Tag: Advantages

Advantages

What are a Advantages? A condition or circumstance that puts one in a favorable or superior position. The opportunity to gain something; benefit or profit. A favorable or desirable feature. A score marking a point interim between deuce and winning the game.
 
Any trait, feature or aspect that gives an individual, entity or any other thing a more favorable opportunity for success. “The advantages of Mary’s plan, compare to Bob’s plan, were that it required less money and manpower, and would complete 5 days sooner.” “He had an advantage over the other job candidates due to his personal relationship with the CEO.” Opposite of disadvantage.
  • Preference Shares: Explanation, Features, Good and Bad

    Preference Shares: Explanation, Features, Good and Bad

    What does Preference Shares mean? Preference Shares, as its name suggests, gets precedence over equity shares on the matters like distribution of dividend at a fixed rate and repayment of capital in the event of liquidation of the company. Preference shares are one of the important sources of hybrid financing. As the name suggests, these have certain preferences as compared to other types of shares. These shares are given two preferences. There is a preference for payment of dividend. Whenever the company has distributable profits, the dividend is first paid on preference share capital.

    Know and Understand the Preference Shares.

    The content of study from Preferred Shares: Explanation of Preference Shares, Features of Preference Shares, Good and Bad of Preferred Shares (Advantages and Disadvantages of Preference Shares).

    The preference shareholders are also the part owners of the company like equity shareholders, but in general, they do not have voting rights. However, they get right to vote on the matters which directly affect their rights like the resolution of winding up of the company, or in the case of the reduction of capital.

    Other shareholders are paid a dividend only out of the remaining profits if any. The second preference for shares is repayment of capital at the time of liquidation of the company. After payment of outside creditors, preference share capital is returned. Equity shareholders will be paid only when preference share capital is paid in full.

    Explanation of Preference Shares.

    They are those shares which carry certain special or priority rights. Firstly, the dividend at a fixed rate is payable on these shares before any dividend is paid on equity shares. Secondly, at the time of winding up of the company, capital is repaid to preference shareholders prior to the return of equity capital. Preferred Shares do not carry voting rights. However, holders of preferred shares may claim voting rights if the dividends are not paid for two years or more on cumulative preference shares and three years or more on non-cumulative preferred shares.

    Meaning of Preference Shares.

    The share which entitles the holder to a fixed dividend, whose payment takes priority over that of ordinary share dividends. Preferred Shares are one of the important sources of hybrid financing. It is hybrid security because it has some features of equity shares as well as some features of debentures. The holders of preference shares enjoy the preferential rights with regard to receiving of dividend and getting back of capital in case the company winds-up.

    Definition of Preference Shares.

    They are a long-term source of finance for a company. They are neither completely similar to equity nor equivalent to debt. The law treats them as shares but they have elements of both equity shares and debt. For this reason, they are also called “Hybrid financing instruments”. These are also known as preferred stock, preferred shares, or only preferred’s in a different part of the world.

    Features of Preference Shares.

    They have the characteristics of both equity shares and debentures. Like equity shares, dividend on preferred shares is payable only when there are profits and at the discretion of the Board of Directors.

    Preferred Shares are similar to debentures in the sense that the rate of dividend is fixed and preference shareholders do not generally enjoy voting rights. Therefore, they are a hybrid form of financing.

    The features of preference shares are listed below:

    Dividends.

    They have dividend provisions which are cumulative or non- cumulative. Most shares have the cumulative provisions, which mean that any dividend not paid by the company accumulates. Normally, the firm must pay these unpaid dividends prior to the payment of dividends on the common stock. These unpaid dividends are known as dividends in arrears or arrearages. Non-cumulative dividends do not accumulate if they are not paid when due.

    An investor contemplating the purchase of preferred shares with a non-cumulative dividend provision needs to be especially diligent in the investigation of the company because of the investor’s potentially weak position vis-a-vis those preference shares with a cumulative dividend provision. In the case of cumulative preferred shares, even if the arrears of the preference dividend are cleared in full, the investor would be the loser as he is to get less in net worth.

    Participating.

    Most they are non-participating, meaning that the preference shareholder receives only his stated dividend and no more. The theory is that the preference shareholder has surrendered claim to the residual earnings of his company in return for the right to receive his dividend before dividends are paid to common shareholders.

    The participating preference shareholder receives stipulated dividend and shares additional earnings with the common shareholders. But this share is usually non-cumulative which confirms the view that preference share does have both protective and profit participating provisions.

    Voting Rights.

    They do not normally confer voting rights. The basis for not allowing the preference shareholder to vote is that the preference shareholder is in a relatively secure position and, therefore, should have no right to vote except in the special circumstances.

    The cumulative preferred shares can vote if their dividend is in arrears for 2 years. The voting right of each preference shareholder is to be in the proportion which the paid-up share capital on his shares bears to the total equity share capital of the company.

    Par Value.

    Most they have a par value. When it does, the dividend rights and call price are usually stated in terms of the par value. However, those rights would be specified even if there were no par value. It seems, therefore, as with equity shares, the preference share that has a par value has no real advantage over preference share that has no par value.

    Redeemable or Callable.

    Typically, they have no maturity date. In this respect, it is similar to equity shares. Redeemable or callable preferred shares may be retired by the issuing company upon the payment of a definite price stated in the investment. Although the “call price” provides for the payment of a premium, the provision is more advantageous to the corporation than to the investor.

    When money rates decline, the corporation is likely to call in its preferred shares and refinance it at a lower dividend rate. When money rates rise, the value of the preference shares declines so as to produce higher yield, the call price acts as an upper peg or plateau through which the price will break only in a very strong market.

    Non-callable preferred shares and bonds are issued in periods of High-interest rates. The issue is barred from redeeming them later in the event of generally falling yields or for a certain period so the investor has important protection against declining income.

    Preference Shares Explanation Features Good and Bad
    Preference Shares: Explanation, Features, Good and Bad, #Pixabay.

    Advantages of Preference Shares:

    The following advantages of preference shares are:

    The obligation for Dividends:

    No Obligation for Dividends; A company is not bound to pay the dividend on preference shares if its profits in a particular year are insufficient. It can postpone the dividend in case of cumulative preferred shares also. No fixed burden is created on its finances.

    Interference:

    No Interference; Generally, they do not carry voting rights. Therefore, a company can raise capital without dilution of control. Equity shareholders retain exclusive control over the company.

    Trading on Equity:

    The rate of dividend on they are fixed. Therefore, with the rise in its earnings, the company can provide the benefits of trading on equity to the equity shareholders.

    Flexibility:

    A company can issue redeemable preference shares for a fixed period. The capital can be repaid when it is no longer required in business. There is no danger of over-capitalization and the capital structure remains elastic.

    Variety:

    Different types of preference shares can be issued depending on the needs of investors. Participating preferred shares or convertible they may be issued to attract bold and enterprising investors.

    They can be made more popular by giving special rights and privileges such as voting rights, right of conversion into equity shares, right of shares in profits and redemption at a premium.

    Disadvantages of Preference Shares:

    They suffer from the following disadvantages:

    Obligation:

    Fixed Obligation; The dividend on preferred shares has to be paid at a fixed rate and before any dividend is paid on equity shares. The burden is greater in the case of cumulative preference shares on which accumulated arrears of dividend have to be paid.

    Appeal:

    Limited Appeal; Bold investors do not like preferred shares. Cautious and conservative investors prefer debentures and government securities. In order to attract sufficient investors, a company may have to offer a higher rate of dividend on preference shares.

    Return Earning:

    Low Return in this shares; When the earnings of the company are high, fixed dividend on they becomes unattractive. Preference shareholders generally do not have the right to participate in the prosperity of the company.

    Voting Rights:

    No Voting Rights; They generally do not carry voting rights. As a result, preference shareholders are helpless and have no say in the management and control of the company.

    Fear of Redemption:

    The holders of redeemable preference shares might have contributed finance when the company was badly in need of funds. But the company may refund their money whenever the money market is favorable. Despite the fact that they stood by the company in its hour of need, they are shown the door unceremoniously.

  • Venture Capital: Definition Advantages Disadvantages

    Venture Capital: Definition Advantages Disadvantages

    What does Venture Capital mean? They define and comprise two words that are, “Venture” and “Capital”. It is a type of funding for a new or growing business. It usually comes from venture-capital firms that specialize in building high-risk financial portfolios.

    The concept of Venture Capital explained by their points in Meaning, Introduction, Definition, Characteristics, Advantages, and Disadvantages.

    Capital invested in a project in which there is a substantial element of risk, typically a new or expanding business. The venture is a course of processing, the outcome of which is uncertain but to which attended the risk or danger of “loss”. “Capital” means resources to start an enterprise. To connote the risk and adventure of such a fund, the generic name Venture-Capital existed coined.

    #Meaning of Venture Capital:

    Venture capital’s a type of private equity, a form of financing provide by firms or funds to small, early-stage, emerging firms that exist deemed to have high growth potential, or which have demonstrated high growth. This is a very important source of financing for a new business. Here money is provided by investors to start a business that has a strong potentiality of high growth and profitability. The provider of venture capital also provides managerial and technical support. Venture capital stands also known as risk capital.

    #Introduction of Venture Capital:

    Venture capital’s considered the financing of high and new technology-based enterprises. It exists said that Venture-capital involves investment in new or relatively untried technology, initiated by relatively new and professionally or technically qualified entrepreneurs with inadequate funds. The conventional financiers, unlike Venture capitals, mainly finance proven technologies and established markets.

