MARKET RESEARCH

 

Market research is the process of gathering and analyzing information to help business firms and other organizations make marketing decisions. Business executives use market research to help them identify markets (potential customers) for their products and decide what marketing methods to use. Government officials use such research to develop regulations regarding advertising, other sales practices, and product safety.

 

Market research services are provided by several kinds of companies, including advertising agencies, management consultants, and specialized market research organizations. In addition, many large business companies have their own market research department.

 

Market researchers handle a wide range of tasks. They estimate the demand for new products and services, describe the characteristics of probable customers, and measure potential sales. They determine how prices influence demand, and they test the effectiveness of current and proposed

advertising. Market researchers also assess a company's sales personnel and analyze the public "image" of a company and its products.

 

A market research study begins with a statement of the problem that the client wants to solve. This statement leads to a detailed definition of the information to be gathered. There are two types of market research information, secondary data and primary data.

 

Secondary data are statistics and other information that are already available from such sources as government agencies and universities. To save time and money, market researchers use secondary sources as much as they can. Primary data are data that must be obtained through research. The chief techniques for gathering such data include mail questionnaires, interviews, retail store shelf audits, use of electronic scanners at retail checkout counters, and direct observation in stores. The researchers design and test research materials, such as questionnaires or guides for interviewers. Finally, they collect the data, analyze the information, and report the results of their study. The computer is an important tool in analyzing market research data.

 

Market research can reduce the risk involved in many business decisions, but some risk always remains. Expenditures for market research must be carefully controlled so that the costs do not exceed the probable benefits from reduced risk.

 

 

GROSS DOMESTIC PRODUCT

 

Gross domestic product (GDP) is the value of all goods and services produced in a country during a given period. It is one of the most widely used measures of a nation's total economic performance in a single year.

Measuring the GDP. One way to determine the GDP is to add up the sum of spending on four kinds of goods and services in any year.

 

(1) Personal consumption expenditures include private spending on durable goods, such as automobiles and appliances; nondurable goods, such as food and clothing; and services, such as haircuts and motion-picture tickets. In the United States, these expenditures make up about two-thirds of the GDP each year.

 

(2) Private investment expenditures include spending by business companies for new buildings, machinery, and tools. They also include spending for goods to be stored for future sale. These expenditures average about 20 percent of the annual GDP of the United States.

 

(3) Government purchases of goods and services include spending for new highways, missiles, and the wages of teachers, fire fighters, and government employees. Such spending amounts to about 20 percent of the United States GDP each year.

 

(4) Net exports represent the value of domestically produced goods and services sold abroad, less the value of goods and services purchased from abroad during the same period. Currently, the value of U.S. exports is exceeded by that of U.S. imports. Net exports thus show a negative percentage in the U.S. GDP. The negative percentage accounts for percentages in the other three major parts of the U.S. GDP totaling more than 100 percent.

 

Real GDP. A nation may produce the same amount of goods and services this year as it did last year. Yet this year's GDP may be 5 percent higher than last year's. Such a situation would occur if prices of goods and services had risen by an average of 5 percent. To adjust for such price changes, economists measure the GDP in constant dollars. They determine what each year's GDP would be if dollars were worth as much during the current year as in a certain previous year, called the base

year. In other words, they calculate the value of each year's production in terms of the base year's prices. When GDP measured in current dollars is divided by GDP in constant dollars, the result is an index of inflation called the GDP deflator.

 

GDP figures do not tell everything about a nation's economy. For example, they tell little about the well-being of individuals and families. Even the GDP per capita does not tell who uses various goods and services. It cannot show, for example, how much of the GDP goes to the poorest 20 percent of the population and how much goes to the wealthiest 20 percent. Nor does the GDP per capita tell anything about the quality of a country's goods and services.

 

GDP excludes production by facilities that are owned by a nation's citizens if the facilities are in another country, and it includes production by foreign-owned facilities within the country. Some

economists believe another figure, the gross national product (GNP), is a better measure than GDP. GNP includes all production by a nation's firms regardless of the firms' location and does not include production by foreign-owned facilities within the country. For many years, the U.S. Commerce Department used GNP to measure the country's economic performance. It switched to GDP in 1991.

