Exploring Business Studies SB7

The Business Studies Syllabus in the National Curriculum is
designed to foster an understanding of the underlying business

concepts, the general strategies of problem solving and aesthetics
of businesses as an important and powerful tool in everyday Exploring
7
life. Business Studies subject will help students to choose the
right path and will enable students to customize their secondary
education and improve their prospects for success in school and
in their life.
This books aims to deliver the contents of the Business Studies
Business Studies
Syllabus through six main subject areas or strands. While
the learning process of this subject involves more than the
Exploring Business Studies 7

understanding of basic concepts, it also focuses on enabling
the students to acquire knowledge, skills and attitudes so as
to develop an informed and critical understanding of, business
environment and to understand key economic issues faced in
every economy with active participation and interaction with
businesses through activities such as field visits.
The eight key competencies laid in down in the National
Curriculum Framework emphasises on developing and preparing
the student mentally and spiritually to the world surrounding
them in order to be competent to face the real world challenges
in order to succeed. This curriculum is also prepared as such
that these key competencies are addressed throughout.
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Email: schools@cambridge.org ISBN 978-1-316-64668-7

Website: www.cambridgeindia.org
www.facebook.com/cambridgeindia MVR 99
Exploring Business Studies
7
A joint publication of National Institute of Education, Maldives
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Preface
This book intends to assist in the teaching and learning of Business Studies in
the Maldivian Schools based on the Business Studies Syllabus developed in
line with the New National Curriculum of the Maldives and rolled out in the year
2015. The Business Studies Syllabus in the National Curriculum is designed
to foster an understanding of the underlying business concepts, the general
strategies of problem solving and aesthetics of businesses as an important
and powerful tool in everyday life. This books aims to deliver the contents of
the Business Studies Syllabus through six main subject areas or strands. While
the learning process of this subject involves more than the understanding of
basic concepts, it also involves constructing meaning or knowledge based
on experiences and understanding the application of business concepts in
students’ daily life. Although, this book intends to cover the basics; a deeper
understanding of the subject can only be achieved through active participation
and interaction with businesses through activities such as field visits.
Our sincere gratitude and appreciation is extended to Cambridge University
Press for partnering with us on this endeavour and the members of the NIE
Curriculum Team for the support rendered.
Author: Waseema Fikuree

Contributing Author: Nishan Mohamed
Professional Guidance: Ahmed Yusuf, NIE

Contents
1. Business Fundamentals . . . . . . . . . 1 4. Business Organisations . . . . . . . . 81
1.1 Basic Economic Concept. . . . . . . 1 4.1 Types of Business

Organisations . . . . . . . . . . . . . . . 81
1.2 Factors of Production . . . . . . . . . 9
4.2 Companies . . . . . . . . . . . . . . . . 84
1.3 Stakeholder . . . . . . . . . . . . . . . . 13
4.3 Private Sector Businesses. . . . . 87
4.4 Public Sector Businesses . . . . . 92

2. Basic Financial Accounting . . . . . 17
4.5 Multi-National Companies . . . . . 93
2.1 The Role of Accounting . . . . . . . 17
4.6 Nationalisation and
2.2 The Double Entry System of
Privatisation . . . . . . . . . . . . . . . . 94
Book-keeping . . . . . . . . . . . . . . . 23
2.3 Documentary Records . . . . . . . . 36

5. Financial Institution . . . . . . . . . . . 100
2.4 Sole Trader Financial
Statements . . . . . . . . . . . . . . . . . 43 5.1 Exchange. . . . . . . . . . . . . . . . . 100
5.2 Evolution of Money . . . . . . . . . 102
3. Entrepreneurship . . . . . . . . . . . . . . 63 5.3 Banking System. . . . . . . . . . . . 108
3.1 Allocation of Resources . . . . . . 63 5.4 Stock Exchange. . . . . . . . . . . . 111
3.2 Economic Systems . . . . . . . . . . 65
3.3 Production . . . . . . . . . . . . . . . . . 68 6. Population . . . . . . . . . . . . . . . . . . 115
3.4 Methods of Production . . . . . . . 70 6.1 Demography . . . . . . . . . . . . . . 115
3.5 Sectors of Production . . . . . . . . 71 6.2 Population Distribution . . . . . . . 123
3.6 Division of Labour . . . . . . . . . . . 72 6.3 Developing and Developed

Economies . . . . . . . . . . . . . . . . 131
3.7 Productivity . . . . . . . . . . . . . . . . 73
3.8 Promotion . . . . . . . . . . . . . . . . . 74

Chapter 1 Business Fundamentals
1 Business Fundamentals
1.1 Basic Economic Concept

Economics is the study of resources, its utilisation and
You will learn
how decisions are made by individuals and organisations
in an effort to satisfy unlimited wants with limited • Needs and wants
resources. Whether we are aware or unaware of it, we • Resources
understand scarcity. We know that our needs and wants • Opportunity cost
are unlimited and there is less to fulfill all desired needs • Consumption
and wants. A want is created through the desire of a • Markets
need. When one need of an individual is fulfilled the • Demand and supply
desire for another need arises creating a want for it.
Needs are basic requirements or

necessities of life. Something you must
have for survival, without it you would
not be able to live. Needs must be
satisfied before wants. Example: food, Water
water, clothing and shelter.
Gardening
Drinking
Washing
Figure 1.1.1: Needs

Entertainment
Shopping Travel
Wants are things that you would like
to have, but these are not necessary
for survival, and you could live without
them. Wants are desires that can be
satisfied by consuming or using a
good or service. Human wants are
unlimited. Example: toys, electronics,
leisure and gadgets.
Money
Figure 1.1.2: Wants
Activity 1.1
List down your five most desired needs and wants in your priority order where the
most desired is the first. Discuss with classmates about any differences in identified
needs and wants and their priorities.
Activity 1.2
From the given items below identify which one is a need or a want. Justify your
classification.
• Ice cream
• Water
• Lunch
• House
• Toys
• Clothes

Resources are the inputs that are required to create outputs which are products and
services. The goods and services available for the production of valuable consumer
products are also referred to as economic resources. These comprise human beings
and other things used for production of goods and services. The resources are limited
and can be consumed directly or indirectly. Resources such as fruits can be used as food
and consumed directly while other resources such as minerals can be consumed after
processing and by turning into goods. The problem of resource scarcity is a common issue
to all the economies around the world. There are three types of resources. They are natural
resources, human resources and manufactured resources.
Natural Resources are materials provided by the earth or nature which can be used.
Natural resources are used as raw materials for the production of goods and services.
They can be in any form of solid, liquid or gas. Examples of natural resources are water,
land, soil, rock, forests, animal, fossil fuels and minerals. These resources cannot be
produced by people. Instead, natural resources are modified by people in order to create
things that are beneficial or are of an economic value. Natural resources are limited in
supply and are interconnected. If one is removed or extracted heavily it will have an impact
on the other. For example, if a lake dries off it will affect the vegetation, soil quality and the
animals living in that area.
Natural Resources
Solar
Rain Water
Wind
Rock
Food
Water
Minerals
Oil
Figure 1.1.3: Examples of natural resources

Natural resources can be classified into two main categories of non-renewable and
renewable resources. Renewable resources are resources those which can be replaced
in a reasonable time or those which are available consistently such as trees and water.
Although, a resource can be
classified as renewable it can
Natural Resources
also turn into a non-renewable
resource if the replacement of the
resource takes years to renew.
Renewable Non-renewable
Non-renewable resources are
Resources Resources
those which take a long period of
time to get replaced or cannot be
replaced once used. For example,
regardless of the mineral formation
Minerals Sand through a natural process of rock
cycle, minerals can be classified as
a non-renewable resource due to
the extended period taken for the
Plants Animals Fossil Fuel minerals to be replaced through the
rock cycle.
Figure 1.1.4: Natural resources
Activity 1.3
trees fisherman photocopy machine river

washing machine barber river gold nurse
oil computers manager mineral
a) From the above list identify natural resources, human resources and manufactured
resources.
b) From the above list identify non-renewable resources justifying your answer.
Choice is the selection between two or more commodities. Choices are made on a daily
basis by all consumers, firms and governments. We are forced to make choices because
our resources are limited and wants are unlimited. When we make a choice, we select
the commodity that gives us the maximum satisfaction. Due to limitation of resources and

increased wants we have to sacrifice some goods

or services in order to gain what we want the most DID YOU KNOW
resulting in opportunity cost.
Opportunity cost is the
Opportunity cost is not how much money hidden cost of any and every
we spend on goods, but the other goods and economic decision.
services we could have bought with the money.
Opportunity cost also includes other relevant costs
like the value of time spend and the value of the
opportunities we forgo.
Limited income
Forced to choose
An iPad OR Video game player
Your choice is
an iPad
The opportunity cost is

the video game player
Opportunity cost = the sacrifice of the

next most desired alternative
Figure 1.1.5: Example of opportunity cost
Activity 1.4
a) Write down a choice made. Identify the ‘opportunity cost’ of making that choice.
b) Explain the reason for making the choice.

Consumption is the use of goods and services to satisfy human wants. It can either be direct
consumption or indirect consumption. As the words suggest, direct consumption refers to
the direct use of goods or services by an individual. For example, food to eat and clothes to
wear. Indirect consumption is when an individual benefits from the consumption of goods and
services which are not specifically intended for a single consumer but a number of people.
For example, the use of airports and public transport systems by individuals.
Activity 1.5
Identify direct consumption and indirect consumption from the list given.
a) Eating a meal at a restaurant
b) Going to see my friend in Addu City by air
c) Enjoying a joyful ride using a Jet Ski
d) Wearing new clothes for Eid festival
e) Brushing teeth using variety of toothpastes
f) Squeezing lime on the rice for lunch
g) Getting tuition sessions from teacher
h) Washing hands with hand soap
i) Father consulting a Physician
j) Drinking fresh juice
A market is any place where the sellers of a particular goods or services can meet with the
buyers of that goods and services and where there is a potential for a transaction to take
place. A transaction can happen when there is an exchange of goods or services offered
to a medium of exchange acceptable for the seller by the buyer. Goods are physical and
tangible things that you buy. A service is something someone does for you. The buyers
must have something they can offer in exchange for there to be a potential transaction.
Examples of markets: goods markets, service markets, virtual markets.
Fish market Local market
Figure 1.1.6: Different examples of market

Activity 1.6
From the following, identify and list down markets and non-markets, with explanation
for your reasons.
a) Your friends home
b) A coffee shop
c) A public school
d) A supermarket
e) Your birthday party venue
f) Your friends class
g) Local shop
Activity 1.7
From the given pictures, identify a good or service.

Demand refers to how much (quantity) of a product or Price

service is desired by buyers. The quantity demanded
is the amount of a product people are willing to buy
at a certain price; the relationship between price
and quantity demanded is known as the demand
P2 A
relationship. A demand exists when there is a need
for the offered product or service by an individual P1 B
or a group of people. The demand and supply are
interrelated such that if the supply is not met to the
demand the prices of products and services tend to
increase due to the shortage in supply. Figure 1.1.7 Demand Curve
shows that when price decreases from P2 to P1
Q1 Q2
quantity demanded increases from Q1 to Q2. Quantity
Figure 1.1.7: Typical demand curve
For example, when there are limited shows and

seats for an anticipated box office hit movie, a DID YOU KNOW
demand is created by the expecting viewers to
The partial equilibrium supply and
purchase the tickets for the show. If the cinema
demand economic model [was]
does not allow for more shows of the movie there
originally developed by Antoine
will be a high demand resulting in higher ticket Augustin Cournot (published in a
prices for the movie. book in 1838) and thirty years later
broadly publicised by Alfred Marshall.
Supply represents how much the market can offer

for a product or service at a given price for a given
Price
period of time. The quantity supplied refers to the
amount of certain goods and services which producers Supply Curve
are willing to supply for a price. The supply is directly
related to the price.
For example, when there is a great demand for P2
PlayStation with people willing to buy at higher prices,
setting the prices too low will create a shortage P1
of PlayStation in the market. Therefore, even with

an increase in supply the prices are kept slightly
increased. Figure 1.1.8 shows a typical supply curve
where price increase from P1 to P2, is met by an
increase in quantity supplied from Q1 to Q2. Q1 Q2
Quantity
Figure 1.1.8: Typical supply curve

Activity 1.8
Materials required: paper money, chocolates, pens, rubber, sweets

There will be two groups of students. One group will be selling the items and other
group will be buying the object. Group with goods will be selling and other group with
money will be buying the products.
Questions
a) Which good was mostly bought?
b) Which good was least favoured?
c) What is the collective term for process of buying?
d) Why do you think some goods are favoured than the other?
1.2 Factors of Production
Factors of production refer to an

economic term to describe the inputs You will learn
that are used in the production of goods • Factors of production
or services in the attempt to make an • Rewards from factors of production
economic profit. There are four main
factors of production. They are Land, Labour, Capital and Entrepreneurship. Each factor of
production has its own reward by being a part of the production of goods and services to
be consumed by individuals and organisations.
Land represents all natural resources including fish and resources extracted from oceans,
which is used in production. Although land is physically fixed some natural resources
such as timber and animal are renewable. Regardless of most of land resources being
renewable it cannot be considered as ‘inexhaustible’. Due to its nature land is considered
as a scarce resource. The most common form of reward for land is rent. Examples of land
include buildings, timber and gold.

Figure 1.2.1: Examples of land
Activity 1.9
Name a local business and identify two forms of land used by this business. Compare
these two resources. HOTS
Labour is an aggregate of all the mental and physical efforts either skilled or unskilled, on
performing at any level through their knowledge, creativity, personal and social attributes
towards producing economic value. Labour is essential in producing things that we desire
and want. Also referred to as human resources or human capital, labour is the people
that form a workforce of a society, economy or organisation. Labour and Labourer should
not be confused. Labourer is one who works for a person or organisation in return for a
reward. The reward for labour is salaries or wages.
10

Mental Labour
Mental labour requires the use of
human intelligence
Physical Labour
Physical labour
involves using of the
human body and
requires minimal
mental work
Capital or Manufactured Resources are man-made resources that can be used for the
production of goods and services. The capital can be any form of wealth, whether in cash
or assets to be employed in investing. These resources enhance the speed and consistency
of produced goods and services. Also, manufactured resources enable humans in making
complex things simple. For example, machines and factories. The reward for Capital is
return on investment.
Figure 1.2.2: Banks provide investments for businesses
11

Activity 1.10
The pictures given below show a remarkable change that has occurred in the fishing
industry of Maldives.
a) What type of change has occurred?

b) Describe what happened to resource usage.
Entrepreneurship is the attempt to create value through recognition of business

opportunity, the management of risk-taking appropriate to the opportunity and through the
communicative and management skills to mobilize human, financial and material resources
necessary to bring a project to fruition.
Entrepreneurs are individuals who take risks and attempts to make an economic profit
from an idea by combining all other factors of production. They also have the knowledge
and capacity to transform resources into valuable consumer products. The role of an
entrepreneur includes the gathering, allocating and distribution of products and services to
organisations and individuals in an economy. The reward for entrepreneurship is Profit or
Loss.
Figure 1.2.3: Some successful entrepreneurs in the Maldives
12

Activity 1.11
From the given list identify land, labour, capital or entrepreneur.