    However, high technology need not be a prerequisite for them. They have also existed described as “unsecured risk financing”. The relatively high risk of venture capital’s compensated by the possibility of high returns usually through substantial capital gains in the medium term. They are in the broader sense is not solely an injection of funds into a new firm; it is also an input of skills needed to set up the firm, design its marketing strategy, organize and manage it.

    Thus it is a long-term association with successive stages of the company’s development under high-risk investment conditions, with a distinctive type of financing appropriate to each stage of development. Investors join the entrepreneurs as co-partners and support the project with finance and business skills to exploit the market opportunities. Venture capital’s not passive finance.

    It may be at any stage of the business/production cycle, that is, start-up, expansion or to improve a product or process; which exist associated with both risk and reward. They make higher capital gains through appreciation in the value of such investments when the new technology succeeds. Thus the primary return sought by the investor is essentially capital gain rather than steady interest income or dividend yield.

    #Definition of Venture Capital:

    “The support by investors of entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain capital gains.”

    They commonly describe not only the provision of start-up finance or “seed corn” capital but also development capital for later stages of business. A long-term commitment of funds exists involved in the form of equity investments, with the aim of eventual capital gains rather than income and active involvement in the management of customers’ business.

    #Characteristics of Venture Capital:

    The following features/characteristics below are;

    Participation In Management:

    They provide value addition by managerial support, monitoring, and follow-up assistance. It monitors physical and financial progress as well as a market development initiative. It helps by identifying the key resource person. They want one seat on the company’s board of directors and involvement, for better or worse, in the major decision affecting the direction of the company.

    This is a unique philosophy of “hands-on management” where Venture capitalist acts as complementary to the entrepreneurs. Based upon the experience of other companies, a venture capitalist advises the promoters on project planning, monitoring, financial management, including working capital and public issue. Their investor cannot interfere in day to day management of the enterprise but keeps close contact with the promoters or entrepreneurs to protect his investment.

    High Risk:

    By definition, their financing is highly risky and chances of failure are high as it provides long-term start-up capital to high risk-high reward ventures.

    Venture capital assumes four types of risks, these are:

    • Management risk; Inability of management teams to work together.
    • Market risk; Product may fail in the market.
    • Product risk; Also, Product may not be commercially viable.
    • Operation risk; Operations may not be cost effective resulting in increased cost decreased gross margins.

    High Tech:

    As opportunities in the low technology, area tend to be few of lower order, and hi-tech projects generally offer higher returns than projects in more traditional areas, venture-capital investments stand made in high tech. areas using new technologies or producing innovative goods by using new technology.

    Not just high technology, any high-risk ventures where the entrepreneur has conviction but little capital gets venture finance. Venture capital’s available for expansion of existing business or diversification to a high-risk area. Thus technology financing had never been the primary objective but incidental to venture capital.

    Length of Investment:

    Venture capitalists help companies grow, but they eventually seek to exit the investment in three to seven years. An early-stage investment may take seven to ten years to mature; while most of the later-stage investment takes only a few years. The process of having significant returns takes several years and calls on the capacity and talent of venture capitalists and entrepreneurs to reach fruition.

    Illiquid Investment:

    Their investments are illiquid, that is, not subject to repayment on demand or following a repayment schedule. Investors seek to return ultimately using capital gains when the investment stands sold at the marketplace.

    The investment is realized only on the enlistment of security or it is lost if the enterprise is liquidated for unsuccessful working. It may take several years before the first investment starts to lock for seven to ten years. Venture capitalist understands this illiquidity and factors this in their investment decisions.

    Equity Participation & Capital Gains:

    Investments are generally in equity and quasi-equity participation through direct purchase of shares, options, convertible debentures where the debt holder has the option to convert the loan instruments into the stock of the borrower or debt with warrants to equity investment.

    The funds in the form of equity help to raise term loans that are a cheaper source of funds. In the early stage of business, because dividends can delay, equity investment implies that investors bear the risk of venture and would earn a return commensurate with success in the form of capital gains.

    #Advantages and Disadvantages of Venture Capital:

    The following advantages and disadvantages below are;

    Advantages of Venture Capital:

    Business expertise: Aside from financial backing, obtaining venture-capital financing can provide a start-up or young business with a valuable source of guidance and consultation. This can help with a variety of business decisions, including financial management and human resource management. Making better decisions in these key areas can be vitally important as your business grows.

    Additional resources: In several critical areas, including legal, tax, and personnel matters, a VC firm can provide active support, all the more important at a key stage in the growth of a young company. Faster growth and greater success are two potential key benefits.

    The advantages of venture capital are as follows:

    • New innovative projects financed through venture-capital which generally offers high profit­ability in long run.
    • In addition to capital, venture-capital provides valuable information, resources, technical assistance, etc., to make a business successful.

    Disadvantages of Venture Capital:

    Loss of control: The drawbacks associated with equity financing, in general, can compound with venture-capital financing. You could think of it as equity financing on steroids. With a large injection of cash and professional, and possibly aggressive, investors, it is likely that your VC partners will want to exist involved. The size of their stake could determine how much say they have in shaping your company’s direction.

    Minority ownership status: Depending on the size of the VC firm’s stake in your company; which could be more than 50%, you could lose management control. Essentially, you could be giving up ownership of your own business.

    The disadvantages of venture capital are:

    • It is an uncertain form of financing.
    • Benefit from such financing can realize in long run only.
    Venture Capital Introduction Definition Characteristics Advantages and Disadvantages
    Venture Capital: Introduction, Definition, Characteristics, Advantages, and Disadvantages, #Pixabay.

    #Know and understand the Dimensions of Venture Capital:

    It is associated with successive stages of the firm’s development with distinctive types of financing, appropriate to each stage of development. Thus, there are four stages of the firm’s development, viz., development of an idea, startup, fledgling, and establishment. The first stage of development of a firm is the development of an idea for delineating precise specifications for the new product or service and establishing a business plan.

    The entrepreneur needs seedling finance for this purpose. Venture capitalist finds this stage the most hazardous and difficult; because the majority of the business projects are abandoned at the end of the seedling phase. The Start-up stage is the second stage of the firm’s development. At this stage, the entrepreneur sets up the enterprise to carry into effect the business plan to manufacture a product or to render a service.

    In this process of development, venture-capitalist supply start-up finance. In the third phase, the firm has made some headway, entered the stage of manufacturing a product or service, but is facing enormous teething problems. It may not be able to generate adequate internal funds. It may also find its access to external sources of finance very difficult.

    To get over the problem, the entrepreneur will need a large amount of fledgling finance from the venture capitalist. In the last stage of the firm’s development when it stabilizes itself; and may need, in some cases, establishment finance to explicit opportunities of scale. This is the final injection of funds from venture capitalists. It has been estimated that in the U.S.A., the entire cycle takes a period of 5 to 10 years.

  • Leasing: Meaning, Definition, Types, Advantages, and Disadvantages

    Leasing: Meaning, Definition, Types, Advantages, and Disadvantages

    What does a Lease (Leasing) mean? A Lease is a contract between the owner of the asset and beneficiary. This article explains the content of Leasing – Meaning, Definition, Types, Advantages, and Disadvantages; Owner of the asset calls lessor and the beneficiary calls lessee. The lessee has the right to possess and to use the asset on payment of the specified rentals over a predetermined period. Also, Learn Investment Banks with their Principle and Functions.

    The Concepts of Leasing explains as their topic of Meaning, Definition, Types, Advantages, and Disadvantages.

    Here are we can discuss the topic; Meaning of Leasing, Definition of Leasing, Types of Leasing, Advantages of Leasing, and Disadvantages of Leasing. A “Lease” is defined as a contract between a lessor and a lessee for the hire of a specific asset for a specific period on payment of specified rentals.

    The maximum period of the lease according to the law is for 99 years. Previously land or real estate, mines and quarries were taken on the lease. But now a day’s plant and equipment, modem civil aircraft and ships are taken.

    Definition of Leasing:

    Lessor: The party who is the owner of the equipment permitting the use of the same by the other party on payment of a periodical amount.

    Lessee: The party who acquires the right to use the equipment for which he pays periodically.

    Lease Rentals: This refers to the consideration received by the lessor in respect of a transaction and includes:

    • Interest in the lessor’s investment.
    • Charges have borne by the lessor. Such as repairs, maintenance, insurance, etc.
    • Depreciation, and.
    • Servicing charges.

    At present there are many leasing companies such as 1st Leasing Company, 20th Century Leasing Company which are doing quite a lot of business through leasing, It has become an important financial service and a lucrative avenue of making sizable profits by leasing companies.

    Steps involved in Leasing:

    A contract of the lease provides a person an opportunity to use an asset that belongs to another person.

    The following steps involving in a leasing transaction:

    • The lessee identifies the need for the equipment and selects the supplier.
    • The lessee approaches a leasing company or Lessor to lease the equipment needed.
    • They have to furnish the following information: 1) Name and address of the lessee. 2) Details about his business. 3) Name and address of the guarantor, if any. 4) Description of the equipment. 5) Name and address of the supplier and the quoted price. 6) Place of installation, and. 7) Duration of the lease.
    • The Lessor examines the proposal after receiving the particulars from the lessee and evaluates the credit-worthiness and rent-paying capacity of the lessee.
    • The Lessor and Lessee entered into the lease agreement. It contains the terms and conditions of the lease such as lease period, rental payments, details regarding renewal of lease period, cost of repair and maintenance, insurance and any other expenses, etc., and.
    • After the lease agreement signs, the Lessor requests the manufacturer to supply the asset to the lessee.