 

 

VALUE-ADDED TAX

 

Value-added tax is a tax imposed by a government at each stage in the production of a good or service. The tax is paid by every company that handles a product during its transformation from raw materials to finished goods. The amount of the tax is determined by the amount of the value that a company adds to the materials and services it buys from other firms.

 

Suppose that a company making scratch pads buys paper, cardboard, and glue worth $1,000. The company adds $500 in labor costs, profits, and depreciation, and sells the scratch pads for $1,500. The value-added tax is calculated on the $500. The companies that had sold the paper, cardboard, and glue to the scratch pads company would also pay a tax on their value added. In this way, the total value added taxed at each stage of production adds to the total value of the final product.

Most firms that pay a value-added tax try to pass this expense on to the next buyer. As a result, most of the burden of this tax in time falls on the consumer. In this sense, the final effect is equal to that of a retail sales tax. The tax is levied at a fixed percentage rate and applies to all goods and services. However, many nations use different rates. In these nations, the less necessary a product is, the higher the rate will be.

 

In 1954, France became the first nation to adopt a value-added tax. Today, this tax is growing in popularity, and Canada and about 40 nations use it. It is not used by the United States on the federal level. But most of the other large industrial nations use it.

 

 

Taxation

 

Taxation is a system of raising money to finance government services and activities. Governments at all levels--local, state, and national--require people and businesses to pay taxes. Governments use the tax revenue to pay the cost of police and fire protection, health programs, schools, roads, national defense, and many other public services.

 

Taxes are as old as government. The general level of taxes has varied through the years, depending on the role of the government. In modern times, many governments--especially in advanced industrial countries--have rapidly expanded their roles and taken on new responsibilities. As a result, their need for tax revenue has become great. Through the years, people have frequently protested against tax increases. In these situations, taxpayers have favored keeping services at current levels

or reducing them. Voters have defeated many proposals for tax increases by state and local governments.

 

Kinds of taxes

Governments levy many kinds of taxes. The most important kinds include property taxes, income taxes, and taxes on transactions.

Property taxes are levied on the value of such property as farms, houses, stores, factories, and business equipment. The property tax first became important in ancient times. Today, it ranks as

the chief source of income for local governments in the United States and Canada. Most states of the United States and provinces of Canada also levy property taxes. Property taxes are called direct taxes because they are levied directly on the people expected to pay them.

 

Income taxes are levied on income from such sources as wages and salaries, dividends, interest, rent, and earnings of corporations. There are two main types of income taxes--individual income taxes and corporate income taxes. Individual income taxes, also called personal income taxes, are applied to the income of individuals and families. Corporate income taxes are levied on corporate earnings. Income taxes may also be levied on the earnings of estates and trusts. Income taxes generally are considered to be direct taxes.

 

Most nations in the world levy income taxes. In the United States, income taxes are levied by the federal government, most state governments, and some local governments. Many people and businesses in the United States also pay special income taxes that help fund Social Security programs. These taxes are known as Social Security contributions or payroll taxes. In Canada, income taxes are levied by the federal government and by the country's 10 provincial governments. Taxes on transactions are levied on sales of goods and services and on privileges.

 

There are three main types--general sales taxes, excise taxes, and tariffs. General sales taxes apply one rate to the sales of many different items. Such taxes include state sales taxes in the United States and the federal sales tax in Canada. The value-added tax is a general sales tax levied in France, the United Kingdom, and other European countries. It is applied to the increase in value of a product at each stage in its manufacture and distribution.

 

Excise taxes are levied on the sales of specific products and on privileges. They include taxes on the sales of such items as gasoline, tobacco, and alcoholic beverages. Other excise taxes are the license

tax, the franchise tax, and the severance tax. The license tax is levied on the right to participate in an activity, such as selling liquor, getting married, or going hunting or fishing. The franchise tax is a payment for the right to carry on a certain kind of business, such as operating a bus line or a public utility. The severance tax is levied on the processing of natural resources, such as timber, natural gas, or petroleum.