Beach of a resort : ............................................
Teachers : ............................................
Ice-cream seller : ............................................
Reef : ............................................
Tree : ............................................
Farming island : ............................................
Grocer : ............................................
Landlord : ............................................
Water Park : ............................................
Mason : ............................................
Building : ............................................
Restaurateur : ............................................
1.3 Stakeholder
Stakeholders are individuals, groups or You will learn

organisations that are affected by the activity
• Stakeholders
of a business. Stakeholders of a business can
• Internal and external stakeholders
be classified into two broad categories. They
are internal and external stakeholders. Internal
stakeholders are individuals, organisations and
businesses directly affected by the actions of a
business. The external stakeholders consists of Suppliers Society
others who are indirectly affected by the action

of a business.
Business Financial
For example, the internal stakeholders of a fish Shareholders Institutions
canning factory will be its shareholders and

employees. The external stakeholders would be Customers
the suppliers, customers, financial institutions,
Figure 1.3.1: Stakeholders of a business
government and the society.
13

Activity 1.12
Sarah is working as a Manager in a private company in the capital City Male´. Each
month she saves a portion of her salary. She was born in a small island where there
were not many shops around. She aimed to open her own ice-cream shop. After
five years Sarah decided to leave her job, and start her dream business.
Answer the following questions
1. What was Sarah’s capital?
2. What type of business did Sarah own?
3. Identify the factors of production she used in her business with HOTS
their description. Justify your answer.
4. What is the term used to describe Sarah’s innovative idea?
Key Terms
Choice: selection between two or more commodities

Consumption: using up of goods and services to satisfy human wants
Demand: quantity of a product or service desired by buyers
Market: place where buyers and sellers meet
Needs: basic requirements or necessities of life
Stakeholder: anyone directly or indirectly related to specific business
Supply: how much the market can offer of a specific product or service
Want: things that an individual desire to have
I Learnt
Write your understanding of the chapter in about 75 to 100 words.
14

Key competencies
Practising Islam: Appreciate creation of nature. Learn to practice Islamic

values such as reduction of waste through appropriate use of available
resources in the most economising manner.
Using Sustainable Practices: Finding more beneficial alternative
solution in making most of limited resources. Finding alternative solutions
which are more beneficial in terms of opportunity cost.
Relating to People: While needs and wants are daily norms, behaviours
such as responsible use of limited resources make the difference within
the society.
Self-Assessment
Topic I have understood I need help

Difference between Needs and Wants
What are resources and their different types
Definition of choice
Definition of opportunity cost
Meaning of consumption and its examples
Meaning of market and its examples
Difference between a market and a service
Meaning of demand and supply
Different factors of production and the rewards
we get from them
Who are stakeholders?
15

Review Questions
1. Define needs and wants.

2. Differentiate between needs and wants.
3. Give three examples of human needs and wants.
4. List three resources which are renewable and non-renewable. Explain your
choice of resources.
5. ‘Resources are limited, human wants are unlimited’ explain this statement.
6. What is meant by opportunity cost?
7. Define consumption and give examples of consumption from the economy.
8. Explain what is meant by demand and supply.
9. What are factors of production?
10. Explain four factors of production which are used in the production process.
11. Discuss the importance of stakeholders in a business.
16

Chapter 2 Basic Financial Accounting
2 Basic Financial Accounting
2.1 The Role of Accounting You will learn

• Accounting and book- keeping
Book-keeping is the process of detailed recording
• Users of accounting information
of all the financial transactions of a business. It is
• Classification of assets, liabilities
necessary for every business to record its financial and capital
transactions. This will help the business to process • The accounting equation
the accounting data in the future. • Simple balance sheet
Accounting further processes the book-keeping
information provided by the book-keeper. This processing includes classifying and
summarising data, reporting, analysing and interpretation of financial information for an
organisation so as to provide meaningful information that helps to make decisions.
Users of Accounting Information

The role of accounting is to provide useful financial information to assist its stakeholders
in making financial decisions. These financial users make use of the past accounting
information to plan for the future. There are internal and external users of accounting
information.
The internal users include owners, managers and
employees. Owners and Managers are the day- DID YOU KNOW
to-day decision makers. They need to plan, control Until about 100 years
and run the business smoothly. They need to know ago, all accounting data
how well things are progressing financially and the were being kept recorded
financial position of the business. Employees assess manually in books. Hence
a company’s profitability and its consequence on their the term ‘bookkeeping’.
future remuneration and job security.
17

The external users include prospective partners, buyers, credit suppliers, lenders, competitors
and regulatory authorities.
Before entering into a partnership, a prospective partner would want to check on the stability
and profitability of the business. A prospective buyer before agreeing to buy the business
would want to see reliable financial information about the business. Investors, whether
existing or potential ones, want to know whether or not their investment is financially sound.
The business owes money to credit suppliers, for supplying goods on credit, and lenders,
for providing credit facility such as loans. These parties would require information about the
business to determine business’s financial ability to pay for goods or repay loans (liquidity
position).
For knowing the relative strengths and weaknesses of their competitors and for strategic
purposes, business enterprises examine and analyse the financial statements of other
business enterprises, their credit policies and debt collecting procedures.
Regulatory authorities need accounting information to ensure that it is in accordance with
the rules and regulations and that it protects the interests of the stakeholders who rely on
such information.
Managers Shop owners Taxation

Banks authority
Internal Users External Users
of Accounting of Accounting
Information Information
Customers
Government
Shareholders Employees
Competitors
Figure 2.1.1 Internal Users of accounting Figure 2.1.2 External Users of accounting
information information
18

Activity 2.1
For each of the following user groups, explain why they may be interested in the
financial affairs of a business.
a) Employees
b) Banks
c) Manager
The accounting equation

The Accounting Equation is a central part of book-keeping and accounting. It originates
from the concept of Accounting Entity which treats the business as a separate entity and
distinct from the owner and other parties.
It is important to remember that accounting records of a business only relate to the business.
Legally, owner of the business is regarded as completely separate from the business. In
order to start or continue the business, the funds (resources) provided by the owner, are
referred to as capital. This is usually in the form of monetary funds; however, the resources
may consist of buildings, motor vehicles, goods etc.
The capital or equity represents the amount owed by the business to the owner. The funds
provided by the owner may not be sufficient, therefore need may arise to borrow from outsiders
like banks. Such amounts owed by the business to outsiders are known as liabilities.
Once the business is formed, things owned by the business or owed to the business are
regarded as the resources of the business or the assets of the business.
The term asset refers to something that is of value to use. Our education is an intangible
asset which we cannot see or touch. However our car is a tangible asset, as we can actually
see and touch it. Do we owe for our car? If so, the loan associated with our car is a liability.
The difference between the asset value and the liability value of the loan is our equity in the
car.
Example
Anwar starts a business with his own cash of MVR 50000 and a loan of MVR 30000.
Therefore the assets (MVR 80000 Cash) should be equal to the sum of owner’s
investment and the loan (i.e. Capital MVR 50000 + Liabilities MVR 30000)
19

Loan
agreement
ASSETS LIABILITIES EQUITY

What business owns What business owes to outsiders What business owes
to the owners
Figure 2.1.3: Relationship between assets, liabilities and capital
Activity 2.2
Not only the business organisation, but educational institutes also own valuable
assets. Identify assets from the school surrounding and list down 10 tangible assets.
Classification of Assets, Liabilities and Capital

Assets are resources owned by a business that have monetary value.
Assets
Non-current assets Current assets

Land and buildings Machines Inventory Cash
Motor vehicles Furniture Trade receivables* Bank
• Acquired for operation of the • Cash, or can be easily converted into cash
business; not for resale • Include inventory bought for resale
• Physical existence • Useful life less than one financial year
• Useful life more than one financial *People who owe money to the business for
year goods sold on credit.
Figure 2.1.4: Types of assets
Liabilities are debts that a business owes to external parties (other than the owners).
Liabilities
Non-current Liabilities Current Liabilities

Loan Mortgage Trade payables* Bank Overdraft
• Debts owed for more than Short-term loan
one financial year • Debts owed for less than one financial year
*People to whom business owes money for
goods purchased on credit.
Figure 2.1.5: Types of liabilities
20

Capital represents the owner’s claim upon a business’ net assets (assets minus liabilities). This
amount is owed by the business to the owners. Another name for capital is owner’s equity.
Example
Zuha provided the following information on 1 January 20..3.
MVR
Motor vehicles 6 500 A Steps:
Cash at bank 2 500 A 1. Classify the items into
Trade receivables 1 900 A Assets (A) and Liabilities (L)
Trade payables 1 800 L 2. Rearrange the accounting
Inventory 3 400 A equation to find the missing
Loan 4 000 L figure
REQUIRED
Calculate Zuha’s capital at 1 January 20..3
Solution
Zuha’s Capital = Assets – Liabilities
= (6500 + 2500 + 1900 + 3400) – (1800 + 4000)
= 14300 – 5800
= MVR 8500
Activity 2.3
Materials required: Bristol board, permanent markers (atleast three colours), ruler,
list of assets and liabilities on the board.
Divide the class into groups. Students will do a chart similar to the chart drawn for
assets and liabilities classifications using the list of assets and liabilities given on
the board as examples. Students are supposed to give a brief explanation for the
following terms: assets, non-current assets, current assets, liabilities, non-current
liabilities, current liabilities.
Balance Sheet is a statement which shows the financial position of the business on a
certain date.It shows the three elements of the accounting equation as Assets, Liabilities
and Capital. Like the accounting equation, Balance Sheet shows that a company’s total
amount of assets equals the total amount of liabilities and capital.
21

Every time the business makes a change to the assets, liabilities or capital, the balance
sheet of the organisation will be affected. However, a balance sheet will not be prepared
after every transaction; instead it will be prepared periodically.
Example
Always remember to write
Name of business the title and the date
Balance Sheet as at ……………
Assets MVR Liabilities and capital MVR Another

name for
Equipment 5000 Capital (C = A – L) 36750 capital-
Furniture and Fittings 10000 Trade payables 3200 Owner’s
Motor vehicles 15000 Bank overdraft 2300 Equity
Inventory 20000 BML Loan 15000
Trade receivables 3600
Cash 2450
Bank 1200
57250 57250
22

2.2 The Double Entry System of Book-keeping

Instead of using Balance Sheet as a statement
You will learn
to prepare and keep the daily accounting records
a more practical and easy system was evolved • Double entry system of book-
known as double entry system of book-keeping. As keeping using the ‘T’ account
format
the name goes, this double entry system of book-
• Double entry rules for assets,
keeping takes into account the two effects of a
liabilities, capital, the asset of
transaction, which is ‘the increase and decrease’ or
inventory, expenses, incomes,
‘the receiving and the giving’.
drawings and carriage costs
A ledger account is used to record the effects of a
transaction using the double entry system. In manual book-keeping,each page of the book
can be considered a ledger account. The double entry system divides each page into two
halves. The left-hand side of the page is known as debit side and the right-hand side is
known as credit side.
Debit side abbreviated Credit side abbreviated

as ‘Dr’. as ‘Cr’.
Dr Title of the account Cr
Left-hand side Right-hand side

This is the debit side This is the credit side.
Figure 2.2.1: The layout of a ledger account
The shape of the above layout resembles a ‘T’, hence it is also known as a T- account.In
order to record two effects of every transaction, each transaction is recorded twice,once on
the debit side of receiving account and once on the credit side of the giving account.
Practically each account will be drawn in one page, but for convenience and examination
purposes several accounts can be kept in one page.
Example
On 1 March 20..4, the owner deposited MVR 50000 in the bank account which was
opened in the name of the business as investment, Bank account is debited as the
bank is receiving money from the owner, and credited in the Capital account, as it
is the owner who is giving the money in the form of capital. The double entry would be
recorded in the accounts as follows:
23

Left side of the account Right side of the account
Dr Bank Account (name of the account) Cr
Date Details MVR Date Details MVR

20..4
Mar 1 Capital 50000
(name of the opposite
account which records
the transaction)
Dr Capital Account (name of the account) Cr

20..4
Mar 1 Bank 50000
(name of the opposite
account which records the
transaction)
The father of Accounting was Luca Pacioli

Italian mathematician Luca Pacioli published the first book about
double entry book-keeping on 10 November 1494. It is in his honour
that International Accountants Day was started. He did not invent the
system. Instead, he simply described a method used by merchants
in Venice during the Italian Renaissance period. His system included
Luca Pacioli
most of the accounting cycles as we know them today. The first
accounting book actually was one of five sections in Pacioli’s mathematics book, titled
Summa de Arithmetica, Geometria, Proportioniet Proportionalita (Everything About
Arithmetic, Geometry and Proportions). This section on accounting served as the
world’s only accounting textbook until into the sixteenth century.
Activity 2.4
For the entry shown in the following account, complete the double entry by drawing up
the second affected account and write the entry on the correct side.
Dr Equipment Account Cr
20..4
April 6 Bank 15000
24

Double entry rule for assets, liabilities and capital

Recall the double entry rule: debit the receiving account and credit the giving account. If the
same rule is applied for assets, liabilities and capital, it will be as follows:
• When an asset increases, in other words the business is receiving the

asset, therefore double entry rule for increase in asset is debit.
• When an asset decreases, in other words the business is giving away the
ASSETS asset, therefore double entry rule for decrease in asset is credit.
• When liability increases, in other words an outside party is giving the
Loan
agreement credit facility to the business, therefore increase in liability is credit.
• When liability decreases, in other words the business is paying back to
the outside party, therefore decrease in liability is debit.
LIABILITIES
• When capital increases, the owner is giving or contributing more capital
in the business, therefore increase in capital is credit.
• When capital decreases, the owner is withdrawing part of the contributed
capital from the business or the liability upon the business is decreasing,
therefore decrease in capital is debit.
CAPITAL
The double entry rules for increase or decrease in assets, liabilities and capital are placed
in a table as follows:
Accounts To record Double entry

increase debit
Assets
decrease credit
increase credit
Liabilities
decrease debit
increase credit
Capital
decrease debit
The same applied to accounting equation as

DID YOU KNOW
follows:
Having Latin roots, the term
Assets Capital Liabilities ‘debit’ comes from the word
= + debitum, meaning ‘what is due’,
To increase Debit Credit Credit and ‘credit’ comes from creditum,
To decrease Credit Debit Debit defined as ‘something entrusted
to another or a loan’.
25

Example
increase decrease A-Assets L-Liabilities C-Capital
Effect upon and
Account to be Account to be
20..4 debited credited
June 3 Computer Equipment worth Equipment(A) Dr Bank (A) Cr
MVR 5000 were bought paying
by cheque
6 Received a loan MVR 5000 by Bank (A) Dr Loan (L) Cr
cheque from Ismail, a friend
16 Owner brought a cheque for Bank (A) Dr Capital (C) Cr
MVR 8000 into the business
22 Sold goods on credit to Nazim Trade Inventory (A) Cr
MVR 600 receivables (A) Dr
REQUIRED
Enter the above transactions in the ledger accounts for the month of June 20..4.
Solution
Dr Computer Equipment Account Cr

20..4
June 3 Bank 5000
Dr Bank Account Cr
20..4 20..4
June 6 Ismail Loan 5000 June 3 Computer Equipment 5000
16 Capital 8000
Dr Ismail Loan Account Cr

20..4
June 6 Bank 5000
26

Dr Capital Account Cr

20..4
June 16 Bank 8000
Dr Inventory Account Cr

20..4
June 22 Nazim 600
Dr Nazim Account Cr

20..4
June 22 Inventory 600
Activity 2.5
Write a transaction on your own and record the double entry in the relevant ‘T’
accounts. (You may use 5th May 20..4 as the date)
Double entry for Inventory

So far we have seen ‘inventory account’ being referred to when goods are bought, sold or
even returned. The fact that goods bought will be recorded at cost price and goods sold will
be recoded at selling price. Therefore, need arises to maintain separate inventory accounts
for sales, purchases and returns.
Goods sold will be recorded in the Sales account and goods bought will be recorded in the
Purchases account. Goods sold to the customers may be returned later, this sales returns
or return inwards will be recorded in Sales returns account. Goods bought from suppliers
may be returned later and this return outwards or purchases returns will be recorded in
Purchases Returns account.
To apply double entry to the above mentioned four accounts, inventory movement (increase
or decrease in asset) is taken into account as follows:
•• W
hen goods are sold (sales) or when goods are returned to suppliers (Return outwards/
Purchases Returns), inventory decreases. The double entry rule for Assets decreases –
27

credit is applied, therefore Sales account and Purchases Returns account always
credit.
•• When goods are bought for resale(Purchases) or when customers returned goods
(Return inwards/Sales Returns), inventory increases. The double entry rule for Assets
increases – debit is applied, therefore Purchases account and Sales Returns account
always debit.
Double entry rule for inventory items is explained in a tabular format as follows:
Debit Credit
{ }
Increases Purchases Sales Decreases
the inventory Sales Returns Purchases Returns the inventory
Double entry for Purchases and Purchases Returns