    Types of Leasing:

    After their definition the content is the following different types of leasing are discussed below:

    Financial Lease:

    This type of lease which is for a long period provides for the use of the asset during the primary lease period which devotes almost the entire life of the asset. The lessor assumes the role of a financier and hence services of repairs, maintenance, etc., are not provided by him.

    The legal title retains by the lessor who has no option to terminate the lease agreement. The principal and interest of the lessor are recouped by him during the desired payback period in the form of lease rentals.

    The finance lease also calls a capital lease is a loan in disguise. The lessor thus is typically a financial institution and does not render specialized service in connection with the asset. A financial lease is an alternative to borrowing money and buying the equipment.

    The features of the financial lease are:

    • The machinery selects from the supplier by lessee based on his requirement.
    • The lessee negotiates the terms of the purchase i.e., price, delivery, installation, warranties, maintenance, and payments.
    • The payment for purchases make by Lessor and he is the legal owner of the machinery.
    • The risk of obsolescence and responsibility for maintenance are to be borne by Lessee, and.
    • Lessee has to pay rent regularly.
    Operating Lease:

    It is where the asset not wholly amortizes during the non-cancellable period if any, of the lease and where the lessor does not rely on is profit on the rentals in the non-cancellable period.

    In this type of lease, the lessor who bears the cost of insurance, machinery, maintenance, repair costs, etc. is unable to realize the full cost of equipment and other incidental charges during the initial period of the lease. The lessee uses the asset for a specified time.

    The lessor bears the risk of obsolescence and incidental risks. Either party to the lease may termite the lease after giving due notice of the same since the asset may lease out to other willing leases.

    Operating lease is a rental agreement and its features are as follows:

    • The period of the operating lease is generally shorter than the economic life of the leased asset, and.
    • The “lessor” bears the risk of obsolescence and responsibility for the maintenance of the asset.
    Sale and Lease-Back:

    To raise funds a company may sell an asset that belongs to the lessor with whom the ownership vests from thereon. Subsequently, the lessor leases the same asset to the company (the lessee) who uses it.

    The asset thus remains with the lessee with the change in title to the lessor thus enabling the company to procure the much-needed finance. It is an agreement between the owner of the asset and the leasing company.

    First, the firm (owner) sells the asset to the Leasing Company and leases it back simultaneously. The ownership of the asset transfers to the leasing company, the company, in turn, leases it to the seller and the seller becomes a lessee.

    Sales Aid Lease:

    Under this arrangement, the lessor agrees with the manufacturer to market his product through his leasing operations, in return for which the manufacturer agrees to pay him a commission.

    Specialized Service Lease:

    In this type of agreement, the lessor provides specialized personal services in addition to providing its users.

    Small Ticket and Big Ticket Leases:

    The lease of assets in smaller value generally calls as small-ticket leases and larger value assets are called big-ticket leases.

    Cross Border Lease:

    Lease across the national frontiers calls cross broker leasing. The recent development in economic liberalization, the cross border leasing is gaining greater importance in areas like aviation, shipping and other costly assets which base likely to become absolute due to technological changes. The lease agreement makes between the persons of the two countries. Lessor and lessee are domiciled in different countries, the lease says to be the cross-border lease.

    Leasing Meaning Definition Types Advantages and Disadvantages
    Leasing: Meaning, Definition, Types, Advantages, and Disadvantages, #Pixabay.

    Advantages of Leasing:

    After their definition and types the content is the following Merits or Advantages of leasing below are:

    • The most important merit of leasing is flexibility. The leasing company modifies the arrangements to suit the requirements of the lease.
    • In the leasing deal, less documentation involves, when compared to term loans from financial institutions.
    • It is an alternative source to obtain the loan and other facilities from financial institutions. That is the reason why banking companies and financial institutions are now entering into leasing business as this method of finance is more acceptable to manufacturing units.
    • The full amount (100%) financing for the cost of equipment may make available by a leasing company. Whereas banks and other financial institutions may not provide for the same.
    Balanced Cash Outflow:

    The biggest advantage of leasing is that cash outflow or payments related to leasing are spread out over several years, hence saving the burden of one-time significant cash payment. This helps a business to maintain a steady cash-flow profile.

    Quality Assets:

    While leasing an asset, the ownership of the asset still lies with the lessor whereas the lessee just pays the rental expense. Given this agreement, it becomes plausible for a business to invest in good quality assets which might look unaffordable or expensive otherwise.

    Better usage of Capital:

    Given that a company chooses to lease over investing in an asset by purchasing, it releases capital for the business to fund its other capital needs or to save money for a better capital investment decision.

    Disadvantages of Leasing:

    In the base of their advantages is the following Demerits or disadvantages of leasing below are:

    • In leasing the cost of interest is very high.
    • The asset reverts to the owner on the termination of the lease period and the lesser lose his claim on the residual value.
    • Leasing is not useful in setting up new projects as the rentals become payable soon after the acquisition of assets.
    • The lessor generally leases out assets that are purchased by him with the help of bank credit. In the event of a default made by the lessor in making the payment to the bank, the asset would seize by the bank much to the disadvantage of the lessee.
    Limited Financial Benefits:

    If paying lease payments towards land, the business cannot benefit from any appreciation in the value of the land. The long-term lease agreement also remains a burden on the business as the agreement locks and the expenses for several years are fixed. In a case when the use of assets does not serve the requirement after some years, lease payments become a burden.

    Reduced return for Equity Holders:

    Given that lease expenses reduce the net income without any appreciation in value, it means limited returns or reduced returns for an equity shareholder. In such a case, the objective of wealth maximization for shareholders not achieves.

    Limited TAX Benefits:

    For a new start-up, the tax expense is likely to be minimal. In these circumstances, there no adds tax advantage that can derive from leasing expenses.

    References: From online content collection with the site of #efinancemanagement and #yourarticlelibrary.

  • Marketing Research Objectives, Advantages, and Limitations

    Marketing Research Objectives, Advantages, and Limitations

    What does Marketing Research mean? Define Marketing Research; “The systematic, objective and exhaustive search for the study of the facts relevant to any problem in the field of marketing.” You’ll understand Marketing Research and their best topics – Objectives, Advantages, and Limitations. Marketing research may describe as a method of getting facts to use by the executive in formulating policies and plans.

    The Concept of Marketing Research explains by its Objectives, Advantages, and Limitations.

    It can also be defined as the systematic gathering, recording and analyzing of data about problems relating to the marketing of goods and services. It’s a systematic search for information. It involves data collection, analysis, and interpretation. Research cannot draw decisions, but it helps marketers in the task of decision making.

    A successful executive will never depend upon guesswork. He looks for more accurate information through research. The main idea of marketing research is to know more about consumers, dealers, and products. As the business grows, the distance between the manufacturer and consumers also widens.

    The management depends upon marketing research as a tool in solving marketing problems. It helps in taking a fruitful and efficient decision as to the flow of goods and services in the hands of the customers.

    What is Market Research?

    Market research is an important element of the process of marketing research. They include a complete analysis of the market. Information regarding the nature, size, organization profitability of different markets, changes in markets and various factors-economic, social and political-affecting those changes are studied vigorously. The main purpose of market research is to know about the consumers and the markets of its products or services.

    This article has given a solution to understanding; Advantages and Limitations of Marketing Research, or Objectives and Limitations of Marketing Research, or Objectives and Advantages of Marketing Research.

    Objectives of Marketing Research:

    Marketing research is undertaken for attaining the following objectives:

    To Provide the Basis For Proper Planning: 

    Marketing and sales forecast research provides a sound basis for the formulation of all marketing plans, policies, programs, and procedures.

    To Reduce Marketing Costs: 

    They provide ways and means to reduce marketing costs like selling, advertisement, and distribution, etc.

    To Find Out New Markets for The Product: 

    Their aims at exploring new markets for the product and maintaining the existing ones.

    To Determine the Proper Price Policy:

    It is considered helpful in the formulation of proper price policy about the products.

    To Study in Detail Likes and Dislikes of the Consumers: 

    It tries to find out what the consumers, (the people of all genders who constitute the market) think and want. It keeps us in touch with the consumers, minds and to study their likes and dislikes.

    To Know The Market Competition: 

    They also aim at knowing the quantum of competition prevalent in the market about the product in question. The company may need reliable information about competitor’s moves and strategies which are of immense significance for further planning.

    To Study The External Forces and Their Impact: 

    They provide valuable information by studying the impact of external forces on the organization. External forces may include conditions developing in foreign markets, govt, policies and regulations, consumer incomes and spending habits, new products entering the market and their impact on the company’s products. External forces may include conditions developing in foreign markets, govt, policies and regulations, consumer incomes and spending habits, new products entering the market and their impact on the company’s products.

    Prof. Gilies has rightly pointed out that,

    “The basic objective of marketing research is to supply management with information which will lead to a fuller understanding of the distribution habits and attitudes of present and potential buyers and users, and their reactions to products, packing, selling and advertising methods.”

    Advantages of Marketing research:

    The following advantages of marketing research below are:

    Explains customer resistance:

    Research is useful for finding out customer resistance to the company’s products. Remedial measures are also suggested by the researcher to deal with the situation. This makes the product and marketing policies agreeable to consumers.

    Suggests sales promotion techniques

    Promotion Research; enables a manufacturer to introduce appropriate sales promotion techniques, select the most convenient channel of distribution, suitable pricing policy for the products and provision of discounts and concessions to dealers. They facilitate sales promotion.

