IGCSE Commerce: Commerce and Production — Revision Notes

Condensed for the final weeks. For the full explanation, use the Commerce and Production study guide.

Production and commerce

Production is the creation of goods and services to satisfy human wants. Commerce is everything concerned with distributing those goods and services to the consumer.

PRODUCTION
 |
 +-- DIRECT SERVICES     personal services: doctor, teacher, hairdresser
 |
 +-- INDUSTRY            extractive, manufacturing, constructive
 |
 +-- COMMERCE
      |
      +-- TRADE            home trade (wholesale, retail)
      |                    foreign trade (import, export, entrepot)
      |
      +-- AIDS TO TRADE    banking, insurance, transport, warehousing,
                           communication, advertising

Commerce is a subset of production, not an alternative to it. Placing them side by side is the standard structural error.

Needs and wants: needs are essentials — food, shelter, clothing; wants are everything beyond that. Because resources are finite and wants are not, choices carry an opportunity cost.

The three branches of production:

Branch	Covers
Primary	Extractive industries (mining, quarrying) and genetic industries (farming, fishing, forestry) that cultivate and replace what they take
Secondary	Manufacturing, processing and construction — converting raw materials into finished or semi-finished goods
Tertiary	Services — split into commercial services (trade and aids to trade) and direct personal services (doctors, teachers, hairdressers)

Commerce sits inside the tertiary branch, alongside direct services — it is not a fourth branch of its own.

Types of industry

• Extractive — takes raw materials from nature: mining, farming, fishing, forestry.
• Manufacturing — converts raw materials into finished goods.
• Constructive — assembles finished goods into structures: building, roads, bridges.

The chain of production

extraction -> manufacture -> wholesale -> retail -> consumer

Each stage adds value. Value can be added by processing, by branding, by breaking bulk, by transporting to where the good is wanted, and by storing it until it is wanted.

Functions of the wholesaler

Six functions, and the marks are for saying who benefits:

Function	Benefit
Breaking bulk	Retailers buy small quantities without tying up capital
Warehousing	Relieves both manufacturer and retailer of storage costs
Bearing risk	Absorbs losses from deterioration, theft, falling prices
Transport	Collects from many manufacturers, delivers to many retailers
Providing information	Advises retailers on new lines, advises manufacturers on demand
Granting credit	Improves retailers’ cash flow

Elimination of the wholesaler happens where manufacturers sell direct to large retailers or consumers — supermarkets buying in bulk, e-commerce, mail order, and perishable or bulky goods. The wholesaler survives where retailers are small and numerous.

Retailing

Small-scale retailers: personal service, local convenience, credit to known customers, long hours — but limited stock, higher prices, little bargaining power.

Large-scale retailers: economies of scale, lower prices, wide range, own brands, self-service — but impersonal and often less convenient.

Modern developments: supermarkets and hypermarkets, chain stores, department stores, franchising, vending machines, and e-commerce, which removes the need for a physical shop but requires reliable delivery and secure payment.

Foreign trade

• Visible trade — goods.
• Invisible trade — services: tourism, banking, insurance, shipping.
• Balance of trade — visible exports minus visible imports.
• Balance of payments — all transactions, visible and invisible.

Entrepot trade is importing goods in order to re-export them.

Confusing balance of trade with balance of payments is the most common error here. A country can have a visible trade deficit and still have a payments surplus if its invisible earnings are large enough — Britain is the standard example.

Home trade vs foreign trade. Both involve buying and selling for profit, both need aids to trade, and both depend on a surplus being produced. Foreign trade differs by crossing national boundaries, involving different currencies and exchange-rate risk, sometimes using different units of measurement, facing customs duties and quotas, and needing more documentation and longer transport times.

Barriers to trade: tariffs (taxes on imports), quotas (quantity limits), embargoes (bans), and exchange control. Purposes: protecting infant industries, protecting employment, correcting a deficit, and retaliation.

Aids to trade

Aid	How it assists trade
Banking	Payment methods, credit, foreign exchange
Insurance	Transfers risk, so traders will take commercial risks
Transport	Moves goods to where they are demanded — creates place utility
Warehousing	Stores goods until demanded — creates time utility
Communication	Links buyers and sellers
Advertising	Informs and persuades, creating demand

Principles of insurance: utmost good faith, insurable interest, indemnity, contribution, subrogation, and proximate cause. Insurance covers insurable risks only — those that are measurable and where losses can be pooled. Bad management decisions and changes in fashion are uninsurable, because they cannot be predicted statistically.

Exam traps

• Treating commerce and production as separate categories.
• Listing wholesaler functions without saying who benefits.
• Confusing balance of trade with balance of payments.
• Confusing visible with invisible trade.
• Saying insurance prevents loss — it compensates for it.
• Naming an aid to trade without explaining how it assists trade.

Self-test

1. Where does commerce sit within production?
2. Give three functions of a wholesaler and who benefits from each.
3. Distinguish balance of trade from balance of payments.
4. What is entrepot trade?
5. Give two uninsurable risks and explain why they cannot be insured.

Answers: 1. Commerce is a branch of production, alongside direct services and industry; it covers trade and aids to trade. 2. Breaking bulk benefits retailers, who buy small quantities; warehousing benefits both manufacturer and retailer by relieving storage costs; granting credit benefits retailers’ cash flow — any three. 3. Balance of trade covers visible goods only; balance of payments covers all transactions, both visible and invisible. 4. Importing goods for the purpose of re-exporting them. 5. Poor management decisions and changes in fashion — they cannot be measured statistically, so the risk cannot be pooled or priced.