 

Tariffs are taxes on imported goods. Countries can use tariffs to protect their own industries from foreign competition. Tariffs provide protection by raising the price of imported goods, making the imported goods more expensive than domestic products.

 

 

Profit

Profit is the amount of money a company has left over from the sale of its products after it has paid for all the expenses of production. These expenses include costs of such things as raw materials, workers' salaries, and machinery. They also include a reasonable return on the owner's investment, a salary for the labor the owner supplies to the firm, and other costs that are hard to calculate. A main task of accounting is to define and measure profits accurately.

 

Profits are vital to the economic system of the United States, Canada, and other countries where private enterprise is encouraged. In such countries, profits belong to the owners of companies or the stockholders of corporations. One of the chief reasons for operating a business is to make a profit.

 

The desire for profits motivates companies to produce their goods efficiently. This is because the lower a company's costs are, the greater its profits can be.

 

A business can earn a profit only by producing goods and services whose selling price is greater than the cost of producing them. Therefore, business executives seek to use labor and raw materials to produce and sell things for which customers will pay a price that is greater than the cost of production. Thus, the search for profits is also the search for the uses of a country's labor and raw materials that will satisfy consumers most completely.

 

Some business executives constantly lower prices to capture sales and profits from their competitors. However, there are several reasons why competition does not eliminate profits. For one thing, at any one time, there will be many firms that have discovered profitable opportunities their competitors cannot yet match. Sometimes, new firms cannot duplicate a profitable product because of patents or trademarks, or for other reasons. Sometimes, new firms cannot produce goods as cheaply as established ones. The bother and risk of entering an unfamiliar industry also keeps some new firms from competing with a product that is not especially profitable. The established firms can then enjoy reasonable profits without fear of new competition.

 

 

BANK

 

Bank is a financial firm that accepts people's deposits and uses them to make loans and investments. People keep their savings in banks for several reasons. Funds are generally safer in a bank than elsewhere. A bank checking account provides a convenient way to pay bills. Also, funds deposited in most bank accounts earn interest income for the depositor. People who deposit money in a bank are actually lending it to the bank, which typically pays interest for the use of the funds.

 

Banks help promote economic growth. Nonfinancial firms borrow from banks to buy new equipment and build new factories. People who do not have enough savings to pay immediately the full price of a home, an automobile, or other products also borrow from banks. In these ways, banks help promote the production and sale of goods and services, and so help create jobs.

 

Like all businesses, banks try to earn profits. They have traditionally done so by accepting deposits at one rate of interest and then lending and investing those funds at a higher rate. But large banks also earn fees from other activities, such as brokerage (buying and selling securities for other investors) or selling insurance.

 

Banking is nearly as old as civilization. The ancient Romans developed a relatively advanced banking system to serve their vast trade network, which extended throughout Europe, Asia, and much of

Africa.

 

Modern banking began to develop during the 1200's in Italy. The word bank comes from the Italian word banco, meaning bench. Early Italian bankers conducted their business on benches in the street. Large banking firms were established in Florence, Rome, Venice, and other Italian cities, and banking activities slowly spread throughout Europe. By the 1600's, London bankers had developed many of the features of modern banking. They paid interest to attract deposits and loaned out a portion of their deposits to earn interest themselves. By the same date, individuals and businesses in England began to make payments with written drafts on their bank balances, similar to modern checks.

 

This article discusses banks throughout the world. Because U.S. banks have unique features, however, this article also includes sections on the regulation and the history of banks in the United States. Banks in the United States have been more strictly regulated than banks in many countries as a result of the numerous bank failures that occurred in the United States during the Great Depression of the 1930's. The United States also has more banks and banking assets than any other country in the world.

 

 

BANK SERVICES

 

Safeguarding deposits. Deposits in a bank are relatively safe. Banks keep cash and other liquid assets available to meet withdrawals. Liquid assets include securities that can be readily converted to cash. Banks are also insured against losses from robberies. But the most important safeguard is the fact that in most countries, governments have established deposit insurance programs. The insurance protects people from losing their deposits if a bank fails.