    Offers guidance to marketing executives:

    To research, offers information and guidance to marketing executives while framing marketing policies. Continuous research enables a company to face adverse marketing situation boldly. It acts as an insurance against possible changes in the market environment.

    Facilitates the selection and training of the sales force:

    It is useful for the selection and training of staff in the sales organization. It also suggests the incentives which should be offered for the motivation of employees concerned with marketing.

    Promotes business activities:

    They enable a business unit to grow its activities. It creates goodwill in the market and also enables a business unit to earn high profits through consumer-oriented marketing policies and programs.

    Facilitates appraisal of marketing policies:

    Research activities enable business executives to have an appraisal of the present marketing policies in the light of findings of research work. Suitable adjustments in the policies are also possible as per the suggestions made by the researchers.

    Suggests new marketing opportunities:

    Research, suggests new marketing opportunities and how they can be exploited fully. It identifies emerging market opportunities.

    Facilitates inventory study:

    It is useful for the evaluation of the company’s inventory policies and also for the introduction of more efficient ways of managing inventories including finished goods and raw material.

    Provides marketing information:

    Research provides information on various aspects of marketing. It suggests the relative strengths and weaknesses of the company. Based on such information, marketing executives find it easy to frame policies for the future period. MR provides information, guidance and alternative solutions to current marketing problems.

    Provides information on product acceptance:

    They help in knowing the probability of acceptance of the product in its present form. It is also useful for the introduction of modifications in the existing product line of a firm.

    Creates a progressive outlook:

    Research generates progressive and dynamic outlook throughout the business organization. It promotes systematic thinking and a sense of professionalization within the company. It also creates enthusiasm among marketing executives. This brings success and stability to the whole business unit.

    Has wider social significance:

    Research is of paramount importance from the social angle. It is how the ultimate consumer becomes king of the market place, with his desires, prejudice and every whim transmitted to the producer and distributor. In brief, MR has a wider scope of significance. It is useful to all parties involved in the process of marketing.

    Limitations of Marketing Research:

    Now let’s discuss above listed limitations of marketing research.

    Limited scope:

    They solve many business-related problems. However, it cannot solve all business problems. It cannot solve problems related to consumer behavior, income and expenditure relationships, etc. Thus, its scope is limited.

    Costly in the Market:

    It is a costly affair. It needs a lot of money to conduct various market research activities. Huge funds are required to pay salaries, prepare questionnaires, conduct surveys, prepare reports, etc. It is not a viable choice for small businesses. It is suitable only for large companies who can afford its cost.

    Provides suggestions and not solutions:

    They provide data to the marketing manager. It guides and advises him. It also helps him to solve marketing problems. However, it does not solve the marketing problem. The marketing manager solves marketing problems. So, MR only provides suggestions. It does not provide solutions.

    Time-consuming:

    It is a lengthy and time-consuming process. This process involves many important steps. All these steps are crucial and not even a single step can be neglected or avoided. In other words, there are no short-cuts in MR. Generally, it takes at least three to six months to solve a marketing problem. Therefore, it cannot be used in urgent or emergencies.

    Limited practical value:

    They only an academic exercise. It is mainly based on a hypothetical approach. It gives theoretical solutions, it does not give real solutions to real-life problems. Its solutions look good on paper but are harder to implement in a real sense. Thus, it has limited practical value.

    Can’t predict consumer behavior:

    They collect data on consumer behavior. However, this data is not accurate because consumer behavior cannot be predicted. It keeps on changing according to the time and moods of the consumers. Consumer behavior is also very complex. It is influenced by social, religious, family, economic and other factors. It is very difficult to study these factors.

    No accurate results:

    It is not a physical science like physics, chemistry, biology, etc. They are also social science. It studies consumer behavior and marketing environment. These factors are very unpredictable. Therefore, it does not give accurate results. It gives results, but it cannot give 100% correct results.

    Non-availability of technical staff:

    It is done by researchers. The researchers must be highly qualified and experienced. They must also be hard-working, patient and honest. However, in India, it is very difficult to find good researchers. Generally, it is done by non-experienced and non-technical people. Therefore, MR becomes a costly, time-consuming and unreliable affair. So, its quality is also affected due to the non-availability of technical staff.

    Can be misused:

    Sometimes, marketing research is misused by the company. It is used to delay decisions, it is used to support the views of a particular individual. Also, used to grab power (managerial) in the company.

    Non-availability of reliable data:

    The quality of the marketing research report depends on the quality of the collected data. If the data is complete, up-to-date and reliable, then the MR report will also be reliable. However, in India, it is very difficult to get full, latest and trustworthy data. So, the non-availability of reliable data is also its limitation.

    The resistance of marketing managers:

    The marketing managers do not use the suggestions given in the marketing research report. Primarily, they feel that these suggestions are not practical. Secondly, they also feel that their importance will become less if they use these suggestions. There is a conflict between marketing managers and researchers.

    Fragmented approach:

    They study a problem only from a particular angle. Also, it does not consider an overall view. There are many causes of a marketing problem. It does not study all causes. It only studies one or two causes.

    For example, if there is a problem with falling sales. There are many causes for falling sales; like poor quality, high-price, competition, recession, consumer resistance, etc. It will only study two causes viz; low-quality and high price. It will not study other causes. So, it is not a reliable one.

  • Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits

    Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits

    What does mean Capitalist Economy? Meaning; It is one of the oldest economic systems and its origin is at the time of mid-eighteenth century in England in the wake of the Industrial Revolution. It is that system, where means of production are owned by private individuals, profit is the main motive and there is no interference by the government in the economic activities of the economy. They are free to use them with a view of making the profit. Everybody is free to take up one line of production he likes and is free to enter into any contract with others for his profit. Hence, it is known as the free market economy. So, what is the topic we are going to discuss; Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits.

    Here are explained; What is the Capitalist Economy? with Meaning, Definition, Features, Merits, and finally Demerits.

    What is the Capitalist Economic System of India? Capitalism is the most prominent in our current global economic system. Its main characteristic is that it most means of production and property are privately owned by individuals and companies. The government has a limited role in such an economy limited to management and control measures. So a capitalist economy is a liberal economy. This means only the free market will determine the supply, demand, and prices of the products.

    Definition of Capitalist Economy:

    According to Wright,

    “Capitalism is a system in which, on average, much of the greater portion of economic life and particularly of net new investment is carried on by private (i.e. non-government) units under conditions of active and substantially free competition and avowedly at the least, under the incentive of hope for profit.”

    In the words of Loucks,

    “Capitalism is a system of economic organization featured by private ownership and use for private profit of man-made and nature-made capital.”

    According to Ferguson,

    “Capitalism is a free-market form or capitalistic economy may be characterized as an automatic self-regulating system motivated by self-interest of individuals and regulated by competitions.”

    Features of Capitalist Economy:

    Capitalist economy has the following main features:

    • Private Property: In this economy, private property is allowed. All means of production like machines, implements, mines, and factories etc. come under private property.
    • Price Mechanism: The Capitalist economy is gained by the price mechanism. Here prices are determined by the interaction of demand and supply without the interference of any kind by the government or any other external forces.
    • Freedom of Enterprise: In this system, every individual is independent to his means of production in any occupation that one likes.
    • The sovereignty of that consumer: Under this system, the consumer plays the most vital role. The entire production pattern is based on the desires, wishes and the demand of the consumer.
    • Profit Motive: The maximization of profit is the main motive of the producer. Profit guides the production in this type of economy.
    • No Government Interference: Under a capitalistic system, the government does not interfere in day-to-day economic activities. This means producers and consumers are free to make decisions.
    • Democratic: The capitalistic system is more democratic in comparison to other economic systems as there are more changes to chancel according to new environments of the economy.
    • Self-Interest: The inspiring force in this system is self-interest. It leads to hard work and to earn maximum income by satisfying their consumers.

    Capitalist Economy Meaning Definition Features Merits and Demerits
    Capitalist Economy: Meaning, Definition, Features, Merits, and Demerits. Image credit from #Pixabay.

    Merits of the Capitalist System:

    The following advantages or merits below are:

    • Individual Motivation: The capitalist economic system motivates the businessmen to develop new items, produce in good quality and undertakes innovative activities because of the initiative of larger profits.
    • Flexible and Dynamic Economy: Motivated by profits, individual initiatives and competition among the traders and businessmen, there is dynamism in the capitalist economy continuously goes ahead with changes and innovative activities.
    • The benefit of Perfect Competition: There exist perfect competition between different traders and creditors who benefit from the capitalist economy. There is no change of monopolistic profits because of perfect competition. The existence of competition initiates more economic welfare. According to George Steiner, from the point of view of public welfare, competition serves as a regulator and reducer of prices as an incentive to improved production efficiency. Without competition, the capitalist economy would become stagnant, unproductive and exploitative.
    • Capital Formation: The capitalist economy encourages for the formation of capital, wealth and assets in the society. New industrial and commercial institutions are set up with the objectives of profits and also encourages the creation of additional employment, income, and savings. 
    • The economic growth of an economy is also faster and higher in a capitalist economy. This is because the investors will also invest in projects that are profitable for them. There is no pressure to produce any goods or services if they do not wish to do so for the sake of the public.
    • Consumers also benefit in a capitalist economy. Firstly they have the freedom to choose whichever products or services they wish to buy. Also, the competition is high and the producers are motivated to make their best products in large quantities at reasonable prices.
    • Capitalism also promotes fundamental rights of freedom and choice for both the consumer and the producers.