Example
The following transactions relate to purchases and purchases returns.
Effect upon and
July 2 Bought goods on credit from Purchases Trade
Hassan MVR 6800 Inventory (A) Dr Payable (L) Cr
8 Bought goods for cash MVR 3300 Purchases Cash (A) Cr
Inventory (A) Dr
19 Returned goods MVR 150 to Trade Purchases returns
Hassan Payable (L) Dr Inventory (A) Cr
REQUIRED
Enter the above transactions in the ledger accounts of the business for the month of
July 20..4.
Solution
Dr Purchases Account Cr

20..4
July 2 Hassan 6800
8 Cash 3300
28

Dr Hassan Account Cr

20..4 20..4
July 19 Purchases returns 150 July 2 Purchases 6800
Dr Cash Account Cr

20..4
July 8 Purchases 3300
Dr Purchases Returns Account Cr

20..4
July 19 Hassan 150
Example
The following transactions relate to sales and sales returns.
Effect upon and
Aug 25 Sold goods on credit to Umar Trade Sales
MVR 6600 receivables (A) Dr Inventory (A) Cr
27 Umar returned faulty goods Inventory (A) Dr Trade
MVR 300 receivables (A) Cr
29 Sold goods for cash MVR 2350 Cash (A) Dr Inventory (A) Cr
REQUIRED
August 20..4.
Solution
Dr Sales Account Cr
20..4
Aug 25 Umar 6600
29 Cash 2350
29

Dr Umar Account Cr
20..4 20..4
Aug 25 Sales 6600 Aug 27 Sales Returns 300
Dr Sales Returns Account Cr

20..4
Aug 27 Umar 300
Dr Cash Account Cr
20..4
Aug 29 Sales 2350
Activity 2.6
Write a transaction for each of the following on your own.

a) Credit sales
b) Credit purchases
c) Sales returns
d) Purchases returns
(Note: You may use Alim as a customer and Bashim as a supplier. Date and amount
are not required.)
Double entry for Expenses and Incomes

Incomes and expenses are not merely the sales and purchases. The salary paid to sales
staff, the rent of the premises, sales commission received as a sales agent are also
considered as sources of income or expenses of the business. These expenses and
incomes arising from normal trading activities need a definition and accounting treatment.
Money spent to run the business on a day-to-day basis is known as expense. Examples
of expenses include administrative expenses, selling expenses, financial expenses and
cost of maintenance and running the non-current assets. Examples of expenses include
30

salary, advertising expenses, loan interest payable, motor expenses etc. Money earned
from normal trading activities is known as income. Examples of income include sales
commission received, interest received on investments etc.
The double entry rule for assets and liabilities – receiving account debit and giving account
credit can be applied to expenses and income. When a business is paying for expense, the
expense account is receiving the money, therefore expense accounts are always debit.
On the other hand, when the business receives an income, the income account is giving the
value to the business, therefore income accounts are always credit.
Example Exp - Expenses Inc - Incomes

The following transactions took place in business in the month of September 20..4.
Effect upon and
20..4 Account to be debited Account to be credited
Sep 1 Paid salaries by cheque Salaries (Exp) Dr Bank (A) Cr
MVR 10000
27 Received rent MVR 6000 by Bank (A) Dr Rent Received
cheque (Inc) Cr
29 Paid for motor expenses by Motor Expenses Bank (A) Cr
cheque MVR 1200 (Exp) Dr
30 Received commission by Bank (A) Dr Commission Received
cheque MVR3900 (Inc) Cr
REQUIRED
September 20..4.
Dr Bank Account Cr
20..4 20..4
Sep 27 Rent received 6000 Sep 1 Salaries 10000
30 Commission received 3900 29 Motor expenses 1200
Dr Salaries Account Cr
20..4
Sep 1 Bank 10000
31

Dr Rent Received Account Cr

20..4
Sep 27 Bank 6000
Dr Motor Expenses Account Cr

20..4
Sep 29 Bank 1200
Commission Received Account

20..4
Sep 30 Bank 3900
Activity 2.7
The following is a bank account prepared from the records of Mohamed for the month
of Oct 20..4.
Bank Account

20..4 20..4
Oct 12 Rent received 6000 Oct 1 Rent 10000
20 Interest received 3900 13 Motor expenses 1200
18 Advertising expenses 3000
23 Interest paid 1100
REQUIRED
a) From the above Bank account, identify and list down the expenses and incomes.
b) Classify the expenses into administrative, selling, financial or repairs and
maintenance.
32

Double entry for Drawings

Drawings refer to the value withdrawn by the owner from the business for his personal use.
This value withdrawn could be cash, cheque, non-current assets or even goods from the
inventory.
Owner’s personal withdrawals from the business reduces the capital contributed by the
owner. Drawings decrease the capital – as capital decreases debit rule can be applied for
Drawings. Therefore, Drawings account is always debit.
In other words, it is the drawings account receiving the withdrawn money or goods and
cash account, inventory account or Non-current asset account giving the value, therefore
receiving Drawings account debit and giving accounts such as cash account, purchases or
Non-current asset account being credit.
Example
The following transactions took place in the business’s books in the month of October
20..4. Effect upon and
Oct 16 Owner withdrew MVR 2500 cash rawings (C) Dr
D Cash (A) Cr
for personal use
20 Owner took goods worth MVR 800 Drawings (C) Dr Inventory (A)
from the business for own use (Purchases) Cr
25 Owner transferred MVR 2000 Drawings (C) Dr Bank (A) Cr
from the business bank account to
his personal account
REQUIRED
Enter the above transactions in the ledger accounts for the month of Oct 20..4.
Solution
Drawings Account
20..4
Oct 16 Cash 2500
20 Purchases 800
25 Bank 2000
33

Cash Account
20..4
Oct 16 Drawings 2500
Purchases Account
20..4
Oct 20 Drawings 800
Bank Account
20..4
Oct 25 Drawings 2000
(Note: Goods bought would be first recorded in the Debit side of Purchases account.
Hence when goods are withdrawn for personal use, Purchases account needs to be
credited.)
Double entry for Carriages

Carriage cost is an expense incurred to transport goods from one place to another. Goods
bought from suppliers to be carried to the business known as carriage inwards or goods
may have to be delivered to customers which is known as carriage outwards. In both
the cases, the expense is incurred by the business. Therefore, same double entry rule as
the expenses can be applied, which means both carriages, carriage inwards and carriage
outwards are debit.
Carriage in Carriage out
Supplier Business Customer
Figure 2.2.2: Goods carrying in and out of the business
34

Example
The following is the motor expenses of Zain for the month of October 20..4.
Motor Expenses paid by cash MVR 2000
It was noted that Motor vehicle was used 75 percent of the time to carry goods to the
business from the suppliers and remaining 25 percent to deliver goods to the customers.
REQUIRED
a) Divide motor expenses into carriage inwards and carriage outwards.
Solution
Carriage Inwards (Cost of carrying goods Carriage Outwards (Cost of delivering

from the suppliers to the business) goods from the business to the customers)
75 % of Motor Expenses 25 % of Motor Expenses

75 % of MVR 2000 25 % of MVR 2000
= 2000 * 75/100 = 2000 * 25/100
= MVR 1500 = MVR 500
b) Post the entry into carriage inwards, carriage outwards and Cash account.
Carriage Inwards Account

20..4
Oct 31 Cash 1500
Carriage Outwards Account

20..4
Oct 31 Cash 500
Cash Account

20..4
Oct 31 Carriage inwards 1500
31 Carriage outwards 500
35

2.3 Documentary Records You will learn

• Source documents and their
Source Documents are written documents which uses
give details of business transactions. The documents • Six books of Prime entry
received and issued by the business are used. These • Two-column and three-column
evidences prove that the business transactions have cash book
taken place.
Types of Source Documents

1. Invoice is a document sent by the seller to the buyer (credit customer) to inform about the
amount payable for goods sold on credit.
2. Debit note When the customer receives the goods, the customer should check that
goods received are in satisfactory condition and they are exactly what was ordered. In
case there are any shortages, damages or overcharges, the supplier must be informed
by issuing a debit note.
Therefore debit note is a document sent by the customer to the supplier requesting to
reduce the total of the original invoice.
3. Credit note When the supplier receives a debit note reporting that goods are faulty,
damaged or there have been an overcharge on an invoice, the supplier in return may
issue a credit note. This credit note issued represents the sales return for the supplier
and the credit note received represents the purchases return for the customer. Hence,
credit note is the source document to record both sales returns and purchases returns.
4. Statement of account is a document issued by the supplier to the customer which shows
summary of the transactions for a month. This works as a reminder to the customer of the
amount due and to settle the account on time.
5. Cheque counterfoil, Pay in slip and Receipts There are two main types of bank
accounts; current account and deposit account. Current account is an account in
bank which helps individuals in frequent or regular money transactions related with a
business. Current accounts often earn no interest. However, saving accounts or deposit
accounts generally earn interest and are intended for funds that will not be accessed
frequently or on a regular basis.
A cheque book will be issued when a customer opens a bank account (current account or
deposit account). With the introduction of debit cards, credit cards and direct debits, the use
of cheques among private individuals has become very less. Nevertheless businesses still
stick with the cheque system.
The cheques can be used to make payments out of the account. Usually a counterfoil is
attached to the cheque where the same important information as the cheque can be written
36

so as to use this information later as a document. When the cheque or cash is paid into the
bank, a pay-in slip is completed. Pay-in slips can be used as a document which shows that
a cheque or cash is deposited in the bank. If the cheques are paid or received through the
banking system, the business need not issue a receipt. However, if cash is received or paid
by the business, the receipt issued acts as a proof of payment. Hence a receipt is a written
document which can be used as a proof of payment.
Activity 2.8
Materials required: A copy of an invoice, debit note, credit note and a statement of
account.
Divide the class into groups (five students in each group). Let the students discuss
and answer the following questions. Give chance to one student from each group to
present the group answer.
Questions
a) Who issued the invoice and to whom? Why was the invoice issued?
b) Who issued the debit note and to whom? Why was the debit note issued?
c) Who issued the credit note and to whom? Why was the credit note issued?
d) Who issued the statement of account and to whom? Why was the statement of
account issued?
e) List down five important informations contained in the documents given.
Books of Prime Entry

Books of prime entry are the books in which transactions are first recorded. These are
not accounts; they are simply books listing devices that record the details of transactions.
Books of prime entry are also known as books of original entry, subsidiary books,
‘journals’ or ‘daybooks’. The business will have a separate book for each kind of
transaction. All transactions should be recorded in one of these books before they are
entered in the ledger.
Special Journals
Special Journals are used to record common credit transactions, involving the same
accounts which occur frequently. The four specialised journals are Sales journal, Sales
Returns journal, Purchases journal and Purchases Returns journal.
37

Sales Journal
The Sales Journal records the sales of goods and services to customers on credit. The
Sales journal is sometimes referred to as the Sales day book. This journal is filled with
records using the copies of the invoices issued to the customers.
Format of Sales Journal is as follows:
The transactions Cross referencing back

should be shown to the original ‘source
in the date order document’
Sales Journal
Date Details Invoice No. Amount ($)
[customer name] xxx
[customer name] xxx
Transfer to sales account xxx
Sales Returns Journal

This records the goods returned by the credit customers. The Sales Return journal is also
known as Sales Returns daybook. This journal is filled with records using the copies of
the credit notes issued to the customers.
Format of Sales Returns journal is as follows:

The transactions should Cross referencing back to the
be shown in the date order original ‘source document’
Sales Returns Journal
Date Details Note No. Amount ($)
[customer name] xxx
[customer name] xxx
Transfer to sales returns xxx
account
Purchases Journal
This records purchases of goods from suppliers on credit. The Purchases journal is also
called the Purchases daybook. This journal is filled up using the invoices received from
suppliers.
38

Format of Purchases journal is as follows:

The transactions should be Cross referencing back to the
shown in the date order original ‘source document’
Purchases Journal
Date Details Invoice No. Amount ($)
[supplier name] xxx
[ supplier name] xxx
Transfer to purchases xxx
account
Purchases Returns Journal

This records the goods returned to the credit suppliers. The Purchases Return journal is
also known as Purchases returns daybook. This journal is filled with records using the
credit notes received from suppliers.
Format of Purchases Returns journal is as follows:
The transactions should be Cross referencing back to the
shown in the date order original ‘source document’
Purchases Returns Journal
Date Details Note No. Amount ($)
[supplier name] xxx
[supplier name] xxx
Transfer to purchases xxx
returns account
The Journal
The Journal or General Journal is not a part of double entry book-keeping. It is used to
record transactions which will not be recorded in any other books of prime entry. The items
usually recorded in the journal are opening entries, purchases ans sales of non-current
assets on credit, non-regular year end adjustments, correction of errors etc.
Format of The Journal is as follows:
The Journal
Date Details Dr ($) Cr ($)
Account to be debited *xxx
Account to be credited *xxx
(Narrative – a brief explanation of what is being
recorded and why the entry is being made)
*The total amount debited and total amount credited should always be equal.
39

Activity 2.9
Materials required: A worksheet with two books of original entry drawn up. (A4 paper –
different colors)
Divide the class into four groups. Give each group a worksheet. Students discuss and
write the possible transactions for each entry in the books of prime entry in the date
order. Give chance for one student from each group to present the group answer.
The Cash Book

The Double Entry System of Book-keeping explains the need to maintain separate accounts
for each type of business transactions. Likewise, cash and bank transactions which involve
flow of money in and out of the business were recorded separately in two accounts – cash
transactions in the cash account and bank transactions in the bank account. Since both the
accounts involve inflow and outflow of money, it can be shown side by side as a separate
book known as Cash book. The cash book can either be two-column or three-column.
The cash book with the cash and bank column side-by-side on both debit side and credit side
is known as two-column cash book. Three-column cash book includes one more column
on both the sides to record cash discount.
Cash discount is an incentive given to encourage prompt payment. The amount of reduction
of the sum to be paid is known as cash discount. Cash discounts are classified into discount
allowed and discount received:
•• Discount Allowed: Cash discount allowed by a business to its customers when they
settle the accounts within the given time. Discount allowed is an expense.
•• Discount Received: Cash discount received by a business from its suppliers when the
business settles the accounts within the given time. Discount received is an income.
Format of the Cash book (Three column) is as follows:
Receipts Payments
Dr Three-column Cash Book Cr
Date Details Discount Cash Bank Date Details Discount Cash Bank
Discount Allowed Two separate columns

Discount Received
Total will be posted to debit on each side are used to
separate cash and bank Total will be posted to credit
side of Discount Allowed
transactions side of Discount Received
account and credit side of
account and debit side of
individual trade receivable individual trade payables
account account
Figure 2.3.1: Format of the Cash book (three-column)
40

The debit side of the cash book records receipts of both cash and bank, whereas the
credit side records payments of both cash and bank. Source documents for receipts and
payments of cash and cheques are receipts, pay-in slip and cheque counterfoil.
Drawing up a Cash Book
Example
The following are the cash and bank account for the month of March 20..5.
Dr Cash Account Cr
20..5 20..5
Mar 1 Balance b/d 2000 Mar 5 Drawings 500
4 Samah 300 18 Azin 1600
8 Rashid 2100 24 Wages 3000
16 Fiyaz 3200
Dr Bank Account Cr
20..5 20..5
Mar 1 Balance b/d 8500 Mar 7 Purchases 2500
6 Shiyam 800 22 Ziyad 760
10 Loan- Khalid 5000 28 Electricity 2900
REQUIRED
Prepare a two-column cash book for the month of March 20.5 using the entries in the
individual cash and bank account.
41