 

A bank not only keeps savings safe but also helps them grow. Funds deposited in a savings account earn interest at a specified annual rate. Many banks also offer a special account for which they issue a document called a certificate of deposit (CD). Most CD accounts pay a higher rate of interest than regular savings accounts. However, the money must remain in the account for a certain period, such as one or two years, to earn the higher rate of interest. Banks also offer money market accounts. These accounts pay an interest rate based on the prevailing rates for short-term corporate and government securities.

 

Providing a means of payment. People who have funds in a bank checking account can pay bills by simply writing a check and mailing it. A check is a safe method of settling debts, and the canceled check provides proof of payment. Customers may also ask a bank to automatically pay recurring

bills, such as telephone and mortgage payments, by a process called direct deposit deduction. Many banks allow people to pay bills electronically by telephone or through the Internet computer network. Many banks offer credit cards. People can use the cards to pay for their purchases at stores and other businesses. The bank then pays the businesses directly and sends the customer a monthly bill for the amount charged. The cardholder can usually choose to pay only part of the bill immediately.

 

If so, he or she must pay a finance charge on the unpaid balance.

Banks may also issue debit cards, which resemble credit cards. When a cardholder uses a debit card, the amount of the purchase is deducted directly from the cardholder's checking account. Some cards can be used as either credit or debit cards.

 

Making loans. Banks receive funds from people who do not need them at the moment and lend them to those who do. For example, a couple may want to buy a house but have only part of the purchase price saved. If one or both of them have a good job and seem likely to repay a loan, a bank may

lend them the additional money they need. To make the loan, the bank uses funds other people have deposited.

 

A major obligation of a bank is to permit depositors to withdraw their funds upon demand. But no bank has enough cash readily available to satisfy its depositors if all were to demand their funds at the same time. Banks know from experience, however, that such a demand--called a run--rarely occurs. If people are confident they can withdraw their funds at any time, they will leave them on deposit at the bank until needed. As a result, banks can loan and invest a large percentage of the funds deposited with them. In most countries, the government limits the percentage of a bank's funds that can be used for loans and investment. The government simultaneously sets a minimum percentage that must be kept on reserve for meeting withdrawals.

 

 

Trade

 

Trade is buying and selling goods and services. Trade occurs because people need and want things that others produce or services others perform.

 

People must have such necessities as food, clothing, and shelter. They also want many other things that make life convenient and pleasant. They want such goods as cars, books, and television sets. They want such services as haircuts, motion pictures, and bus rides. As individuals, people cannot produce all the goods and services they want. Instead, they receive money for the goods and services they produce for others. They use the money to buy the things they want but do not produce.

 

Trade that takes place within a single country is called domestic trade. International trade is the exchange of goods and services between nations. It is also called world trade or foreign trade. For detailed information on international trade. Trade has contributed greatly to the advance of civilization. As merchants traveled from region to region, they helped spread civilized ways of life. These traders carried the ideas and inventions of various cultures over the routes of commerce. The mixing of civilized cultures was an important development in world history.

 

The development of trade

Early trade. For thousands of years, families produced most of the things they needed themselves. They grew or hunted their own food, made their own simple tools and utensils, built their own houses, and made their own clothes. Later, people learned that they could have more and better goods and services by specializing and trading with others. As civilization advanced, exchanges became so common that some individuals did nothing but conduct trade. This class became known as merchants. The most famous early land merchants were the Babylonians and, later, the Arabs. These traders traveled on foot or rode donkeys or camels. The Phoenicians were the chief sea traders of ancient times.

 

Trade was very important during the hundreds of years the Roman Empire ruled much of the world. Roman ships brought tin from Britain, and slaves, cloth, and gems from the Orient. For more than 500 years after the fall of the Roman Empire in A.D. 476, little international trade took place. The expansion of trade began in the 1100's and 1200's, largely because of increased contacts between people. The crusades encouraged European trade with the Middle East. Marco Polo and other European merchants made the long trip to the Far East to trade for Chinese goods. Italians in Genoa, Pisa, and Venice built great fleets of ships to carry goods from country to country.