    Demerits of Capitalist System:

    The countries which have become independent after the 1950s adopted mostly the socialistic economic system because of the demerits of the capitalist economic system. Human welfare aspect has completely disappeared in the capitalist system and it has created disparity in income and wealth. H.D. Dickinson writes, “Capitalism. …is fundamentally blind, purposeless, and irrational and is incapable of satisfying many of the urgent human needs.

    Some of the important disadvantages or demerits of capitalism are:

    • Increase Inequalities: It increases inequalities in wealth, income and opportunities. Increase in economic inequalities creates economic and social problems.
    • Economic Instability: It is difficult to establish a balance between the demand and supply. There will be a trade boom or recession or the frequent fluctuations in prices. All the decisions relating to production are taken by the capitalist and due to wrong estimates of future requirements; imbalance in production is generally found. Due to fluctuations in prices industrial and other economic activities become unstable and this will have an adverse impact on economic development and expansion.
    • Inefficient Production: The capitalist always produces with the motive of profit only. He always produces goods for use by the higher income class of the community so that maximum profits can be obtained. There is no place in the mind of the capitalist to produce for consumption by common people. Goods and service are not produced by keeping in view the interest and wants of the common man, but with the motive of capitalist’s profits.
    • Class Conflicts: The capitalist economy divides the community into two parts; on the first side the top capitalists and on the other side labor class which depends on the capitalists to fill their stomach. Since the production resources are controlled by the capitalists they exploit the labor from their reasonable reward.
    • Unemployment: In a capitalist economy, full employment situation cannot be brought due to lack of central economic planning. With the result, optimum use of resources cannot be possible. This brings the situation of unemployment.
    • Monopoly and Exploitation: The establishment of large-scale business, improvement in technology, the motive of maximization of profits, formation of combinations and acute competition are the reasons for the creation of monopoly and exploitation of customers.
    • Neglect of National Interest: They are mainly oriented towards self-interest of maximization of profits for which they compete with each other. They neglect the social interests. They do not undertake their activities keeping in view the national interest.
  • Group Technology: Meaning, Definition, Advantages, and Limitations

    Group Technology: Meaning, Definition, Advantages, and Limitations

    What does mean Group Technology? Group technology or GT takes advantage of the similarities of parts and machines in a manufacturing system. In this paper, the classification and clustering approaches to group technology in manufacturing systems are discussed. The mathematical programming formulations for the clustering problem are presented. GT is the important technology among the others and it will play a major role in the factory of the future. So, what is the topic we are going to discuss; Group Technology: Meaning, Definition, Advantages, and Limitations.

    Here are explained; What is the Group Technology? first Meaning, Definition, Advantages, and finally Limitations.

    Meaning of Group technology: GT is a concept that is currently attracting a lot of attention from the manufacturing community. GT offers a number of ways to improve productivity in batch manufacturing. The essence of GT is to capitalize on similarities in recurring tasks. GT is, very simply, a philosophy to exploit similarities and achieve efficiencies grouping like problems.

    Group technology is an approach to organizing manufacture which can be applied in any industry (machining, welding, foundry, press work, forging, plastic molding, etc.) where small-batch variety production is used.

    Discuss of GT list;

    • What is the Group Technology?
    • Meaning of Group Technology.
    • Definition of Group Technology.
    • Advantages of Group Technology, and.
    • Limitations of Group Technology.

    Definition of Group technology:

    The basic approach enables all aspects of manufacturing, from design, through estimating and planning, to production, to be rationalized. It forms the basis for the development of computer-aided procedures and flexible automation. Group technology is a manufacturing philosophy or principle whose basic concept is to identify and bring together related or similar parts and processes, to take advantage of the similarities which exist, during all stages of design and manufacture.

    If parts can be classified into families, and machines arranged into groups, then the handling of parts during manufacture can be easily done by the robot. It must be understood that there exists a relationship between finished products and the parts from which they are made. While assemblies may bear little relation to each other, the sub-assemblies from which they are constructed will exhibit some like features. By exploiting the similarities which exist among such a population of parts, group technology sets out to reduce the time and cost of manufacture.

    “Group technology is the realization that many problems are similar and that, by grouping similar problems, a single solution can be found to a set of problems, thus saving time and effort.”

    Explain the Definition;

    The main theme is thus to identify somehow from the large variety of parts those families which require similar manufacturing operations. Cells are created to manufacture defined types and size ranges of parts. Groups of machines, chosen for each family are situated together in a group layout, in such a way that parts flow from one machine to the next in the sequence of operation.

    It is not necessary for every part to visit each machine, but the machines in a cell should ideally be capable of carrying out all the operations required in the family. It may be remembered that in a functional layout, all like machines are grouped at one place and thus a product has to move a lot of distance in a zig-zag manner. But in a cell layout, various machines are arranged so that product flows from one machine to the next in sequence.

    History of Group Technology:

    Prior to 1913, the era of Henry Ford and his Model T, all machining models were similar to our present job shop techniques with machines laid out usually in lines or blocks of similar machines. The work was loaded onto the machines usually by the manual progress control system. Ford introduced the assembly line and that, in turn, led to automated transfer machines. However, the majority of engineering do not produce items in the quantity that justify such methods and so the jobbing shop philosophy continued.

    GT is mainly coordination of normal good engineering practices. It is impossible to say who first practiced GT. There are reports of it having been used in Germany in the 1930s. In an international Conference held in Stockholm in 1947, the basic groups were explained by C.B.Nanthorst. In Italy, M. Patrignany was an early exponent of this technology. However, little of this appears to have been in English. First published work was from the USSR by S.P.Mitrofanov in 1959 and thereafter subsequent books here published by F.S.Denyanyuk and E.K. Ivanov.

    The first reported work on GT outside Russia was done by a French Forges et Ateliers de Construction Electriques de Jeurmont – and this was about in Machinery in 1962. Subsequently, several British companies conducted considerable work in this field. There have also been considerable studies done by various consultants in the Universities. The significant contribution by J.L.Burbidge in the 1960s led to GT as A total Manufacturing Philosophy.

    Advantages of Group Technology:

    According to Burbidge, the following are the advantages of introducing GT in manufacturing.

    • Short throughput times because machines are closed together.
    • Better quality because groups complete parts and the machines are closed together under one foreman.
    • Lower material handling costs because machines are closed together under one foreman.
    • Better accountability because of machines complete parts. The foreman can be made responsible for costs, quality, and completion by the due date.
    • Training for promotion since GT provides a line of succession because a group is a mini-department.
    • Automation GT is the first evolutionary step in automation.
    • Reduced set up time since similar parts brought together on the same.
    • Morale and job satisfaction since most workers prefer to work in groups.
    • The output is improved due to improved resource utili­sation.
    • Work in progress and finished stock levels are re­duced.
    • Simplified estimating, accounting and work man­agement.
    • Improved plant replacement decisions, and.
    • Improved job satisfaction, morale, and communica­tion.

    Studies were undertaken by N.L.Hyer indicates the following significant savings after implementing GT Snead prepared a summary matrix, listing the benefits listing benefits achieved for the various GT. What is the Definition of Production Management?

    Group Technology Meaning Definition Advantages and Limitations
    Group Technology: Meaning, Definition, Advantages, and Limitations. #Pixabay.

    Limitations of Group Technology:

    Group Technology is a great concept. But all good concepts do have their own limitations and need proper care in their applications for results to be realized in practice.

    The Disadvantages of Group Technology or cellular manufacturing may be as follows.

    • High Cost: The cost of implementation is generally high. This is because an outside consultant is often required since in-house expertise on GT is rarely available. It requires a long set up time and painful debugging.
    • Not Suitable for large Variety of Products: May not be suitable for a factory with a very large variety of products.
    • The entire production of the company cannot be put under the GT and hence GT will have to coexist with the conventional layouts.
    • Not suits all Applications: There are too many GT codes in used and there is no one GT code that suits all applications.
    • It is often difficult to conceive all the operations for a group of components being taken care of in the cell created for it.
    • The range of product mix in a plant may be under constant change in which case the GT cells may need a constant revision which is impractical.
    • The additional cost of implementation of this system.
    • The rate of change in product range and mix.
    • Difficulties with out-of-cell operations, and.
    • Coexistence with non-cellular systems.

    How to Uses of Group Technology in the Company for Production?

    Survey of product and use of group technology:

    Group technology technique can be conveniently followed using a classification system. In an assembly, a variety of parts exist. These varieties of parts can be-segregated in three broad areas, viz.

    • Standard and proprietary parts (like nuts, bolts, screws, keys, washers, etc.)
    • Similar parts (like shafts, gears, bearings, levers, etc.)
    • Product specific parts (like gearbox, bed, saddle, etc.)

    It may be noted that the group technology is not concerned with categories (i) and (iii) but relates to category (ii). The aim thus is to group the range of parts under the category (ii) in some way, for the purpose of manufacture. Several types of classification systems have been devised and one has to carefully consider the system based on his needs.

    An organization with a wide range of products needs a complex detailed system but the same is not good for the one dealing with a limited range. Provision should always be made for future likely growth and classification system chose must keep this requirement in view.

    Organizational suitability for Group Technology:

    The suitability of a firm for the introduction of GT depends on several factors. The survey of Willey and Dale give a tentative description of a company profile likely to achieve. The greatest benefits from GT, some of these are:

    • The company must be a relatively small organization with reasonably small machine tools, and manufacturing equipment.
    • The company should not be typified by either large or small component variety.
    • The batch sizes and the batch size range of products of the companies it is relatively small.