Dr Two-column Cash Book Cr

Date Details Cash Bank Date Details Cash Bank
20..5 20..5
Mar 1 Balance b/d 2000 8500 Mar 5 Drawings 500
4 Samah 300 7 Purchases 2500
6 Shiyam 800 18 Azin 1600
8 Rashid 2100 22 Ziyad 760
10 Loan- Khalid 5000 24 wages 3000
16 Fiyaz 3200 28 Electricity 2900
(Note: The cash book is not balanced as Balancing of ‘T’ Accounts is outside the scope
of this book.)
The individual cash and bank accounts show how it would appear if they are kept
separately. However, if cash and bank accounts are put together in one book, it is known as
cash book and it appears as shown in the two-column cash book above. In the cash book
above, the debit column for cash is put up next to debit column for bank. The credit column
for cash is put up next to credit column for bank. The transactions appear in the cash book
in the date order.
42

2.4 Sole Trader Financial Statements You will learn

• Sole trade
There are different types of business organisations, one such business
business is a sole trade business. Sole trade business is any • Financial
business that is owned and controlled by one person. So the statements
person who owns and controls the sole trade business is known prepared by a sole
as sole trader. A sole trader may employ staff to work in his trade business
business. However, ownership will not be shared. Individuals who
provide a specialist service like hairdressers, plumbers or photographers, are also sole
traders.
Making a profit is the main reason why people start up a business. In case the aim is
not achieved or is not achieving often the owner rethinks and diverts his funds towards
a profitable cause. Hence calculating such profit or loss is one of the main reason why
businesses follow systematic double entry book-keeping. The profit or loss or the financial
position of the business is calculated using financial statements which are usually
prepared at the end of each financial year.
Figure 2.4.1 Different business organisations
Financial statements
Income statement
A statement known as Income statement is used to calculate profit or loss arising from the
trading business. The Income statement comprises of two sections – trading account and
profit and loss account.
•• Trading account section is used to calculate trading result of the business and it
calculates the profit earned on goods sold. This trading result is known as gross profit.
43

•• Profit and loss account section determines the final net profit or loss for the year. Net
profit is arrived after taking into account all the running expenses and incomes.
Format of Income Statement

Income statement is part of the double entry system. Following the double entry system,
Income statement can be prepared in horizontal format. In horizontal format, Income
statement follows ‘T’ account format (left-hand side as debit and right-hand side as credit).
However, the most commonly used method by most of the businesses is vertical format.
In vertical format, double entry rules are being followed, however, the statement is not
presented in a ‘T’ account format.
Format of Income statement in vertical format

Name of the business
Income Statement for the year ended ……………………………….………………….
MVR MVR MVR
Sales XXX
Less: Sales returns (XXX)
XXX
Less: Cost of sales
Opening inventory XXX
Add: Net Purchases
Purchases XXX
Less: Purchases returns (XXX)
Add: Carriage inwards XXX XXX
XXX
Less: Closing Inventory (XXX) (XXX)
Gross profit XXX
Add: Other Incomes
Commission received XXX
Rent received XXX
Discount received XXX XXX
XXX
Less: Expenses
Wages and salaries XXX
Rent and rates XXX
Motor Vehicle expenses XXX
Finance Costs XXX (XXX)
Net profit (or loss) for the year XXX
(Note: Put the amounts to be deducted in brackets.)
44

Balance sheet
Balance sheet is a statement which shows the financial position of the business on a
particular date. It is also known as Statement of financial position. The balance sheet
is not part of the double entry system. It is a statement which shows assets, liabilities and
capital of the business on a particular day, usually end of the accounting period.
Format of Balance Sheet
Name of the business

Balance sheet as at ……………………………………..
Cost Depreciation Book Value
to date
Non-Current Assets MVR MVR MVR
Land and Buildings xxx (xxx) xxx
Plant and Machinery xxx (xxx) xxx
Office Equipment xxx (xxx) xxx
Fixtures and Fittings xxx (xxx) xxx
Motor Vehicles xxx (xxx) xxx
xxx (xxx) xxx
Current Assets
Closing Inventory xxx
Trade Receivables xxx
Bank xxx
Cash xxx xxx
Total assets xxx
Liabilities and Capital
Opening capital xxx
Add: Net Profit for the year xxx
Less: Drawings (xxx) xxx
Non-Current liabilities
Long term loan xxx
Current liabilities
Trade payables xxx xxx
Total liabilities xxx
45

Key Terms
Accounting: the process of recording, summarising, reporting, analysing and

interpretation of financial information of an organisation
Accounting equation: the relationship between the assets, liabilities, and capital.
Assets: assets are resources owned by a business.
Balance sheet: statement which shows the financial position of a business.
Book-keeping: detailed recording of all the financial transactions.
Books of prime entry: the books where transactions are first recorded.
Capital: amount owed by the business to the owners.
Carriage inwards: cost of carrying goods from suppliers to the business.
Carriage outwards: cost of delivering goods to the customers.
Cash book: a ledger account which contains cash and bank account and the book of
prime entry to record cash and bank transactions first.
Cheque counterfoil: important information about the cheque can be written so as to
use this information later as a document.
Credit note: sent by the supplier to the customer confirming the acceptance of return.
Credit side: the right side of the account.
Debit note: sent by the customer to the supplier requesting to reduce the total of the
original invoice.
Debit side: the left side of the account.
Drawings: value withdrawn by the owner from the business for his personal use.
Expenses: Money spent to run the business on a day-to-day basis.
Gross profit: trading result of the business (Sales less cost of sales).
Income statement: a financial statement that measures financial performance over a
specific accounting period.
Incomes: Income earned from normal trading activities.
Inventory accounts: Sales, Sales returns, Purchases and Purchases returns
account.
Invoice: a demand for payment.
Liabilities: debts that a business owes to external parties.
Net profit: Gross profit plus other incomes less all the running expenses.
46

Pay-in slip: document which shows cheque or cash is deposited in the bank.
Profit and loss account: used to calculate the final net profit (or loss) for the year.
Purchases journal: where credit purchases are first recorded.
Purchases Returns journal: where goods returned to the supplier are first recorded.
Receipt: act as a proof of payment.
Sales journal: where credit sales are first recorded.
Sales Returns journal: where goods returned by the customer first recorded.
Sole trade business: a business that is owned and controlled by one person.
Sole trader: a person who owns and control the sole trade business.
Source documents: written document which gives details of business transactions.
Statement of account: shows summary of the transactions for a month
Trading account: used to calculate trading result of the business.
Transaction: events which result in changes.
I Learnt
Answer review Questions 8,16,23,28 and 33 on your own and submit your work as an
assignment.
Key competencies
Relating to people: Understand how indirectly each one of us becomes a

user of accounting information. Introduction of the language of business.
Making meaning: Exhibit the understanding of accounting equation to
daily lives, how it can be applied to small businesses, will classify the items
used in the surrounding environment into assets or liabilities.
Understanding and managing self: Double entry bookkeeping system
and maintaining proper records encourage students to follow certain set
rules in their daily lives. Students will realise how following the set rules and
systemic record keeping avoids misunderstandings and misinterpretations.
47

Self-Assessment

Definition of book-keeping
Definition of accounting
Users of accounting information
Definition assets, liabilities and capital
Classification of the items into assets,
liabilities and capital
Write the accounting equation
Calculation of assets, liabilities and capital
using accounting equation
Preparation of a simple Balance sheet
Explaination the term ‘double entry system’
Double entry rules for assets, liabilities and
capital
Names of the inventory accounts and double
entry rule for each account
Definition of the term expenses and incomes
and double entry rule for each
Definition of the term ‘drawings’
Explain the three kinds of drawings and
double entry for each kind
Explain carriage inwards and carriage
outwards
Prepare ‘T’ accounts for transactions involving
assets, liabilities, capital, expenses, incomes
and drawings
Explaination of the terms – expenses,
incomes, drawings and carriages
Purpose of each business document
Listing important information of the document
Use of six book of prime entry
48

Writing the source documents, books of

prime entry and double entry for different
transactions
Differentiate between two-column and three-
column cash book
Drawing two and three-column cash book and
recording different transactions
Features of sole trade business
Formulas to calculate Cost of sales, Gross
profit and Net profit
Preparation of a simple Income statement and
a Balance sheet
Review Questions
1. Explain the term accounting.

2. Explain the term book-keeping.
3. State users of accounting information.
a) two internal users
b) two external users
4. Explain why the assets of a business are always equal to the capital plus the
liabilities.
5. Classify the following into Non-current assets, Current assets, Non-current
liabilities and Current liabilities.
a) Land and buildings
b) Motor vehicles
c) Inventory of goods
d) Trade receivables
e) Trade payables
f) Loan from LTR Finance Company repayable after five years.
g) Cash
h) Loan repayable within ten months.
49

6. Write true or false.

a) The prime function of accounting is to classify and record business
transactions.
b) Assets + Capital = Liabilities
c) Business will not owe anything to the owner.
d) Liabilities are resources owned by the business.
e) Accounting equation cannot be applied to balance sheet.
f) Debts owed for less than one financial year is known as short term or current
liabilities.
g) Inventory bought for resale is a current asset.
7. Fill in the blanks.

a) The accounting equation is ____________=___________+_____________
b) Items owned by a business that have monetary value are ________________
c) _________________ is the interest of the owner in a business.
d) Money owed to an outsider is a(n) _________________.
e) ______________ shows the financial position of the business at a particular
date.
8. Fill in the blanks in the following table.

Assets Capital Liabilities
a) 12,500 ……………….. 1,800
b) 28,000 ……………….. 4,900
c) 16,800 12,500 ………………..
d) 19,600 16,450 ………………..
e) ……………….. 19,200 6,300
f) ……………….. 39,750 11,650
9. States which of the following are wrongly classified. Underline your answer.
Assets Liabilities
Loan from Siya Inventory
Cash in hand Trade receivables
Trade payables Money owing to bank
Machinery
Premises
Motor Vehicles
50

10. Zena provided the following information on 1 July 20..3.

MVR
Buildings 10000
Machinery 3000
Trade payables 2500
MBL Loan 5000
Cash in hand 800
Inventory 5600
REQUIRED
a) State the Accounting equation.
b) Calculate the capital from the balances given (Hint: use the accounting
equation).
11. Amy has the following assets and liabilities on 30 April 20..3.
Building 65 000
Motor vehicle 20 000
Fixtures 12 000
Inventory 8 500
Bank loan 10 000
Cash in hand 2 500
Trade receivables 7 200
Trade payables 5 600
REQUIRED
Prepare the balance sheet of Amy to calculate the amount capital.
12. Complete the following table.
debited credited
a) Bought computer equipment on
credit from AvinTecho store
b) The owner brought his private
motor bike to use in the business
c) A trade receivable, Imran, paid
the business in cash
51

d) Repaid part of the loan from

Siman by cheque
e) Returned some of the office
machinery to Sherin
f) Bought office furniture by cash
13. Complete the following table.
debited credited
a) Bought goods for cash MVR 4300
b) Paid Neena, a trade payable by
cheque MVR 1600
c) Sold goods for cash MVR 2200
d) Anwar returned faulty goods
MVR 200 to the business
e) Received commission in cash
MVR 1100
f) The owner brought more cash
MVR 10000 into the business
g) Paid insurance by cash MVR 400
h) A loan of MVR 5000 is received
from Hassan
i) Withdrew cash MVR 900 from the
business for personal use
14. Fill in the blanks.

a) Every transaction affects at least ………………….accounts.
b) Increase in asset is ………………….. .
c) …………………. in liability is credit.
d) Increase in capital is ………………….. .
e) Sales account and …………………. .…………………. account always credit.
f) Money spent to run the business on a day-to-day basis is known as
………………….. .
g) …………………. refer to the value withdrawn by the owner from the business
for his personal use.
h) …………………. …………………. is the cost of delivering goods to the
customers
52

15. Fatima started a business on 1 November 20..4. The following transactions took
place during the first month of trading.
REQUIRED
Enter the following transactions in the ledger accounts of Fatima for the month of
November 20..4.
Nov 1 Started business with MVR 15000 in the bank.
5 Bought office equipment on credit from Vian Stores MVR 10000.
8 Bought goods MVR 1000 on credit from Daily goods Store.
13 Sold goods MVR 3000 on credit to Amina.
18 Paid rent by cheque MVR 6000.
16. The following transactions took place in the business of Hashim in the month of
December 20.4.
Dec 2 Received a loan of MVR 5000 cash from Ali.
5 Bought motor vehicle on credit from Nza Motors MVR 10000.
8 Received commission in cash MVR 2000.
13 Sold goods MVR 3000 for cash.
18 Paid insurance by cash MVR 800.
REQUIRED
Enter the following transactions in the ledger accounts of Hashim.
17. Yasin spent MVR 1800 for Motor Expenses. It was noted that Motor vehicle was
used 60 percent of the time to carry goods to the business from the suppliers and
remaining 40 percent to deliver goods to the customers.
REQUIRED
Divide the motor expenses into carriage inwards and carriage outwards.
18. State the purpose of each of the following business documents.

(a) Invoice
(b) Credit note
(c) Statement of account
19. List down five important information that must be included in a document.
53

20. State the source document for each of the following transactions
Item Transactions Source Document
a) Bought goods on credit from Amir
b) Sold goods on credit to Shiyam
c) Shiyam returned damaged goods to the
business
d) Returned faulty goods to Amir
e) Settled Amir account by cheque
f) Shiyam paid his account in cash
g) Owner deposited a cheque as capital
contribution
21. The following account of Ibrahim appeared in the books of Yusuf.

Ibrahim Account

20..5 20..5
July 8 Returns (ii) 300 July 1 Balance b/d 1300
10 Bank (iii) 3000 5 Purchases (i) 3700
REQUIRED
a) Name the source document for each of the following (i) to (iii) above
b) State whether Ibrahim is a trade receivable or trade payable to Yusuf.
22. The following account of Sahil appeared in the books of Riyaz.

Sahil Account

20..5 20..5
Aug 1 Balance b/d 1430 Aug 1 Returns (ii) 900
10 Sales (i) 4500 Bank (iii) 3700
Discount (iv) 300
REQUIRED
a) Name the source document for each of the following (i) to (iv) above.
b) Name the book of prime entry for each of the following (i) to (iv) above.
c) State whether Sahil is a trade receivable or trade payable to Riyaz.
54

23. Wahid owns a bookshop which sells books and stationeries.

REQUIRED
The table below contains some transactions carried out during March 20..5.
Complete the table for each transaction, stating the prime document, books of
prime entry and double entry, stating the account to be debited and account to be
credited.
The first transaction has been completed as an example.
Double entry
Prime Books of
Transaction Account to be Account to be
document prime entry
debited credited
Bought some books
MVR 6600 on credit Purchases Purchases Rehendhi
Purchases
from Rehendhi Invoice Journal Bookstore
bookstore
Bought office
fixtures paying by
cash MVR 7600
Sold story books
worth MVR 2030 on
credit to LilChamp
pre-school.
Wahid withdrew
MVR 1700 from
business bank
account to pay his
home electricity bill
24. Susan buys goods on credit from Yara. The goods are unsuitable and Susan
returns them to Yara. Complete the table below, using a tick ( ) to show who
received each document.
Document Yara Susan
Invoice
Debit note
Credit note
55

25. Arif provided the following information on 1 January 20..6.

MVR
Non-current assets 14 000
Loan from Finance Co 6 000
Inventory 350
Bank overdraft 324
Capital ?
REQUIRED
Prepare an opening journal entry at 1 January 20..6 to show the capital on that
date. A narrative is required. (Hint: Use General Journal)
26. The following are the cash and bank account of Gadir for the month of April
20..6.
Cash Account

20..6 20..6
Apr 1 Balance b/d 25670 Apr 4 Rent 5500
3 Hussain 3300 12 Motor Vehicles 14600
6 Ibrahim 870 20 Purchases 1350
17 Sales 2410
Bank Account

20.6 20.6
Apr 1 Balance b/d 4330 Apr 9 Drawings 2500
6 Ahmed 1800 21 Samha 760
19 Bank Loan 5000 27 Insurance 2900
REQUIRED
Prepare a two-column cash book for the month of April 20..6 using the entries in
56

the individual cash and bank account.
27. Below are the transactions of Shiya in July 20..6.

