a sole proprietorship files simpler tax returns to report its business activity. Typically a sole proprietorship reports its income and deductions on the individual's personal tax returns. In comparison, an identical small business operating as a corporation or partnership would be required to prepare and submit a separate tax return.

A sole proprietorship often has the advantage of the least government regulation.

Disadvantages to a Sole Proprietor

A business organized as a sole trader will likely have a hard time raising capital since shares of the business cannot be sold, and there is a smaller sense of legitimacy relative to a business organized as a corporation or limited liability company.

It can also sometimes be more difficult to raise bank finance, as sole proprietorships cannot grant a floating charge which in many jurisdictions is required for bank financing.

Hiring employees may also be difficult.

This form of business will have unlimited liability, so that if the business is sued, the proprietor is personally liable.

The life span of the business is also uncertain. As soon as the owner decides not to have the business anymore, or the owner dies, the business ceases to exist.

In countries without universal health care, such as the United States, a sole proprietor is also responsible for his or her own health insurance, and may find difficulty finding any if one of the family members to be covered has a previous health issue.

Another disadvantage of a sole proprietorship is that as a business becomes successful, the risks accompanying the business tend to grow. To minimize those risks, a sole proprietor has the option of forming a corporation. In the United States, a sole proprietor could also form a limited liability company, or LLC, which would give the protection of limited liability but would still be treated as a sole proprietorship for income tax purposes.

What is a Partnership?

A partnership is a type of business entity in which partners (owners) share with each other the profits or losses of the business undertaking in which all have invested. Partnerships are often favored over corporations for taxation purposes, as the partnership structure does not generally incur a tax on profits before it is distributed to the partners (i.e. there is no dividend tax levied). However, depending on the partnership structure and the jurisdiction in which it operates, owners of a partnership may be exposed to greater personal liability than they would as shareholders of a corporation.

Advantages of Partnership

• Easy to set up
• More capital can be brought into the business.
• Partners bring new skills and ideas to a business
• Decision making can be much easier with more brains to think about a problem.
• Partners share responsibilities and duties of the business.
• Division of labour is possible as partners may have different skills.

Disadvantages of Partnership

• There is unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell of their personal belongings.
• Disagreement among the partners can lead to problems for the business.
• There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit.
• There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt.

Types of Industrial Actions

• Strike: when employees refuse to work
• Picketing: When employees stand outside the workplace and prevent the smooth functioning of the firm. E.g. they may stop the movement of Lorries in and out of factory.
• Work to Rule: It is when workers purposely follow all the rules in order to delay the progress of work.
• Go slow: It is when the employees work at a very slow pace.
• Non-cooperation: It involves workers refusing to follow a new procedure or rule.
• Overtime ban: It is when the employees refuse to work overtime or for additional hours of work apart from their normal working hours.