    Athersmith and Crookall Rajagopal and Smith Gupta Andand Grayson have suggested. Another way of finding out the suitability of GT for a batch production industry. Computer simulation has been used by the effect of the introduction of GT in the batch production. Industries based on the parameters such as throughput time. WIP inventory and plant utilization Further GT are considered a desirable stepping stone for establishing Just-In-Time production.

  • 5 Advantages and disadvantages of Capitalism

    5 Advantages and disadvantages of Capitalism

    Understand the Advantages and disadvantages of Capitalism; Capitalism is an economic system in which each individual in his capacity as a consumer, producer, and resource owner is engaged in economic activity with a large measure of economic freedom. Individual economic actions conform to the existing legal and institutional framework of the society which is governed by the institution of private property, the profit motive, freedom of enterprise, and consumer sovereignty. Now discuss the pros and cons of capitalism;

    5 Advantages and disadvantages of Capitalism.

    Definition: Prof. R. T. Bye has defined capitalism as, “That system of economic organization in which free enterprise, competition and private ownership of property generally prevail.” Thus, the definition hints at the major features of capitalism. Also, understand Capitalism in India, Economic Growth and Development.

    Advantages of Capitalism:

    The protagonists of capitalism advance the following arguments in favor of capitalism – pros and advantages of capitalism.

    • Quality Products at Low Costs.
    • Increase in Production.
    • Flexible System.
    • Progress and Prosperity.
    • Maximizes Welfare, and.
    • Optimum use of Resources.

    Now, explain;

    Quality Products at Low Costs:

    The twin freedoms of consumers and producers lead to the production of quality products and lowering of costs and prices. Thus the society as a whole stands to gain under capitalism.

    Increase in Production:

    Arthur Young wrote, “The magic of property turns sand into gold.” This observation of Young holds good in a free enterprise economy where every farmer, trader, or industrialist can hold property and use it in any way he likes. He brings improvement in production and increases productivity because the property belongs to him. This leads to an increase in income, savings, and investment, and to progress.

    Flexible System:

    A capitalist economy operates automatically through the price mechanism. If there are shortages or surpluses in the economy, they correcte automatically by the forces of demand and supply. As such, capitalism is a highly flexible system that can adapt itself to changing economic conditions. That is why it has survived many depressions, recessions, and booms.

    Progress and Prosperity:

    The presence of competition under capitalism leads to an increase in efficiency, encourages producers to innovate, and thereby brings progress and prosperity to the country. As pointed out by Seligman. “If competition in biology leads only indirectly to progress, competition in economics is the very secret of progress”.

    Maximizes Welfare:

    The automatic working of the price mechanism under capitalism brings efficiency in the production and distribution of goods and services without any central plan and promotes the maximum welfare of the community.

    Optimum Use of Resources:

    Under capitalism, producers undertake the production of only those goods that appear to yield maximum profits in anticipation of demand. This leads to the optimum use of resources.

    Disadvantages of Capitalism:

    The following arguments are advanced against capitalism – the cons and disadvantages of capitalism.

    • Inequalities.
    • Consumer’s Sovereignty a Myth.
    • Inefficient Production.
    • Leads to Monopoly.
    • Depression Unemployment, and.
    • Non-utilisation of Resources.

    Now, explain;

    Inequalities:

    The institution of private property creates inequalities of income and wealth under capitalism. The price mechanism through competition brings huge profits to big producers, the landlords, the entrepreneurs, and the traders who accumulate the vast amount of wealth. While the rich roll in wealth and luxury, the people with low-income live in poverty and squalor.

    Consumer’s Sovereignty a Myth:

    Consumer’s sovereignty is a myth under capitalism. Consumers have to buy only those commodities which manufactured and supplied by the producers in the market. The majorities of consumers are not rational buyers and are often ignorant about the utility and quality of the products available at the stores or shops. They are also misled by advertisement and propaganda about the usefulness of the products. Products which produced by monopoly concerns are often of inferior quality and are priced high. Thus there is no consumers’ sovereignty in a seller’s market.

    Inefficient Production:

    Capitalism fails to produce goods in keeping with the society’s requirements. Frivolous luxury goods and obnoxious articles produced to satisfy the wants of the few rich at the expense of the necessities needed by the people with low-income. Thus there is social wastage of the economy’s resources.

    Leads to Monopoly:

    The competition which regarded as the very basis of capitalism contains within itself the tendency to destroy competition and leads to monopoly. It is the profit motive under capitalism which leads to cut-throat competition, and ultimately to the formation of trusts, cartels, and combinations. This brings about a reduction in the number of firms actually engaged in production. As a result, small firms are eliminated in this process.

    Depression and Unemployment:

    Capitalism is characterized by business fluctuations and unemployment. Excessive competition and unplanned production lead to overproduction and glut of commodities in the market and ultimately depression and unemployment.

    Non-utilisation of Resources:

    The price mechanism under capitalism fails to employ the country’s resources fully. Free and unfettered competition, inequalities of income distribution, overproduction, and consequent depression lead to wastage of productive resources. Besides, there is mass unemployment and freedom of occupation has little meaning under capitalism.

  • Capitalism: Meaning, Definition, Characteristics, Features, Merits, and Demerits

    Capitalism: Meaning, Definition, Characteristics, Features, Merits, and Demerits

    What does mean Capitalism? Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Capitalism is an economic system where private entities own the factors of production. The four factors are entrepreneurship, capital goods, natural resources, and labor. So, what is the topic we are going to discuss; Capitalism: Meaning, Definition, Characteristics, Features, Merits, and Demerits…Read in Hindi.

    Here are explained What is Capitalism? First Meaning, Definition, Characteristics, Features, Merits, and finally their Demerits.

    The owners of capital goods, natural resources, and entrepreneurship exercise control through companies. Capitalism is ‘A system of economic enterprise based on market exchange’. The Concise Oxford Dictionary of Sociology (1994) defines it as ‘a system of wage-labor and commodity production for sale, exchange, and profit, rather than for the immediate need of the producers’.

    ‘Capital refers to wealth or money used to invest in a market with the hope of achieving a profit’. It is an economic system in which the means of production are largely in private hands and the main incentive for economic activity is the accumu­lation of profits. From the perspective developed by Karl Marx, capitalism organizes around the concept of CAPITOL implying the ownership and control of the means of production by those who employ workers to produce goods and services in exchange for wages.

    Max Weber, on the other hand, considered market exchange as the defining characteristic of capitalism. In practice, capitalist systems vary in the degree to which private ownership and economic activity are regulated by the government. It has assumed various forms in indus­trial societies. In common parlance, these days, capitalism knows as a market economy. The goods sold and the prices they are sold at determines by the people who buy them and the people who sell them.

    In such a system, all people are free to buy, sell and make a profit if they can. This is why capitalism often calls a free market system. It gives freedom to entrepreneurs (of the opening industry), to the worker (of selling labor), to the trader (of buying and selling goods), and to the individual (of buying and consuming).

    Meaning of Capitalism:

    Under capitalism, all farms, factories and other means of production are the property of private individuals and firms. They are free to use them to make a profit. The desire to earn a profit is the sole consideration with the property owners in the use of their property. Under capitalism, everybody is free to take up any line of production he wishes and is free to enter into any contract to earn the profit.

    Definition of Capitalism:

    In the words of Prof. LOUCKS,

    “Capitalism is a system of economic organization featured by the private ownership and the use for private profit of man-made and nature-made capital.”

    Ferguson and Kreps have written that,

    “In its own pure form, free enterprise capitalism is a system in which privately owned and economic decision are privately made”.

    Prof. R. T. Bye has defined capitalism as,

    “That system of economic organization in which free enterprise, competition and private ownership of property generally prevail.”

    Capitalism from Mc Connell view is,

    “A free market or capitalist economy may be characterized as an automatic self-regulating system motivated by the self-interest of individuals and regulated by competition.”

    A capitalist economy works through the Price System.

    Prices perform two functions:

    • A rationing function,
    • An incentive function.

    Prices ration out the available goods and services among buyers according to the amounts each buyer wants and can pay for others whose desire is less urgent or whose income is smaller will receive smaller qualities. Prices also provide an incentive for firms to produce more. Where demand is high prices will rise encouraging firms already in the industry to produce more and drawing new firms into the industry. Where demand is falling, prices will normally fall too. Firms will reduce their production, releasing resources for use in other industries where there is a demand for them. Firms are buyers as well as sellers.

    They buy materials and supplies from other firms behaving exactly as private individuals do in deciding what to buy and how much to buy. If a new machine promises to reduce production costs or if a certain material can substitute for another at saving, the firm will buy low-cost resources to compete with other firms. The economy is tied together by millions of those interactions linking producers with one another and with consumers, linking one product with other products and linking every market with other markets. The point is that all the economic units in an economy inter-relates.

    The Characteristics of Capitalism:

    Capitalism involves new attitudes and institutions—entrepreneurs engaged in the sustained, systematic pursuit of profit, the market acted as the key mechanism of productive life, and goods, services, and labor become commodities whose use was determined by rational calculation.

    The main characteristics of the capitalistic organization in its ‘pure’ form may briefly describe as under:

    • Private ownership and control of the economic instruments of production, i.e., CAPITOL.
    • The gearing of economic activity to making profits—maximization of profits.
    • Free market economy—a market framework that regulates this activity.
    • The appropriation of profits by the owners of capital. It is the income derived by the capitalist from selling in the market.
    • The provision of wage labor, which creates by converting labor-power into a commodity. It is this process that produces the working class and inherently hostile relationships in capitalist society workers (proletariat) versus capitalist, employee versus the employer.
    • Business firms privately own and compete with each other to sell their goods to consumers.
    • Commercialization of agricultural and industrial production.
    • Development of new economic groups and expanding across the globe.
    • Capital accumulation by the capitalists as an obligatory activity, for unless there is capital to invest, the system will fail. Profits produce capital when they are re-invested.
    • Investment and growth are accomplished by using accumulated capital to expand an enterprise or create a new one. Capitalism, thus, is an economic system that requires constant investment and constant economic growth.