20..6 MVR
July 1 Cash at Bank 10000
Cash in hand 9900
4 Shiya withdrew money from the bank for her personal expenses MVR 600
6 Cash sales MVR 10000
7 Paid wages by cheque MVR 3300
9 Received a cheque from Nizam MVR 890, in full settlement of his account
MVR 920
16 Sold some of the unused office equipment for MVR 2300, and received a
cheque for the same amount
22 Paid amount owed to Niam Store by cash MVR 560, after a cash discount
of MVR 40
29 Paid motor expenses by cash MVR 250
REQUIRED
Prepare a two-column cash book for the month of July 20.6.
28. Amina started business on 1 September 20..6 with a capital of MVR 29500 which
was paid into a business bank account. Transactions for the month of September
20.6 were:
20.6
Sep 2 Amina brought additional cash MVR 10000
4 Purchased office equipment and paid by cheque, MVR 9800
6 Bought goods for MVR 6500 cash
8 Sold goods for cash MVR 2000
15 Paid a cheque MVR 6000 to Azeez in settlement of his account,after
deducting a cash discount of MVR 500
18 Paid rent of premises MVR 7000 by cheque
20 Received a cheque from Avin for MVR 1800 in full settlement of his
account MVR 2000
57

25 Amina took MVR 1800 cash for her personal expenses

REQUIRED
a) Enter the above transactions in Amina’s three-column cash book for the month
of September 20.6
b) From the above transactions identify and complete the table below by
indicating source document and double entry in each case.
Double entry
No. Transactions Source Documents
Debit Credit
(i) September 4
(ii) September 8
(iii) September 20
29. Aina had the following transactions for the month ended March 20..7.
Dr Three-column Cash Book Cr
Date Details Discount Cash Bank Date Details Discount Cash Bank
20..7 20..7
Mar 1 Balance b/d 2000 18 500 Mar 5 Purchases (i) 500
4 Anil 300 7 Drawings (iii) 2500
6 Usha (ii) 20 780 18 Azin (v) 200 1600
8 Riya 100 2100 22 Wages(vi) 3300
16 Sales (iv) 3200 28 Electricity 2900
REQUIRED
a) Explain entries (i) – (vi) in the cash book. The first one (i) has been completed
as an example.
(i) Bought goods for cash MVR500
b) Identify one trade receivable and one trade payable from the above cash book
entries.
30. Manih is a trader. The following balances were taken from his books on 30 April
20..7.
MVR
Purchases 40000
Sales 85600
Purchases returns 1500
Sales returns 1000
Carriage inwards 900
Inventory at 1 May 20..6 8300
Discount received 700
Discount allowed 500
Wages 12200
58

General expenses 1800

Additional information:
The inventory at 30 April 20..7 was valued at MVR 8600.
REQUIRED
Using the above information, complete the following income statement. In each of
the blanks enter the missing word(s) or figure.
Manih
Income Statement for the year ended…………………………………………….
MVR MVR MVR
Sales ………
………………………………….… (1000) ………
Less: COST OF SALES
………………………………….… ………
Add: Net Purchases
Purchases ………
………………………………….… (1500)
Add: Carriage inwards ……… 39400
………
Less: closing inventory (8600) (39100)
GROSS PROFIT ………
Add: OTHER INCOMES
………………………………….… ……… ………
46200
Less: EXPENSES
………………………………….… 500
Wages ………
………………………………….… 1800 (14500)
PROFIT FOR THE YEAR ………
59

31. The following balances remain on the books of Samira on 31 July 20..7 after the
preparation of her income statement for the year ended 31 July 20..7.
MVR
Capital 155000
Premises 80000
Inventory at 31 July 20..7 12000
Motor vehicles 15000
Trade payables 12000
Fixtures and equipment 30000
Drawings 9000
Bank overdraft 4700
Cash 200
Loan (repayable in 20..9) 10000
Motor vehicle 15000
Net loss (Loss for the year) 11500
REQUIRED
Prepare Samira’s balance sheet as at 31 July 20..7.
60

32. Adil is a trader. The following balances were extracted from his books on 31
August 20..7.
MVR
Capital at 1 September 20..6 80000
Drawings 14500
Fittings and equipment 12800
Motor vehicles 15000
Trade payables 9350
Cash equivalent (Bank) 9550
Motor vehicle expenses 7250
Wages and salaries 13450
Financial cost paid 636
Carriage inwards 2000
Discount received 750
Sales 95100
Purchases 74464
Sales returns 950
Purchases returns 700
Inventory at 1 September 20..6 29600
6% Loan repayable in 20..9 10600
Inventroy at 31 August 20..7 was valued at MVR 31200.
REQUIRED
a) Prepare the Income Statement of Adil for the year ended 31 August 20..7.
b) Prepare the Balance Sheet of Adil’s at 31 August 20..7.
61

33. The following balances have been extracted from the books of Fahi Shopping on
31 October 20..7
MVR
Revenue 198 000
Finance income 900
Purchases 53 000
Carriage charges 6 900
Sales returns 300
Rent 44 100
Office Salaries 26 200
Sales commission 37 600
Discount allowed 100
Stationery 2 400
Other operating expenses 8 700
Electricity 7 200
Bank 4 700
Inventory 1 November 20..6 39 000
Office furniture 8 000
Motor vehicles 37 300
Premises 104 200
10% long-term loan from Bank 20 000
Financial cost paid 2 000
Capital 100 300
Drawings 14 000
Additional information:
Inventory on 31 October 20..7 was valued at MVR 41000.
REQUIRED
a) Prepare the Income Statement of Fahi Shopping for the year ended
31 October 20..7.
b) Prepare the Balance Sheet of Fahi Shopping as at 31 October 20..7.
62

Chapter 3 Entrepreneurship
3 Entrepreneurship
3.1 Allocation of Resources

Human needs and wants are unlimited. Resources
You will learn
required for the satisfaction of those needs and wants
are limited. Thus, resources should be used wisely to • Resource allocation
gain the maximum benefit from the scarce resources. • Three basic economic questions.
Allocation of resources is a strategic process
whereby an organisation plans to use its available resources (factors of production) for the
production of goods and services. In order to determine the best use of scarce resources,
every organisation needs to answer the three basic questions of what to produce, how
to produce and for whom to produce. These questions are concerned with how the
scarce resources are being used. Different economies would have different answers as their
means and resources would differ.
What to produce: Regardless of the public or private sector, before a product or service
is provided it has to be considered which products are most required and how much of it
would be required to produce. With limitation of resources, an increase on one product
would mean a decrease on the other (opportunity cost). Thus, careful consideration should
be given in terms of opportunity cost and the
quantity of the required product.
DID YOU KNOW
How much a product is produced is determined by
the market forces of demand and supply. If there 58% of Rwanda’s parliament
members are women. This
is an excess or shortage of supply then it would
is world highest women
result in fluctuating prices and unstable market
representation in parliament.
conditions. However, in a free market the demand
Source: 2015 World Population
and supply are naturally pushed towards the
Data Sheet
equilibrium.
How to produce: In order to determine the most
feasible methods of production for a good, an organisation would seek the most cost
effective method in terms of labour and capital. Depending on the goods for production,
an organisation may choose a labour intensive method or capital intensive method for the
production.
63

For whom to produce: This area focuses on the distribution of the produced goods.
Although there may be a demand for the goods produced, it is pointless to produce those
goods if they do not reach the consumers.
Activity 3.1
Local Councils are under pressure from the people on how their budget is spent.
While some people may want to upgrade an old hospital with new equipment which
can give them good healthcare, the others may want to improve the transport system.
Divide the class into two groups; one group who wants to upgrade the hospital
and the other group who wants to improve transport system. Choose one pair from
opposing groups and debate on the topics. Rest of the students will act as the council
who will decide by majority vote how to spend their money.
Activity 3.2
In Activity 3.1, suppose the local government had decided to improve transport
system. However, the local government is facing critics about their decision on
expenditure of public funds.
a) If you are a local council member what would be your justification for this decision.
b) Explain how you will answer the three fundamental economic questions of, what to
produce, how to produce and for whom to produce?
Activity 3.3
You wanted to be an entrepreneur, with finance inherited from your family. You come
up with the idea of opening a good standard childcare centre as many women go to
work and have difficulty in managing their children at home
a) What is your main aim to start childcare centre.
b) How would you decide on using available resources to start a childcare business.
c) With reference to the three fundamental economic questions, justify your answer
on how resources would be allocated to the childcare centre.
64

3.2 Economic Systems You will learn

• Economic system
An economic system can be defined as the system in
• Planned economic system
which a country decides and allocates its resources and
• Market economic system
apportions its goods and services within the national
• Mixed economic system
community or a given geographic area.
There are four primary types of economic systems. They are traditional economic system,
command economic system, market economic system and mixed economic system. In a
command economic system there is a strong influence of the government in its economic
activities, whereas in a market economic system the status of the economy is determined
by the free market and the government has no control over economic activities. It may not
be correct to state that a true free market economic systems exists as there will be some
form of economic control either direct or indirect. A mixed economic system is a mix of
command and market economic systems.
Traditional economic systems cherish tradition and value which could result in low
economic growth due to less exploitation of natural resources. Therefore, these economies
may not experience a greater surplus compared to other economic systems. Since a
traditional economic system preserves its traditions and heritage, other economic benefits
such as modern technology and healthcare could be a luxury whereas other economic
systems may take those benefits for granted. However, modern developments and affects
of globalisation have seen a decline in the traditional economic system worldwide.
Activity 3.4
Ahmed and Hassan are two friends who were classmates from primary till secondary
education. They both belong to a country where there is subsistence economies. This
means that in this country every household produces most of the things. Both, Ahmed
and Hassan got a scholarship. Hassan went to the United States and Ahmed went to
North Korea. The United States has a mixed economy, which is a combination of a
free market economy and a command economy. Compared to most other countries
around the world, United States is more towards a free market. Whereas, North Korea
has a command economic system.
a) What are the disadvantages of the economic system of Ahmed and Hassan’s
country?
b) Are there any disadvantage of the economic system in the United States and
North Korea? Discuss.
65

Activity 3.5
Ahmed is amazed with the development in the United States and he wanted his
country to follow an economic system as the United Sates. Now Ahmed wanted to his
country to change from subsistence economy to a free market economy. Hassan was
impressed with the economic system in the North Korea where most public goods and
services such as healthcare and education are provided free. Thus, Hassan wanted to
persuade his country to follow a planned economic system.
a) If the country is to follow the system proposed by Ahmed, what do you think might
be the advantages of the new system?
b) What could be the effect of introducing the new system proposed by Ahmed on:
i) A physically disabled person
ii) An eighty year old person with no caretaker
iii) A child who is orphaned
iv) A worker who has great demand
c) If the country follows the system proposed by Hassan, what do you think might be
the advantages of this new system compared to a subsistence economy?
d) What would be the effect of the introduction of this new system (proposed by
Hassan) on:
i) A physically disabled person
ii) Seventy year old man who has no child to take care of him.
iii) A child who is orphaned
iv) A worker who has great demand
Activity 3.6
A market economy is an economic system where businesses are owned by private

owners with the goal of making profit. In market economies, prices of goods and
services are set by supply and demand. Examples of countries which has market
economic systems are United States, United Kingdom, Germany, and Canada. In a
market economy some people can be:
i) Rich
ii) Poor
Explain with reasons.
66

Why is Maldives a Mixed Economic System?

The Maldives is considered as a mixed economic system because there is the co-existence
of private and public sector in economic activities of the country. State interventions play
a key role in mixed economies. Although there are no direct influences on the economic
activity by the government, the government intervenes through policies, taxes and
subsidies. In order to control the import on certain goods such as tobacco and polythene,
high customs taxes are imposed. A tendency to change the economic policy can be
regarded as a resemblance of a mixed economy.
As such, over the years, the Maldives has seen
DID YOU KNOW
various phases where there have been economic
policy changes. While the Maldives has part During 1692 to 1700, in
qualities of a command economy and part Maldives first half laari was
qualities of a market economy, the Maldives can issued by Sultan Mohammadh
Ibunul Haaju Ali.
be considered as a mixed economy.
Activity 3.7
After returning from a scholarship abroad, Ahmed and Hassan met their friend
Ibrahim. The three friends discussed the economic systems around the world and
the relevance to Maldives. Ahmed explained the achievements in the United States
economic system. But, Hassan disagreed and said North Korea’s planned economy
is better. Ibrahim was not positive about either of the suggestions. He said that none
of the systems were appealing and a mixed economy would be best suited for his
country.
a) Can there be a free market economic system?
b) If a country has a full market economic system, what may be the consequences?
c) List five reasons why a mixed economic system is convenient.
d) Discuss the benefits and write about 100 words comparing free market, mixed and
planned economic systems.
67

3.3 Production
Production is the process by which inputs (raw
materials) are converted into outputs (consumer goods
You will learn
or services) which are of value in order to gain economic • Production
profit. For example, if we look at our economy we would • Capital intensive production
find a number of products that are put forward into the • Labour intensive production
market. These include from the breadfruit chips made
at homes, fish canned at factories and cement packed in packing plants. Although the
breadfruit can be sold as it is, in order to sell it as breadfruit chips, a process of frying and
packaging is involved. Thus, breadfruit is the input or the raw material and the output is
deep fried breadfruit chips in packets. Similarly, for a fish canning factory the input would be
the raw fish and the output would be processed and canned fish.
Production can be classified into two main categories of capital intensive and labour
intensive production. While Capital intensive productions require a high financing cost in
order to produce goods and services, labour intensive products require a higher number
of workers in order to produce goods and services. Mostly industries such as oil refining,
transport and telecommunication have more capital than labour to produce. On the contrary,
industries such as agriculture, mining and hospitality require labour. Depending on the
ratio of capital required to the amount of labour required, a production can be classified as
capital intensive or labour intensive.
Figure 3.3.1 Labour intensive production Figure 3.3.2 Capital intensive production
68

Activity 3.8
Fish processing
Carefully, look at the picture above and determine if it’s a labour intensive or capital
intensive production. Explain your answer in about 100–150 words with justifications.
69

3.4 Methods of Production

Any economy or economic system requires the You will learn
production of goods for consumption. This is • Role of production
because few raw materials or natural resources • Different methods of production
can be consumed as it is. Resources require to
be transformed into various goods and services in order to satisfy the human needs and
wants. Production can be classified into three categories. They are job, batch and flow
production.
Job production: Certain goods require to be produced for a job. For example, a specialised
order from a car manufacturer or handicrafts made in the local islands. In job production
each job is unique.
Batch production: This type of production requires the set quantities of a good to be
produced. This is most common when there is a moderate quantity of a good that needs to
be produced at a given time. For example, a bakery producing bread, cakes and cookies in
batches.
Flow production: Also known as mass production, flow production employs an assembly
line system where the goods get completed along the line with various parts getting
fixed to it and completed at the end. Flow production processes are most ideal and
appropriate where the goods require to be produced in large quanitities. For example, the
car manufacturing process requires a single flow whereby separate parts are fixed along a
continuous flowing line of production to deliver a completed car ready to be sold.
Activity 3.9
a) Identify a production process where there is job production, batch production and
flow production.
b) Explain why you think that method of production suits the product being made.
Activity 3.10
Visit a factory in Maldives or watch a video. Observe the production method used in
production process.
a) What is the production method used in this factory.
b) Explain why you think that the method of production used in the factory suits the
product being made.
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3.5 Sectors of Production