 

A great period of overseas exploration began in the 1400's. Trade routes between Europe and Africa, India, and Southeast Asia were established as a result of the explorations. In the 1500's and 1600's, private groups formed companies, usually with governmental approval, to trade in new areas.

 

Trade between Europe and America was carried on by the chartered companies that established the earliest American colonies. The colonists sent sugar, molasses, furs, rice, rum, potatoes, tobacco, timber, and cocoa to Europe. In return, they received manufactured articles, luxuries, and slaves.

 

Trade also pushed American frontiers westward. Trading posts sprang up in the wilderness. Many of these posts later grew into cities.

 

Trade today affects the lives of most people. Improved transportation permits trade between all parts of the world. Through specialization, more and better goods and services are produced. Increased production has led to higher incomes, enabling people to buy more of these goods and services.

 

 

GAME THEORY

 

Game theory is a method of studying decision-making situations in which the choices of two or more individuals or groups influence one another. Game theorists refer to these situations as games and to the decision makers as players. An example of such a situation is one in which the decision of each of several countries about whether to acquire nuclear weapons is affected by the decisions of the other countries. Game theory has become important in such fields as economics, international relations, moral philosophy, political science, social psychology, and sociology. Its roots are generally traced back to the book The Theory of Games and Economic Behavior (1944), by Hungarian-born mathematician John von Neumann and Austrian economist Oskar Morgenstern.

 

Game theorists have identified many types of games. In zero-sum games, the players have opposite interests. In nonzero-sum games, also called mixed-motive games, they have some interests in common. When the players can agree on a plan of action, they are in a cooperative game. In a non-cooperative game, the players cannot coordinate their choices. Coordination may be impossible if the players cannot communicate, if no institution exists to enforce an agreement, or if coordination is forbidden by law, as in the case of antitrust laws.

 

Game theory's most famous game is called Prisoner's Dilemma, a non-cooperative game that involves the following imaginary situation: The police arrest two suspects and keep them isolated from each other. Each prisoner is told that if only one of them confesses, the one who confesses will go free but the one who remains silent will receive a severe sentence. They are also told that if they both confess, each will receive a moderate sentence, and if neither confesses, each will receive an even milder sentence. Under these conditions, each prisoner is better off confessing no matter what the other one does. Yet by pursuing their own advantage and confessing, both get harsher sentences than they would have received if they had trusted each other and kept quiet.

 

Prisoner's Dilemma highlights and summarizes a conflict between individual and group interests that lies at the heart of many important real-life situations. For example, when farmers maximize their production, prices fall and all the farmers suffer. Collectively, the farmers would be better off restricting the amount they plant. Nonetheless, it is to each farmer's individual advantage to plant as much as possible. Decisions about paying taxes, protecting the environment, or acquiring nuclear weapons may also reflect this tension between what is good for the decision maker and what is good for the group.

 

 

DEFLATION

 

Deflation is a decline in the general level of prices in an economy. It is the opposite of inflation, in which prices rise. Deflation is rarer than inflation, but its consequences can be more severe.

 

Each year, about 5 percent of all countries experience deflation. Most of them are less developed nations, and the deflation they experience is brief. However, many industrialized countries, including the United States, the United Kingdom, Japan, Australia, and Canada, have experienced periods of deflation.

 

Deflation sometimes occurs when an economy undergoes a depression or a recession. During depressions and recessions, the total output of an economy declines. Depressions are more severe than recessions. The United States experienced sharp deflation during the Great Depression of the

1930's.

 

Deflation can be caused by competition among producers of goods and services to increase sales by reducing their prices. But weak demand for goods and services is the chief cause of almost all periods of deflation. In the United States during the Great Depression, several forces acted simultaneously to reduce demand. Banks had little money to lend to qualified individuals and businesses. The Federal Reserve System, the nation's central bank, failed to stimulate the economy by increasing the amount of money in circulation. Also, the federal government sought a balanced budget, which prevented it from cutting taxes or increasing its own spending. All of these factors contributed to a decline in demand and thus to deflation.