    What has impressed students of modernity is the huge and largely unreg­ulated dominance of capitalist enterprise across political and religious control with it’s related monetary and market networks.

    The Features of Capitalism:

    What a capitalistic economy is a can knows through its main features. These derive from the way certain functions perform and the main decisions of the economy execute.

    These may be stated as under:

    Private Property and Freedom of ownership:

    A capitalist economy is always having the institution of private property. An individual can accumulate property and use it according to his will. The government protects the right to property. After the death of every person, his property goes to his successors.

    The right of Private Property:

    The most important feature of capitalism is the existence of private property and the system of inheritance. Everybody has a right to acquire private property to keep it and after his death, to pass it on to his heirs.

    Price Mechanism:

    This type of economy has a freely working price mechanism to guide consumers. Price mechanism means the free working of the supply and demand forces without any intervention. Producers are also helped by the price mechanism in deciding what to produce, how much to produce, when to produce and where to produce.

    This mechanism brings about the adjustment of supply to demand. All economic processes of consumption, production, exchange, distribution, saving and investment work according to its directions. Therefore, Adam Smith has called the price mechanism as the “Invisible Hand” which operates the capitalist.

    Profit Motive:

    In this economy, the desire to earn a profit is the most important inducement for economic activity. All entrepreneurs try to start those industries or occupations in which they hope to earn the highest profit. Such industries expect to go under a loss abandoned. Profit is such an inducement that the entrepreneur prepares to undertake high risk. Therefore, it can say that the Profit Motive is the SOUL of the capitalist economy.

    Competition and Co-operation Goes Side by Side:

    A capitalist economy characterizes by free competition because entrepreneurs compete for getting the highest profit. On the other side buyers also compete for purchasing goods and services. Workers compete among themselves as well as with machines for taking up a particular work. To produce goods of the required type and quality workers and machines are made to co-operate so that the production line runs according to schedule. In this way, competition and co-operation go side by side.

    Role of the Entrepreneur:

    The entrepreneurial class is the foundation of the capitalist economy. The whole of the economic structure of the capitalist economy base on this class. Entrepreneurs play the role of leaders in different fields of production. The presence of good entrepreneurs is a must for healthy competition. Entrepreneurs are the main sources of the dynamism of the capitalist economy.

    Main Role of Joint Stock Companies:

    In a joint-stock company, business carries on by a board of directors which democratically elects by the shareholders of the company at its general body meeting. Because of this, it has said that Joint-stock Companies “Democratic Capitalism”. However, the real functioning of the corporate sector is not democratic because there is a one-share-one vote election. Since big business houses own a majority of the shares of a company, they manage to get re-elected and the company is run as if it were their family business.

    Freedom of Enterprise, Occupation, and Control:

    Every person is free to start any enterprise of his choice. People can follow the occupations of their ability and taste. Moreover, there is the freedom of entering into the contract. Employers may contract with trade unions, suppliers with a firm and one firm with another.

    Consumer’s Sovereignty:

    In a capitalist economy, a consumer compares to a sovereign king. The whole production frameworks according to his directions. Consumer’s tastes govern the whole production line because entrepreneurs have to sell their products. If a particular type of production is to the liking of consumers, the producer gets high profits.

    It arises Class Conflict:

    From this class-conflict arises. The society is normally divided into two classes the “haves” and the “have-not’s”, which are constantly at war with each other. The conflict between labor and capital is found in almost all capitalistic countries and there seems to be no neat solution to this problem. It seems that this class-conflict is inherent in capitalism.

    Historical Development of Capitalism:

    Historically, modem capitalism has mainly developed and expanded in Great Britain and the United States. Early industrial capitalism in Great Britain and the United States in the 19th century is regarded as the classical model that approximates the pure form most closely. Modern (industrial) capitalism differs fundamentally from pre-existing production systems because it involves the constant expansion of production and ever-increasing accumu­lation of wealth.

    In traditional production systems, levels of production were fairly static since they were geared to habitual, customary needs. Capitalism promotes the constant revision of the technology of production. The impact of science and technology stretches beyond the economic sphere. Scientific and technological development, such as radio, television, computers and other electronic media, have also come to shape how we live, how we think and feel about the world. In the face of these developments, traditional debates between the advocates of free-market capitalism, and state socialism have become more or less outdated or are becoming outdated.

    As we have moved into a ‘postmodern’ world (information society) from the 18th and 19th-century modern society, some philosophers like Francis Fukuyama predicated about the ‘end of history’—meaning that there are no future alternatives to capitalism and liberal democracy. Capitalism has won in its long struggle with socialism, contrary to Marx’s prediction and liberal democracy now stands unchallenged.

    Capitalism Meaning Definition Characteristics Features Merits and Demerits
    Capitalism: Meaning, Definition, Characteristics, Features, Merits, and Demerits.

    The advantages or Merits of Capitalism:

    The main merits and advantages of capitalism are as follows:

    Production According to the Needs and Wishes of Consumers: 

    In a free-market economy, consumer needs and wishes are the uppermost in the minds of the producers. They try to produce goods according to the tastes and liking of the consumers. This leads to the maximum satisfaction of the consumers as obtained from his expenditure on the needed goods.

    Higher Rate of Capital Formation and More Economic Growth: 

    People under capitalism have the right to hold property and pass it on an inheritance to their heirs and successors. Owing to this right, people save a part of their income so that it can invest to earn more income and leave the larger property for their heirs. The rate of Capital formation increases when savings invest. This accelerates economic growth.

    Efficient Production of Goods and Services: 

    Due to the competition, every entrepreneur tries to produce goods at the lowest cost and of a durable nature. Entrepreneurs also try to find out superior techniques of producing the goods consumers get the highest quality goods at the least possible cost because the producers are always busy in making their production methods more and more efficient.

    Varieties of Consumer Goods: 

    Competition is not only in price but also in the shape design, colors, and packing of products. Consumers, therefore, get a good deal of variety of the same product. They need not give limited choices. It says that variety is the spice of life. The free market economy offers a variety of consumer goods.

    In Capitalism there is no Need for Inducement or Punishment for Good and Bad Production:

    A capitalist economy encourages efficient producers. The able an entrepreneur is, the higher is the profit he obtains. There is no need to provide any kind of inducement. The price mechanism punishes the inefficient and rewards the efficient on its own.

    It Encourages Entrepreneurs to Take Risks and Adopt Bold Policies: 

    Because taking the risk they can make higher profits. Higher the risk, the greater the profit. They also make innovations to cut their costs and maximize their profits. Hence capitalism brings about great technological progress in the country.

    The disadvantages or Demerits of Capitalism:

    The capitalist economy has been showing signs of stress and strain at different times. Some have called for a radical reform of the free-market economy. Others like Marx have considered the capitalist economy to be contradictory in itself. They have predicted the ultimate doom of the capitalist economy after a series of deepening crisis.

    The main demerits or disadvantages of the capitalist economy are as follows:

    Inequality of Distribution of Wealth and Income: 

    The system of private property acts as a means of increasing inequalities of income among different classes. Money begets money. Those who have wealth can obtain resources and start big enterprises. The propertyless classes have only their labor to offer. Profits and rents fewer classes have only their labor to offer. Profits and rents are high.

    Wages are much lower. Thus the property holders obtain a major share of national income. The common masses have their wages to depend upon. Although their number is overwhelming their share of income is relatively much lower.

    Class Struggle as Inevitable in Capitalist Economy: 

    Some critics of capitalism consider class struggle as inevitable in a capitalist economy. Marxists point out that there are two main classes into which the capitalist society divide. The ‘haves’ in which the rich property class owns the means of production. The “have not’s” which constitute the wage-earning people have no property.

    The ‘haves’ are few. The ‘have not’s are in the majority. There is a tendency on the part of the capitalist class to exploit the wage-earners. As a result, there is a conflict between the employers and the employees which leads to labor unrest. Strikes, lockouts and other points of tension. All these have a very bad effect on production and employment.

    Social Costs are Very High:

    A capitalist economy industrializes and develops but the social costs of the same are very heavy. Factory owners running after private profit do not care for the people affected by their production. The environment pollutes because factory wastes not properly dispose of. Housing for factory labor very rarely provides the result that slums grow around big cities.

    Instability of the Capital Economy: 

    A capitalist economy is inherently unstable. There is a recurring business cycle. Sometimes there is a slump in economic activity. Prices fall, factories close down, workers render un-employe. At other times the business is brisk, prices rise, fast, there is a good deal of speculative activity. These alternating periods of recession and boom lead to a good deal of wastage of resources.

    Unemployment and Under-employment: 

    A capitalist economy has always some unemployment because the market mechanism is slow to adjust to the changing conditions. Business fluctuations also result in a large part of the labor force going unemployed during depressions. Not only this, workers are not able to get full-time employment except under boom conditions.

    Working Class does not have Adequate Social Security: 

    In a capitalist economy, the working class does not have adequate social security, commodity, the factory owners do not provide for any pension, accident benefits or relief to the families of those who die in employment. As a result, widows, and children have to undergo a good deal of suffering. Governments are not in a position to provide for adequate social security in overpopulated less developed countries.