Production can be classified into three sectors. They
You will learn
are primary, secondary and tertiary production.
All these three sectors are linked in a production • Sectors of production
process and require the other sector to complete • Primary, secondary and tertiary
the production process. The production process is sector of production
complete when the goods reach the consumer. • labour intensive production
Primary: This sector involves the extraction and

development of natural resources that are required for a good to be produced. Usually
production method employed within this sector is labour intensive. For example, the
extraction of oil, harvesting of agricultural products, mining or fishing.
Secondary: At this stage the raw materials get processed and take the shape of the final
good which is produced for consumption. For a larger percentage of goods, this sector
requires mechanical engineering as the sector involves a transformation process. For
example, the tuna cans produced at a tuna canning factory that are ready for dispatch to its
expected consumers.
Tertiary: These activities enable the delivery of the good to the consumer. For example,
advertising also will fall into this sector as the advertisements would bring the good and the
consumer together and facilitate the transfer to the consumer.
PRIMARY SECONDARY TERTIARY

PRODUCTION PRODUCTION PRODUCTION
WAREHOUSING
MANUFACTURE ADVERTISING
RAL OIL
CO
RETAIL SHOP
TRANSPORT
ASSEMBLY
SELLING
EXTRACTION
Figure 3.5.1: Sectors of production
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Activity 3.11
Sectors of production can be either primary, secondary or tertiary. From Education,

Fishing, Tourism and Retailing:
i) Identify the sector which the industry belongs to.
ii) Explain reasons for your choices above.
3.6 Division of Labour

When one worker has to complete a whole product
You will learn
then it may require a set of skills or it could increase
the time spent on production due to switching • Division of labour
of jobs and tools to complete the product. The • Advantages and disadvantages of
division of labour
division of labour is the breaking down of different
jobs in a production process into smaller jobs so
that one can specialise in the work he or she does. By doing so, the production process
becomes more efficient resulting in efficient use of resources available and reduction in
wastage. As practice makes perfect, the continuous performance of a single job increases
the efficiency of the individual with improved speed and
skills. The continuous performance of a single task may
also lead to inventions as the worker may seek to find ways
to improve upon the work he or she is doing.
On contrary to the positivity towards division of labour,
there are disadvantages as well. It is human nature to
get bored when the same work is being done repetitively.
This may cause workers lose interest in work and become
careless. Since the work of a single worker does not
represent a finished product, he or she may not take
pride in the work that is being done which may lead to
decreased job satisfaction. A process which employs
division of labour is interdependent on each other’s
work and performance. Therefore, a lag in one area of
production could result in an undesired overall effect on the
production. Figure 3.6.1: Division of labour
72

Activity 3.12
Visit a factory or watch a video which shows the production process in a factory.
Observe the job of each worker.
a) Identify the activities performed by workers.
b) Explain how the work is divided among workers and state the term for it.
c) Analyse why work should be divided in this way.
d) Consider whether more could be achieved by the factory if its resources were
allocated in a different way.
3.7 Productivity
Productivity defines the efficiency of an
You will learn
organisation in terms of the ability to produce goods
and services at given output and input levels during • Productivity
a specified period. Productivity is the increase in • Marginal and average product
output in relation to changes in an organisation • Law of diminishing return
inputs. While productivity increases the output of an
organisation, it leads to a reduction in costs per unit. This in turn results in higher profits for
the organisation. Therefore, productivity is a critical determinant of cost efficiency.
Productivity is calculated by dividing the output by the input for a given period. Input is the
total cost or resources used for the production. Non-manufacturing productivity is measured
in monetary value. Productivity can be expressed as:
output
Productivity =
input
Example
A worker produces 200 units of a product in an 8 hour work day. Calculate productivity
of the worker.
Solution
Worker productivity = 200 ÷ 8
= 25 units per hour
This means that the employee produces a total of 25 units of the product during one
hour of work.
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Total Product is the total number of units produced by using a resource or a set of
resources in a given period of time. Marginal cost is the additional cost incurred to
produce an additional unit of the product. However, the marginal product is measured in
physical units and is the additional factor of production or resources (input) in producing an
additional unit of a product. Further, the average product is a ratio which expresses the
total product in terms of the total quantity of input used for the production of the product.
Law of Diminishing Return

DID YOU KNOW
The law of diminishing return is an economic
concept whereby when one factor of production The red and white Coca-Cola
remains constant and the other factors increase logo is recognized by 94% of
i.e. the variable factor diminishes with regard to the world’s population
output per unit. For example, when the number
of workers in a factory is increased without
proportionately increasing the other factors the
output per unit would decrease compared to the increased labour.
3.8 Promotion
Promotion is the process of generating customer You will learn
awareness towards a good or service in order to
• Promotion
generate sales, create brand awareness and loyalty.
• Different forms of promotion
Although the main aim is to increase the awareness of
a product or service, it also aims towards persuading
consumers to purchase a specific product or service. Nevertheless, promotional objectives
may be short-term or long-term in nature. A promotion could be towards increasing the
sales, expansion of market or even creating interest towards the product or service. Some
forms of promotion are TV, radio, online, press and sales promotion.
74

the advertising process
set objectives
determine the purpose and
01 duration of advertising
02
decide budget
based on predictable sales
revenue, competitor spending on
advertising and how much the
business can afford, set an
advertising budget
create campaign
depending on the type of product
decide on an advertising
campaign. example, it can be to a
target audience.
03
04
select media
determine the media that can
reach the most of the target
audience in the most cost
effective manner
evaulate
review the advertising campaign
to see if the campaign was
effective in meeting the
objectives.
05
Figure 3.8.1: Advertising process
75

Activity 3.13
Observe your neighbourhood and identify the promotional activities. Justify your
suggestions.
Key Terms
Allocation of resources: how scarce resources are distributed between competing

uses.
Average product: is the per unit production of a firm.
Division of labour: workers specialising in a particular task.
Economic system: how a country decides what to produce, how to produce and for
whom to produce is called its economic system.
Marginal product: is the change in output resulting from employing one more unit of a
particular input.
Market economy: an economy where consumers determine what is produced,
resources are allocated by the price mechanism and land and capital are privately
owned.
Mixed economy: an economy in which both the private and public sectors play an
important role.
Planned economy: an economy where government makes the critical decisions, land
and capital are state owned and resources allocated by directives.
Primary industry: industry that extracts raw materials from the earth, such as coal,
fish or wheat.
Productivity: is the amount of output that can be produced from a given input of
resources.
Promotion: raising customer awareness of a product or brand, generating sales,
replace to create brand loyalty.
Secondary industry: industry that processes primary products into manufactured
goods.
Tertiary industry: industry that provides a service.
Total product: is the overall quantity of output that a firm produces.
76

I Learnt
Choose a country of your choice, and a company from that country. Use the chosen
company to answer the following questions.
a) The type of economic system in that country.
b) How are the main resources allocated in this economy
c) What is produced by the company?
d) Explain the type of production used in this company?
e) Does this company use division of labour?
f) What is the main method of promotion used by the company?
Key competencies
Practising Islam: seeking help and helping others are Islamic values which can
be seen in various economic aspects. Students learn that people, organisations
and economies are interdependent in some form.For instance, the concept of
division of labour also encourages on seeking assistance from people with
different capacities.
Relating to People: students are able to demonstrate their knowledge on
various aspects of economic development and improve their knowledge by
relating theory with practice.
Living a Healthy Life: various economic terms enhance the business
vocabulary of students and boost their self confidence in discussions enabling
students to engage in healthy conversations with the knowledge of the subject.
Using Technology and the Media: understand how technology can be applied
to enhance processes and to economise the use of resources in order to gain
the maximum benefit from the limited resources.
Understanding and Managing Self: the economic systems, resources
allocation and production are important areas for a country. Students understand
the importance of being organised, managing time and its relevance to
management of resources, production and the prosperity of the economy in
general.
Making meaning: various terms used help students to express themselves
better and associate concepts learned with practical situations in an analytical
perspective
77

Self-Assessment

Allocation of resources
Economic system
Maldives economic system
Production
Capital intensive production
Labour intensive production
Methods of production
Job production
Batch production
Flow production
Sectors of production
Primary production
Secondary production
Tertiary production
Division of labour
Productivity
Total product
Marginal product
Average product
Law of diminishing return
Promotion
Different types of promotion
78

Review Questions
1. Choose the best answer.

a) What are the three questions faced by all economies?
i) What to produce, when to produce it and who receives it.
ii) What to produce, how to produce it and who receives it.
iii) Where to produce, how to produce and when to produce
iv) Where to produce, when to produce and how to produce.
b) Market allocation of goods and services:
i) Works the same way as government allocation of goods and services.
ii) Always works best when there is no government.
iii) Only helps rich people get more at the expense of poor people.
iv) Requires government to protect property rights and enforce the rules of
market exchange.
c) What is the argument for government intervention in an economy?
i) to make the distribution of income uneven
ii) to prevent private sector firms from overcharging consumers
iii) to encourage the consumption of harmful products
iv) to increase role of price mechanism in allocating resources
d) Which of the following statement is not true in a mixed economy
i) most people work for privately-owned firms
ii) the government normally provides education and health services.
iii) there is no public ownership of land and capital
iv) the prices of most goods and services are free to change according to
movements in supply and demand
2. Fill in the missing words.
a) Any economic system has to answer ………………….. fundamental economic
questions.
b) One of the disadvantage of planned economy is ……………………….. .
c) A mixed economy is one in which the allocation of ……………………. is
determined by both the ………………. mechanism and ……………………
intervention.
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3. Say whether these statements are true or false.

a) In a market economy, there are often great inequalities in the ownership of
wealth.
b) In a capitalist economy, most of the land and capital is owned by the state.
c) Lighthouses are examples of public goods.
d) In a command economy, firms produce only those goods and services which
are profitable to produce.
4. Answer the following questions.

a) Why do resources have to be allocated in an economy?
b) Define three types of economic system with examples.
c) What type of economic system does the Maldives have? Explain your
reasons.
d) What is the aim of producing goods and services for firms in:
i) A planned economy
ii) A market economy
e) Explain what is meant by job, batch and flow production, using relevant
examples.
f) Production can be labour intensive or capital intensive. Explain labour
intensive and capital intensive production.
g) What are the main sectors of production?
h) With relevant examples, explain sectors of production.
i) Explain three advantages and disadvantages of division of labour.
j) What is productivity?
k) If a company employs 20 workers to produce 400 DVD players per day,
calculate the average product per employee.
l) Firm X and Y produces shoes. In firm X 1000 pairs are produced in a 40 hour
week, while firm Y produces 700 pairs in 40 hour week.
i) Calculate productivity of firm X and Y.
ii) Which firm is more efficient? Explain why?
m) Explain law of diminishing return.
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Chapter 4 Business Organisations
4 Business Organisations
4.1 Types of Business Organisations

In general terms, a business is the activity of buying
and selling goods and services. However, in business
You will learn
terms, a business is an entity that engages itself • Business Organisation
in economic activities seeking to make a profit • Aim of business organisation
through individuals working towards a common • Private and public sector
goal. A business could be commercial, industrial or
professional. A business involves provision of goods and services that satisfies a society’s
needs.For example, a grocery store enables people to buy their grocery items while
satisfying their need for groceries. A business can be an organisation that operates for
profit or an organisation engaged in business not for a profit such as a corporative working
for the benefit of the community.
The Nation’s Business
For-Profit Government Not-For-Profit

Business Corporations Organisations
Public Private Community Co-Ops Foundations
Social Enterprises NPO’s Charities
Figure 4.1.1 Types of business organisations
Activity 4.1
a) Write a short definition of each of the terms given in Figure 4.1.1.

b) Use your own knowledge of retailers and manufacturers in the local area, try to
name a business as an example of each type of ownership.
81

As illustrated in Figure 4.1.1,

there can be many types of
businesses. Businesses can be
broadly categorised into private
sector, public sector and non-
profit organisations.The private
sector businesses include
private, public and community
based businesses. From these,
the most common types of
private sector businesses are
sole proprietor, partnership,
and corporations.The public
Figure 4.1.2 businesses cater for the needs of individuals
sector includes corporations
and municipal enterprises. The
non-profit organisations include organisations that are run for the benefit of the society.
Since the primary motive of these organisations is to provide service and assistance to its
members, profits are not a concern.
The Aims of a Business Organisation

Different businesses have different objectives or aims. While some may be interested in
making maximum profit to the owner, the others may be more concerned of the services
they provide.Voluntary organisation may not operate towards a profit but are more
concerned about the services they provide and any business activity would be to fund for
the sustainability of the organisation. A nation’s businesses can be broadly categorised into
two sectors. They are public sector and
private sector.
Private Sector vs Public Sector

Private sector is the part of the
economy which is not under the direct
control of a country’s government.
The public sector is the area on
which the government of a country
has direct control. These include
government owned organisation and
entities providing goods and services.
Public sector includes schools, public
hospitals and parks. While some public Figure 4.1.3 citizens rely on some public sector
organisations for services
82

sector organisations charge a fee from its users, the others are provided as a service for a
country’s citizen.Some of these include the fire department and police department. Private
sector is relatively larger in free market economies such as the United States where more
opportunities and less restrictions are imposed on businesses. In the United States, most
of the public services are run by the private sector with low taxes. On the contrary, in the
United Kingdom taxes are higher and public services are provided by the government.
Apart from non-profit organisations, private sector businesses are considered to be profit
driven. They are more concerned about adding value to provide products and services
that could be sold competitively in the market. However, public sector businesses are more
concerned with the services they provide for the public.
Funding for its operations is critical for any organisation. The public sector is financed
through the taxpayer’s money. Private sector is funded by savings or capital raised through
issuing shares. Operationally, private sector is driven by creating value addition.Therefore,
private sector is adaptive to changes. However, adapting to short term changes may not be
possible for the public sector.
Individuals who join the private sector usually seek higher pay, career advancements
or expect to gain experience which would ultimately lead to higher pay or career
advancements. However, most individuals who join the public sector do so to provide for
others and seek stability in their career rather than high pay.
The responsibilities in public sector may be relatively high but authority is often limited.
Regardless of how capable or keen a person may be, he or she may not be able make the
right decision at the right time. Sometimes, the public sector organisations do not have clear
authority and governance, in other cases it is very clear but restricted by laws, regulations
and legislations. Most successful private sector organisations have clear structures and well
established procedures determining roles and responsibilities of workers. The private sector
can be observed to have a balance of authority and responsibility through empowerment.
Activity 4.2
Visit any two businesses from your neighbourhood which belong to two broad sectors
of business.
a) Prepare a report of about 200 words about the two businesses.
b) Compare your findings with the characteristics of business organisation.
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Activity 4.3
Indira Gandhi Memorial Hospital (IGMH) is a state-owned hospital, and one of the
biggest hospitals in Malé, Republic of Maldives. The hospital is located at the west
end of Malé. The hospital is a gift from the Indian Government and is dedicated to
Indira Gandhi. IGMH replaced the previous sole hospital, Central Hospital, located
at the center of Malé. Central Hospital was later demolished and the location was
leased to a private party by the government to make another hospital. The Indira
Gandhi Memorial Hospital has 275 beds and provides a range of basic and speciality
services.
ADK hospital is a small clinic registered under the name of Mediclinic which opened
its doors in Male’ in 1987 with a great aspiration to succeed, and to be the best in
the business. This marked the beginning of the ADK Group of Companies. The
ADK Hospital revolutionised healthcare and medical services in the country by
setting standards in the sector, and by complementing the public health service and
government hospital.
a) Identify the private and public sector hospital in the scenario and justify your
argument.
b) What could be the reason for leasing the location to a private party to build a
hospital?
c) Discuss and write down the reasons why IGMH may face more challenges
compared to ADK hospital.
4.2 Companies
A company is a separate legal entity that engages in business
You will learn
activities. It can be structured in many ways and the ownership
maybe from a single person to a number of people. There are • Companies
three main types of companies. They are sole proprietorship, • Types of companies
partnership and limited liability companies.
Sole proprietorship: This is the simplest form of business operation within the business
organisations. This type of businesses are owned by a single owner and often the owner
is the manager of the business. In business terms, a sole proprietor is referred to a person
conducting a business which has no legal entity but is individually liable for any debts.
84

Partnerships: These are business establishments

formed by two or more people sharing profit DID YOU KNOW
and losses at prior agreed percentages.
Coca-Cola was named after
In partnerships, a partnership agreement
the coca leaves and kola nuts
is established defining the responsibilities, that were used as flavouring.
limitations and investment details of partners. The
agreement states the details of the partnership
such as the profit sharing percentage and the
business to be conducted by the partnership.
Except unless in a limited liability partnership, the
liabilities of partners are unlimited. This exposes
the owners or the partners to greater personal liability. A partnership has a limit on the
number of partners it can accommodate, usually 20 partners. Therefore, partnerships find it
difficult to raise more capital and to expand. Although partnerships may be easy to setup as
it has a limited scope compared to companies.
Limited liability companies: These include private limited companies, public limited
companies and joint ventures. The limited liability companies have limited liabilities meaning
that the owners are only liable to an amount not exceeding the amount invested in the
company.
Activity 4.4
Visit a small shop which sells retail goods. Conduct an interview with the owner.
a) What were the reasons for classifying the shop owner as a sole proprietorship?
b) List the advantages of being a sole proprietorship.
c) If you are given a choice would you prefer to be a sole proprietorship form
a partnership or a limited company? Explain your reasons in about 100 to
150 words.
Activity 4.5
Aisha has worked as a designer for a tailoring company for many years. She often
thought of setting up her own business. Having worked as a wedding dress designer
she knows how much it costs to buy a wedding dress, which will be worn only once.
She thought that a wedding dress rental might be a good idea. She has discussed this
idea with her friend Sarah who is also very enthusiastic about the idea.
a) Discuss the advantages Aisha will have by starting her own business.
b) Explain any disadvantages she may face with regard to her decision.
85

c) If Aisha decides to be a partner with her friend Sarah in opening a wedding dress
shop, what will be the advantages and disadvantages of this decision.
Formation of a Company
Companies are legal entities. Therefore, they need IKEA is the initials of the
to be registered with the relevant authorities of the founder Ingvar Kamprad and
government. All the details of the companies will be the initials of the property
held with the registrar of companies. and village he grew up in,
Elmtaryd Agunnaryd.
To form a company, the goals and objectives of the
company need to be identified. This information is
written in the articles of association. The articles of association include information on
the purpose as well as the duties and responsibilities of its members. Further, the members
or the shareholders attributes towards the company needs to be identified. These are stated
in the memorandum of association.
The articles of association and the memorandum of association are two basic documents
that are required and need to be filed with the registrar of companies. A company’s legal
name should be mentioned in both the articles of association and the memorandum of
association. In addition, tax registration documents are required to be submitted along with
the documents for registration of a company in the Maldives.
Activity 4.6
The wedding dress designer Aisha in Activity 4.5 wanted to add more profit without
committing all her free time. She spoke with her classmate Ahmed who is also a
business coach. She realised that it might be time to look at ways of making more
money that could not be achieved by just charging an hourly rate.
“Ahmed convinced me to give it a try and then pointed out that I might need to re-
think how I managed my finances in order to ensure that I didn’t expose myself to any
unnecessary risk”.
a) What motivated Aisha to move from sole proprietorship to a limited company?
b) Identify the documents which are required to form a limited company.
c) Explain three benefits which Aisha will gain by forming a company.
86

4.3 Private Sector Businesses

Private sector businesses are those businesses that are run
You will learn
by individuals other than the government institutions and
which the government has no operational control. A private • Franchise business
sector business may be from a small business with a single • Joint ventures
owner to a multinational business operated globally with • Cooperatives
many owners. Rules and regulation are laid down by the • Types of cooperatives
government to regulate the private sector.
Decision making processes are more convenient and fast in private sector businesses as
they are more concerned of any possible profits or losses that may arise due to untimely
decisions. Private sector business has more control over the business operations in terms
of control over its costs. Private sector businesses are more likely to invest in future such
as new technologies, in view to reduce costs of productions and to have a competitive
advantage over its competitors.
Private sector companies have the freedom to change price of goods and services at
values which best suits them. Therefore, in a situation where there is a scarcity of a good
or service that the organisation offers, there is a possibility of prices being increased for the
product or service. For example, during the water crisis in the capital city Male’ in the year
2014, private businesses increased the prices of storage containers and bottled water.
Activity 4.7
Choose two businesses one is a private business and the other a public business.
You are required to study both businesses and answer the following questions.
a) Name a private sector business.
b) Name a public sector business.
c) Discuss how both private sector and public sector businesses are regulated.
d) Explain how decision making and ability to adapt to short term changes takes
place in both private and public organisations.
e) Who controls these businesses?
87

Franchise
Franchise is a business system in which an owner of a product or service provides the
license to sell the products or services along with other privileges. A franchise is usually
given to a specific geographical area. Simply said, a franchise is the grant of rights to open
an outlet of the product or service of an owning company in a specific location as per
guidelines set by the product or service owner. A contractual agreement is signed between
the franchisor and the franchisee. The franchise agreement would explain in detail the
franchisor’s rules on operating the franchise.
Generally, in return for the license of
rights provided, the franchisee pays
to the franchisor a fee or royalty and a
percentage of sales revenue. One of the
oldest operating franchise in the Maldives
can be identified as Male Aerated Water
Company Private Limited having the
franchise of Coca-Cola products. More
recent franchises include Marrybrown,
Burger King and Secret Recipe.
Figure 4.3.1 A franchise business operated in
the Maldives. pl. provide hi-res image
Activity 4.8
a) In Maldives there are many franchises. Choose any three franchised and complete
the table given below.
Name of Business Produce goods Provide a service Target market
b) Explain why a franchising business is could be popular.

c) What are the advantages of a franchising business?
Franchising is a long-term entrepreneur strategy whereby the franchisor grants rights to a

franchisee to market and sell products and services of the franchisor through an agreement
or a license. By franchising, the franchisor allows of the franchisee to use its business name
88

and provide access to the franchisors processes, trademarks and proprietary knowledge.
Franchisor is the legal owner of the business who offers the franchise. Franchisee is the
person or organisation seeking franchise from a franchisor.
Activity 4.9
a) Discuss what is meant by franchisee and franchisor and list three franchisees and
franchisors.
b) Discuss and explain in about 100 to 150 words, the difference between franchisor
and franchisee, and the advantages of being a franchisor and franchisee.
Joint Ventures
Joint ventures are business arrangements and understandings within two or more parties
combining their energy and work in order to initiate a commercial enterprise for mutual
gain. The joint venture could be for an existing or a new business. The parties contribute
their resources according to the joint venture agreement. The agreement defines the roles
of each party, their responsibilities and limitations in liability. Businesses turn towards joint
ventures when they believe that they would get a competitive advantage by combining
their resources with another party. For example, where an organisation lacks expertise in
certain areas or have limitation in resources that are required for a specific tender, a joint
venture with an organisation who has the required expertise or resources can be an ideal
solution to compete for the tender. In general, joint ventures are meant to be short term
contractual agreements for a specific project. However, some joint ventures might continue
for a longer period depending on the nature of business collaboration. As such, a separate
company could also be established under the joint venture agreement. Some companies
form joint ventures to gain entrance into foreign markets by forming joint ventures with local
companies. By doing so, the foreign company could take advantage of the local company’s
reputation and the local company perhaps could take advantage of the foreign company’s
expertise or technological advances. Unless otherwise agreed for a specific proportion in
the joint venture agreement, the joint venture parties share equal amounts of profits. It is
more appropriate for a joint venture to keep their accounts on cash basis rather than on
going concern.
Cooperatives
A cooperative is a business owned and controlled by a group of people for their own
benefit. The members of a cooperative are not investors but it’s the customers of the
cooperative. Cooperatives choose their board in an annual members meeting. The
decisions within a cooperative are made by the vote of members. Usually, it is a ‘one
89

member one vote’ policy whereby each member gets a voting right and participates in
the decisions made. No proxies are allowed for voting. Therefore, the cooperative has
a democratic control over its operations and functioning. Unlike other businesses, a
cooperative does not work towards profit maximisation. It operates towards provision of
services and benefits for its members. However, this does not mean that a cooperative
should be run on losses.
The membership in a cooperative is voluntary and
open irrespective of race, sex or ethnicity if the DID YOU KNOW
person has a common interest in the cooperative
Poverty in Maldives: Population
and is willing to abide by the rules of the
living below the MDG poverty
cooperative. There are no restrictions on joining
line of USD 1.25 is 8 percent
or leaving the corporative. The membership is
and population living below the
open throughout without having a fixed term. The
national poverty line (half the
membership of a cooperative is not transferable
median of atoll expenditure per
and the number of shares that can be held by any
person per day at MVR 22) is
one individual is limited. However, on death of a
15 percent.
member, the shares are automatically transferred
to the heirs. A membership can be revoked Source: HIES 2009/10
if a person is seen to have lost interest in the
cooperative or if he or she does not agree to the
rules of the cooperative at any given time.
Similar to a company, a cooperative is financed through the sale of shares. Nevertheless,
the capital raised is limited as the shares are sold at a very low rate. Sometimes the
government also provides financing in the form of loan. Depending on the rules and
regulations of the country of operation, a cooperative may or may not declare a dividend
as interest on capital to shareholders. Even if a dividend is declared, it will be very minimal.
Mostly any profits made are re-invested in the capital of the cooperative or a part of it is
spent on social welfare.
Since most of the members of a cooperative may have low income, they may not have had
proper education. Thus, having a limited understanding on the concept of cooperatives.
This creates bottlenecks that may arise due to differences in thoughts and sentiments.
Therefore, to avoid such differences and to function properly through combined decisions of
agreeable views, creating awareness among members is essential.
Types of Cooperatives
There are three main types of cooperatives. Namely, consumer, producer and worker
cooperatives. However, there are other types of cooperatives such as credit unions, retail or
purchasing cooperatives, housing cooperatives and social cooperatives.
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Consumer cooperative: These are businesses that are owned and governed by the
customers of the business. However, one does not need to be a member to do business
with a consumer cooperative. The consumer cooperative sells products or services that
may be required by the members. These cooperatives offer goods at discounted rates
and sometimes offer credit to their members. Consumer cooperatives can vary in sizes
from very small to million dollar businesses. The primary involvement of a member of a
consumer cooperative would be in the consumption of its goods and services.
Producer cooperative: These cooperatives are generally formed by groups within the
arena of agriculture such as farming, fishing and forestry. The cooperatives are formed in
order to ease their processes and to market their products. The producer cooperative may
engage in a variety of activities such as sourcing inputs, equipment, establishment of joint
storage and increased distribution networks. Through these cooperatives producers gain
collective advantage.
Worker cooperative: In an organisation it’s the owner or a small group of owners who
take most of the profits. Further, managers are the people who make decisions on the daily
operations of the business. For this reason, managers are paid a high wage. While the
wages of an ordinary worker are set by the owners or managers, an ordinary worker hardly
has any say in the operations or business conditions that may affect their daily life. While,
most businesses have a top to down hierarchy, the workers hardy have any influence on
their bosses. To overcome this situation with a collective bargaining or action, workers join
together to form cooperatives. A worker cooperative can be defined as a group of workers
working together towards the benefit of the workers in a democratic and fair environment.
Members of a worker cooperative work within the same industry. There is no limitation on
the number of members of a worker cooperative and a worker cooperative may or may not
have a board of directors.
Activity 4.10
a) What are the main types of cooperative?

b) Explain each type with relevant local examples.
c) Are there cooperatives in the Maldives? Justify your answer.
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4.4 Public Sector Businesses

In contrast to private sector businesses, the public sector
businesses or organisations are operated and controlled
You will learn
by the government of a country. For example, public health • Public sector businesses
care services and schools.
Cost of the services provided by the public sector are usually funded from the taxpayer.
Some public organisations may be very expensive to run therefore a higher proportion of
the taxpayer’s money may be allocated for those organisations. Thus, taxpayer’s money
may not be invested in projects that provide the best value for money. This allows the basic
costs to be covered and debt to be minimised. Prices are controlled with low profit margins
making products and services more affordable. When public sector companies regulate
the market there is very little room for private sector businesses to compete or to prosper
in the industry. The people who are in charge of public sector businesses can be held
accountable which minimises the risk of manipulation and misuse.
Corporations are entities which are separate and distinct from its owners and recognised
as having a legal existence with the right to sue and be sued. In the Maldives, corporations
are overseen by the Privatisation and Corporatisation Board of the Maldives which assigns
and removes directors for public corporations. The main areas of public services are
undertaken by government corporations. For example, the state owned organisations such
as STELCO and Maldives Road Development Corporation are public sector businesses.
These are companies providing some basic requirements for the citizens of the country.
If services such as these are owned by the private sector, there is always the fear of
increased prices for products and services offered and or creation of unfair competition.
Another example would be the Public Service Media.
Activity 4.11
Public corporation and public limited companies are two different types of companies.
Compare public corporation and public limited companies. In your discussion, you
may include ownership, sector and aim of the company.
Activity 4.12
What could be the reasons that a board is established to assign and remove directors
of corporations? Write a critical answer in about 100 to 150 words.
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4.5 Multi-National Companies

A multinational company is an organisation which owns and
You will learn
controls businesses in other countries other than the country
of incorporation. It can also be stated as an enterprise which • Multinational companies
operates in many countries but is managed from one home
country. Some definitions of a multi-national company state that a quarter of its income
should arrive from its establishments overseas. Multi-national companies are also known as
trans-national companies.
Multi-national companies can gain cost advantage in the international market by
establishing business operations in regions where the raw materials and labour
are cheaper. Thus, reducing the cost of production. When a business is globally
represented, then it is less likely to have a negative impact due to trade barriers. Further,
the establishment of business operations in different countries creates employment
opportunities in the host country of business operation.
Although there are not many companies operating
outside Maldives with its main office in the Maldives,
there are a number of foreign based companies
conducting their businesses in the Maldives. However,
these foreign companies cannot be considered as
multi-national companies in the context of Maldivian
economy. This is because to be a multi-national
company in this country’s context, the country should
be hosting the main corporate office of the business.
As such, there are very few multi-national companies
in the Maldives. One such company is State Trading
Organisation Limited (STO) which has its businesses
overseas and has its corporate office in the Maldives.
Other companies such as Hilton, John Keels and
Ernst & Young are business units of multi-national
companies that have their corporate offices overseas.
Figure 4.5.1 A multinational
Company operated in the Maldives.
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Activity 4.13
The following table lists some of the multi-national companies. Complete the column
for country of origin and their main product.
Company Country of origin Main products
Apple
Coca Cola
Sony
Unilever
Nestle’
4.6 Nationalisation and Privatisation

The government taking over of an industry is
called nationalisation. One of the main reasons You will learn
of nationalisation is that there is a fear that an • Nationalisation and privatisation
essential product or service might be discontinued
to less viability in operations. In this case, the
government takes over and subsidises for any
losses to ensure the continuity of the product
or service to the public. Nationalisation can
happen with or without compensation. An
example of nationalisation would be the re-
acquiring of Ibrahim Nasir International Airport,
Maldives by the government of the Maldives.
Privatisation is the reverse of nationalisation
where government owned industries are
turned over to private sector. For example,
Ghiyasuddin School which was established in Figure 4.6.1 Privatised school
1999 as a government school which was later
owned by Shri Educare Pvt Ltd, India, in 2010 under the public private partnership project.
Activity 4.14
Assume one of the public school is privatised. Discuss the advantages and
disadvantages of privatising the school.
94