  • Free Trade Area, Short Explain, Advantages and Disadvantages in Free Trade

    Free Trade Area, Short Explain, Advantages and Disadvantages in Free Trade

    What is Free Trade? Free trade area is a trade policy that does not restrict imports or exports; it is the idea of the free market as applied to international trade. In government, free trade is predominately advocated by political parties that hold right-wing or liberal economic positions, while economically left-wing political parties generally support protectionism, the opposite of free trade. So, what is the discussing topic; Free Trade Area, Short Explain, Advantages and Disadvantages in Free Trade.

    The Concept of Study; first Free Trade Area, after Short Explain of Free Trade, then discuss Advantages and Disadvantages in Free Trade.

    Free trade: The system in which goods, capital, and labor flow freely between nations, without barriers that could hinder the trade process. Many nations have free trade agreements, like NAFTA (North America Free Trade Agreement, between Canada, the United States, and Mexico) and several international organizations promote free trade between their members. A number of barriers to trade are struck down in a free trade agreement. Taxes, tariffs, and import quotas are all eliminated, as are subsidies, tax breaks, and other forms of support to domestic producers. In the words of Adam Smith: 

    “After all why the protection in needed just to save the gold from going into the other country. I do not give much importance to it. It is a kind of commodity which is less important than other commodities because goods can serve many other purposes besides purchasing money but money can serve many other purposes besides purchasing goods. If protection is levied, it will divert industries from more advantageous trade to less advantageous trade”.

    Free Trade Area (FTA):

    Free trade area is a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. It can be considered the second stage of economic integration. Countries choose this kind of economic integration form if their economic structures are complementary. If they are competitive, they will choose the customs union.

    A group of countries, such as the North American Free Trade Area (Canada, Mexico and the United States), pledged to remove barriers to mutual trade, though not to movements of labor or capital. Each member continues to determine its own commercial relations with non-members so that a free trade area is distinguished from a customs union by the need to prevent the most liberal of its members from providing an open door for imports. This is done by agreeing rules of origin, which set the terms on which goods manufactured outside the area may move from one state to another within it.

    The illustration of a Free Trade Area:

    Unlike a customs union, members of a free trade area do not have the same policies with respect to non-members, meaning different quotas and customs. To avoid evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Goods that don’t cover these minimum requirements are not entitled to the special treatment envisioned in the free trade area provisions.

    Cumulation is the relationship between different FTAs regarding the rules of origin sometimes different FTAs supplement each other, in other cases, there is no cross-cumulation between the FTAs. A free trade area is a result of a free trade agreement (a form of trade pact) between two or more countries. Free trade areas and agreements (FTAs) are cascadable to some degree if some countries sign agreement to form free trade area and choose to negotiate together (either as a trade block or as a form of individual members of their FTA) another free trade agreement with some external country (or countries) then the new FTA will consist of the old FTA plus the new country (or countries).

    Within an industrialized country, there are usually few if any significant barriers to the easy exchange of goods and services between parts of that country. For example, there are usually no trade tariffs or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country.

    The aim of a free trade area is to so reduce barriers to easy exchange that trade can grow as a result of specialization, the division of labor and most importantly via (the theory and practice of) comparative advantage. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage.

    The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free trade area. However, the theory refers only to aggregate wealth and says nothing about the distribution of wealth. In fact, there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. The proponent of free trade can, however, retort that the gains of the gainers exceed the losses of the losers.

    Short Explain of Free Trade:

    The commercial policy is concerned with whether a country should adopt the policy of free trade or of protection. If the policy of protection of domestic industries is adopted, the question which is faced whether protection should be granted, through imposing tariffs on imports or through the fixation of quota or through licensing of imports. The commercial policy has been the subject of heated discussion since the time of Adam Smith who advocated for free trade and recommended that tariffs should be removed to avail of the advantages of free trade.

    Even today, economists are divided over this question of commercial policy. Various arguments have been given for and against free trade. If the policy of protection of domestic industries is adopted, the question is whether for this purpose tariffs should be imposed on imports or quantitative restrictions through quota and licensing be applied. The readers should be knowing that a Bharatiya Janata Party in India has been demanding a policy of ‘Swadeshi’ which in essence means that domestic industries should be pro­tected against low-priced imports of goods from abroad, that is, free trade should not be allowed.

    Besides Adam Smith, the other famous classical economist David Ricardo in his famous work “On the Principles of Political Economy and Taxation” also defended free trade to promote effi­ciency and productivity in the economy. Adam Smith and the other earlier economists thought that it pays a country to specialize in the production of those goods it can produce more cheaply than any other country and import those goods it can obtain at less cost or price than it would cost to produce them at home. This means they should specialize according to absolute cost advantage.

    However, Ricardo put forward the ‘Theory of Comparative Cost’ where he demonstrated that to obtain benefits from the trade it is not necessary that countries should produce these goods for which their absolute cost of production is the lowest. He proved that it could pay a country to import a good even though it could produce that good at a lower cost if its cost is relatively lower in the production of some other good.

    Ricardo’s theory of trade rests on the idea of relative efficiency or comparative cost. Despite the classical arguments for free trade to promote efficiency and well-being of the people, various countries have been following the protectionist policies which militate against free trade. By imposing heavy tariff duties on imports of goods or fixing quotas of imports they have prevented free trade to take place between countries. Several arguments have been given in favor of protection. In what follows we spell out this free trade vs. protection controversy.

    Advantages of Free Trade:

    The advocates of free trade put forward the following advantages of free trade:

    • International Specialization: Free trade causes international special­isation as it enables the different countries to produce those goods in which they have a comparative advantage. International trade enables countries to obtain the advantages of specialization. First, a great variety of products may be obtained. If there were no international trade, many countries would have to go without some products. Thus, Iceland would have no coal, Nepal no oil, Spain no gold and Britain no tea. Second, specialization leads to an increase in total production. 
    • Increase in World Production and World Consumption: International trade permits industry to take full advantages of the economies of scale (large-scale production). If certain goods were produced only for the home market, it would not be possible to achieve the full advantage of large-scale production. So, free trade increases the world production and the world consumption of internationally traded goods as every trading country produces only the selected goods at lower costs.
    • Safeguard against the Advent of Monopolies: Thirdly, if there were no international competition, the home market would be so narrow that it would be comparatively easy for the combinations of firms in many indus­tries, e.g., motor cars, paper, and electrical goods, to exercise some control over it. Free trade is often an efficient way of breaking up domestic monopolies.
    • Links with Other Countries: International trade and commercial relations often lead to an interchange of knowledge, ideas and culture between nations. This often produces a better understanding of those countries and leads to amity and theory reduces the possibility of commer­cial rivalry and war.
    • Higher Earnings of the Factors of Production: Furthermore, free trade increases the earnings of all the factors as they are engaged in the production of those goods in which the country has a comparative advantage. It would increase the productivity of each factor.
    • Benefits to Consumers: On account of free trade the consumers of the different countries get the best quality foreign goods, often of a wider range of choice, at low prices.
    • Higher Efficiency and Optimum Utilisation of Resources: Free trade stimulates home producers, who face foreign competition, to put forth their best effort and thus increase managerial efficiency. Again, as under free trade, each country produces those goods in which it has the best advantages, the resources (both human and material) of each country are utilized in the best possible manner.
    • Evil Effects of Protection: Free trade is also advocated because it can remove the evil effects of protection, such as high prices, the growth of monop­olies, etc. It is also immune from such abuses as ‘corruption and bribery’ and the creation of vested interests which often arise under a protectionist system.
    • If the policy of free trade is adopted by all the countries of the world, it promotes a mutually profitable international division of labor which leads to specialization in the production of those commodities in which they have the greatest relative advantage. The diversification of human and material resources of the country into remunerative channels results in increasing the real national product of all the countries. The standard of living of people all over the world goes up.
    • Free trade is undoubtedly the best from the point of view of the consumers because they can get a wider range of goods and commodities at lower prices. When protection is levied, the choice is reduced and the prices of commodities go up.

    Disadvantages of Free Trade:

    But, free trade is opposed on several grounds. The following Disadvantages of Free Trade below are:

    • Excessive Dependence: As a country depends too much on foreign countries, an outbreak of war may upset its economy. During the 1991 Gulf War America refused to sell its products to its enemies.
    • Obstacles to the Development of Home Industries: If foreign goods are imported freely, the domestic industries of the developing countries would not be able to develop rapidly due to the superior strength of foreign industries.
    • Empire-Builder: Under free trade, the foreign traders particularly the dominant ones may try to become empire-builders in the future. In the past, free trade gave rise to colonialism and imperialism.
    • Import of Expensive Harmful Goods: A country may also import expensive and harmful foreign goods.
    • Rivalry and Friction: Finally, free trade sometimes creates rivalry and frictions among the trading nations. In other words, commercial rivalries resulting from trade often lead to war. This is an important point.
    • One of the most captivating arguments put forth against free trade is that it leads to over-dependence upon other countries. In the time of war or any other emergency, the over-specialized countries may not be able to supply the required goods to the non-specialized ones.
    • It is pointed out that under the system of free trade, the economically backward country remains always at a disadvantage with the economically advanced country. So in order to build up industries, the backward nations must erect tariff walls the USA. and Germany in the late 19th century abandoned free trade because they were late in entering the industrial field. They developed the industries behind tariff barriers. So is also the case with India.

    Free Trade Area Short Explain Advantages and Disadvantages in Free Trade
    Free Trade Area, Short Explain, Advantages and Disadvantages in Free Trade. Image credit from #Pixabay.