Key Terms
Business Organization: an organization established with the purpose of producing

and selling goods and services.
Sole proprietorship: a one person business with unlimited liability.
Limited liability: shareholders’ liability for the business is limited to the value of the
shares they have agreed to buy.
Partnership: a business organization of two more people who are personally
responsible for its debts and share its profits.
Private limited company: a business organization with limited liability which can only
sell its shares with the approval of existing shareholders.
Public limited company: a business organization with limited liability which sells its
shares to the general public.
Franchise: is a type of license that a party (franchisee) acquires to allow them to
have access to a business’s (the franchiser) proprietary knowledge, processes and
trademarks in order to allow the party to sell a product or provide a service under the
business’s name.
Public corporation: a business organization owned by the government which is
designed to act in the public interest.
Multinational company: a company which produces in a number of countries.
Co-operatives: a firm that exists for the benefits of its members.
Nationalisation: the taking into state ownership of private sector firms.
Privatisation: the sale of public sector assets to the private sector.
I Learnt
Choose the main three types of business organisations; for profit business,
government corporations and not-for-profit organisations. Write an analytical report of
about 125–150 words about your understanding of this three type of businesses.
95

Key competencies
Practicing Islam: Islam teaches on being fair and just. Eliminate unfair
competition and encourage healthy competition.
Thinking Critically and Creatively: while businesses in the local

community are important, it is equally important compare and contrast
business around the world to understand and explore opportunities for the
Maldivian companies in a global context.
Living a Healthy Life: through identification of the most suitable types for
investments, students will be able to make their own economic decision at
various stages of their life.
Using Technology and the Media: in a globalised world where

businesses are far yet close, students are encouraged to explore
businesses and its practices around the world through various
technological means.
Understanding and Managing Self: through the understanding of

various types of business organisation students are able to compare
and suggest the most appropriate type of business for themselves or to
another entrepreneur.
Making Meaning: various terms used help students to express

themselves better and associate concepts learned with practical situations
in an analytical perspective.
96

Self-Assessment

What is a business
Business objectives
Two broad categories of business
Public sector
Private sector
Companies
Sole proprietorship
Partnership
Limited liability companies
Formation of a company
Franchise
Franchisor
Franchisee
Joint ventures
Cooperatives
Consumer cooperative
Producer cooperative
Worker cooperative
Corporations
Multi-National Companies
Nationalisation
Privatisation
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Review Questions
1. Choose the best answer.

a) A___________ is a form of organisation in which the owner maintains
complete control over the business and is personally liable for business debts.
i) Sole proprietorship
ii) General partnership
iii) Corporation
iv) Limited liability company
b) A _____________ is a form of business organisation in which two or more
business owners share the management and risk of the business.
iii) Corporation
c) A___________ is a legal business entity that is separate from its owners and
managers.
iii) Corporation
d) A business that provides goods or services without seeking profits for
distribution to individual members is a ____________.
i) Not-for-profit organisation
ii) Partnership
iii) Cooperative
iv) Corporation
e) What type of business organisation does not usually have shareholders?
i) A multinational company
ii) A partnership
iii) A private limited company
iv) A public limited company
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a) In about 100 words, explain who owns, controls and is responsible for any
debt, in a sole proprietorship and in a partnership.
b) Why do sole proprietorship often find it difficult to raise money for investment?
c) What are the advantage of a private limited company rather than a
partnership as a form of business organisation?
d) Differentiate between private sector and public sector.
e) What are the main documents required to form a company.
f) What is a joint venture company? Give examples from the Maldives economy.
g) What are the different types of cooperatives? Explain each.
h) Define multi-national companies and give examples from the local economy.
i) Define nationalisation and privatisation providing local examples.
99

5 Financial Institution
5.1 Exchange
Exchange is the act of giving and taking. An exchange can
happen only when the item offered for exchange is of value You will learn
to the other individual willing for the exchange. Exchange • exchange and barter
can be done in commodity or financial means. For example, system
a fisherman will have fish, and a farmer will have fruits and
vegetables. So, the fisherman could get fruits and vegetables by giving fish to the farmer.
The most common form of exchange currently used is money. In ancient times where
money was not yet invented as a means of exchange, people and communities used to fulfil
their needs and wants through exchange of goods that are of value to the other. This was
known as barter system.
Barter is a system whereby commodities are offered in exchange for goods and services.
For example, if you exchange one of your story books with your friend for a pencil case,
then you have bartered. Due to the difficulties in barter system such as not being able to
match with the commodities available for exchange and after the introduction of money,
barter system is now hardly used. Nevertheless, there are some organisations and
associations encouraging barter system to save money. For example, there are online
markets where students can list their used books to be traded with books of interest listed
by other members.
Figure 5.1.1: Barter system
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Chapter 5 Financial Institution
Activity 5.1
From the following cases, identify an act of exchange:

Exchange Not an exchange
a) Ahmed got a new PlayStation for his birthday;
he wanted to give his friend his old PlayStation.
b) Sarah got two same titles of a storybook on her
birthday and she wanted to have another title
of the same series of books from her friend by
giving one of her books of same title.
c) Aisha received a new storybook. When she
finished reading the book, her friend asked if
she could borrow it.
d) Ali got a Burger for lunch but you have a Pizza;
you and your friend Ali decided to share your
lunch.
Activity 5.2
Read the scenario and answer the following questions:

Picnic Island is famous for growing fruits specially watermelon. The neighboring Iruvai
Island grows both vegetables and fruits. This year Northeast Monsoon had affected
Iruvai Island severely and some of its crops are severely damaged to the extent that
they don’t have enough for their daily needs. Those damaged crops are mainly fruits.
The council of Iruvai Island met to decide the best way to get fruits for the Islanders.
One of the council members suggested to visit nearby Island and see how the
situation was in those islands:
a) Without involving money how can they sort out their problem?
b) What name is given to this process?
c) Discuss how they can settle this problem. HOTS
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5.2 Evolution of Money

For an exchange to happen, what is offered for goods and You will learn
services should be of value to the person offering the goods and • Money
services. Therefore, one may not fulfill the desired need through • history of money
barter system if the person does not have something of value to • invention of mone
offer to the provider of goods and services.
The need to establish a common medium of exchange which can be used to fulfill ones
needs lead to the invention of money. One of the most common forms of money used in
the Maldives in early days was the cowry shell. Money can be anything which can be used
as a common medium of exchange, has an economic value and can be served as a means
of economic calculation. Currently, money in currency is issued by the central bank of the
country and in the form of notes and coins.
Figure 5.2.1: Evolution of money in the Maldives
102

Figure 5.2.2: History of money in the Maldives
103

Coins are the divisible of notes and are given

as change or used to make small purchases.
Every country has coins and notes. The coins
used in the Maldives are called Laari. One
Rufiyaa is equivalent to 100 Laari. The coins
used in the United States are called Cents and
Pence in the United Kingdom.
Figure 5.2.3: Coins in circulation in Maldives
A Bank note is a piece of paper money issued and endorsed by the central bank of a
government where a stated sum has to be paid on demand to the bearer. Bank notes are
used as a medium of exchange to buy expensive goods and services. It bears security
features such as holograms and fine prints making it difficult to replicate and are issued in
limited supply.
Figure 5.2.4: Advancements and changes to a 100 Rufiyaa note
104

Table 5.1: Currencies used in SAARC countries
Country Currency Name Currency Code

Afghanistan Afghan afghani AFN
Bangladesh Bangladeshi taka BDT
Bhutan Bhutanese ngultrum BTN
India Indian Rupee INR
Maldives Maldivian Rufiyaa MVR
Nepal Nepalese Rupee NPR
Pakistan Pakistani Rupee PKR
Sri Lanka Sri Lankan Rupee LKR
Characteristics of Money
In order to be accepted as a medium of exchange, money should possess certain
characteristics. Therefore, money should be generally acceptable, durable, portable,
divisible, homogenous and limited in supply. It should be generally acceptable to everybody.
If people are not willing to accept it as money then it will not be able to carry out the
functions of money. People will not accept anything which will go rotten as money or
anything which may last for a week or which may rust, corrode or deteriorate in some
form. Money should be convenient to carry with people. People would like to carry lots
of purchasing power without much inconvenience to them. Therefore, it should not be too
bulky or heavy for a person to carry. While dividing it into small units, it should not lose
value. There should not be any problem making small payments or large payments. Every
note or coin of the same value should be exactly same so that people can easily recognise
it as money. Money should be limited in supply. That is because anything which is unlimited
has no economic value and cannot be used as money.
Activity 5.3
The following is a list of commodities which have a value. Discuss if they could be
used for monetary transactions and explain with the characteristics of money.
a) Gold
b) Flower
c) Cowry Shell
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Activity 5.4
Below are images of an early Maldivian bank note and the current bank note.
Compare the two notes and discuss the changes to the note over the period. Focus
your discussion to include changes such as security features and characteristics.
Functions of Money
Money allows people to buy and sell products. In the past many things have been used as
money for example, cowry shells, gold and silver coins. With money, life is easier and many
problems are solved as people do not have to carry the lot they want in exchange to buy.
The functions of money are: medium of exchange, act as a store of value, unit of account
or measure of value and standard deferred payments. The most important function of
money is that it enables people to exchange product or goods conveniently.
106

Livestock was mostly used in BARTER.

HISTORY OF MONEY Commodities such as salt were used to pay for
goods and known as COMMODITY MONEY.
Roman soldiers were paid in salt.
PRE-
COWRIE was introduced as the first HITORY
form of money by the Chinese. Till
the 20th century Africa used cowrie
as money.
1200
BC
The first coin was

minted in China. The
1000 coin was practical;
BC easy to carry and
durable.
Turkey introduced
precious metal coins
which were made in 700
gold and silver. BC
Merchants deposited their gold with
goldsmiths who in turn gave a paper receipt
of deposit which eventually was used as
money. The first European bank note was
800 from Sweden.
Now we have more secure forms of AD
currency notes, coins and cheques.
Further, directions are towards a cashless
world where use of cards and Internet
transactions are becoming a daily norm.
TODAY
Figure 5.2.5: History of money
107

5.3 Banking System

A Bank is an organisation which deals with finance. You will learn
There are different types of banks. The different types
• banks
of banks are: commercial bank, investment bank, saving
• different types of banks
bank, Islamic bank and central bank. Different banks have
different functions and offer different services. The services
of banks include receiving deposits, making payments and financing activities.
A bank accepts deposits from customers and keeps it safe on behalf of the customers.
In order to make deposits, an individual or organisation have an account opened with the
intended bank. There are different types of accounts that can be held in a bank. Some of
them are savings accounts, current accounts and fixed deposit accounts.
The banks also allow to make
payments from a respective
account through various modes
of payments. Some of the modes
of payment include cheques,
direct debits and electronic cards.
Cheques are an alternative for
bank notes. It is a safe way of
carrying cash as the cheques are
issued to a specific bearer and
money can only be withdrawn by
the bearer of the cheque. Direct
debits are executed through Figure 5.3.1: Electronic transaction through cards
instruction given to a bank by
a customer. For example, a customer may request the bank to settle bills on behalf of the
customer from his or her account through a direct debit. Today, cards can be seen as the
most commonly used payment method due to its convenience in carrying and safety. A card
is linked to the customer’s account and any payments made through the card are deducted
from the account. Cards can be of two types. They are credit card and debit card. Debit
cards allow payment up to the value available in an account held with the bank. Whereas,
credit cards are linked to accounts with a credit limit allowed by the bank which can be
settled on a later date. However, the bank makes the payment to the merchant immediately
on behalf of the card holder through the credit limit allowed to the credit card holder.
108

Figure 5.3.2: A cheque from the Bank of Maldives
Financing activities of a bank include providing overdrafts and loans for individuals and
organisations. Loans are the most profitable activity of conventional banks. Loans are
issued to be repaid with an interest. Bank overdrafts are facilities allowing customers to over
draw from their accounts up to an agreed limit. Usually overdrafts require a collateral to be
placed at the bank for the value of the overdraft.
Activity 5.5
From the below listed banks operated in the Maldives, identify the local and
international banks.
a) Bank of Maldives Plc
b) State Bank of India
c) Habib Bank Limited
d) Bank of Ceylon
e) The Hong Kong and Shanghai Banking Corporation Ltd.
f) The Mauritius Commercial Bank (Maldives) Private Limited
g) Maldives Islamic Bank Pvt. Ltd.
A commercial bank is a financial institution offering its services to the public, government
and business. Bank or commercial bank offers services such as accepting deposits and
providing financial assistance through loans. Also, a bank is a safe place to keep savings
deposited. The bank keeps record of the transactions on behalf of the customer for a
nominal fee. There are different types of banks to cater for various financial purposes.
Some of the types of banks are: Central Banks or the Regulatory Banks, Commercial
Banks, Investment Banks (Merchant Banks), Savings Banks and Islamic Banks.
109

Investment banks, also known as the Merchant Services Banks serve mainly to large
firms and act as an intermediate in managing their shares and business takeovers. Further,
they accept deposits from and lend money to these firms and keep records of financial
transactions.
A Savings bank, as the name suggests serves the
general public encouraging savings by providing attractive
interest rates for money deposited in the bank for a period
of time. Compared to an Investment bank, the rules are
much lenient with increased flexibility in withdrawals
making it convenient even to the low income group.
Islamic bank, is a financial institution mobilising financial
resources and investing it in a Sharia compliant manner.
The Islamic banking concept eliminates interests and
promotes fairness through the sharing of profits and
losses among all the parties involved in an endeavor. The
Islamic bank has a Sharia board acting as an advisory
council to the bank in its operations ensuring Islamic
principles are followed.
Central bank, is the government bank and is
the regulatory body of all the banks operated in
a country. Central bank is an independent body
which makes rules and regulations on banking
sector operations. Central bank also provides
banking to the government and the other banks.
Figure 5.3.3: Some banks in Maldives

Table 5.2: Central banks of SAARC countries
Country Central Bank
Afghanistan Da Afghanistan
Bangladesh Bangladesh Bank
Bhutan Royal Monetary Authority of Bhutan
India Reserve Bank of India
Maldives Maldives Monetary Authority (MMA)
Nepal Nepal Rastra Bank
Pakistan State Bank of Pakistan
Sri Lanka Central Bank of Sri Lanka
Source: http://www.saarcfinance.org/index.html
110

Activity 5.6
Aisha lived in an Island where the land was fertile and crops grew easily. The family
sustained on income from farming. However, Aisha accepted an opportunity from the
government to migrate to another island with a larger population. The offer included a
fully furnished newly built four bedroom house. After migration Aisha realised that the
land was not fertile and that crops could not be grown. Therefore, Aisha had to look for
a new source of income. Her only asset was the knowledge of baking gained through
a diploma program. With keen interest in baking she wanted to run a bakery. However,
she lacks the investment required for the startup including the equipment and labour.
Starting a bakery will need an investment. For example, she need things such as
ovens, a place to have bakery and few workers.
a) Is it possible for Aisha to start her own business?
b) Explore and determine how Aisha could finance her new business. Explain you
answer.
c) Discuss any risks that could be involved in this method of financing.
5.4 Stock Exchange

A Stock is a supply of anything which is kept for sale. You will learn
Similarly, a stock in a stock exchange is shares of the • stock exchange
listed companies in the specific stock exchange. A • types of securities
publicly owned company trades their shares in a stock
exchange enabling the public to buy and sell their
shares freely in a marketplace. A stock exchange is a
regulated financial market where securities are traded.
Securities are financing or investment instruments which
have a proof of ownership with an assigned value that
can be sold. Some forms of securities include, shares,
debentures and bonds. The stocks of public companies
in the Maldives are traded through the Maldives Stock
Exchange. In a global scale, NASDAQ in New York,
London and Tokyo are the leading stock exchanges
in the world. However, Chinese Stock Exchange is
increasingly becoming global in recent years.
Figure 5.4.1: Different stock
exchanges
111

Activity 5.7
a) Visit the Maldives Stock Exchange (MSE) and obtain information requirements to
get listed in the stock exchange.
b) Discuss the advantages for companies in getting listed in MSE?
c) Using the information gathered, write a report of (75–100 words) about listing on
the stock exchange.
Key Terms
Bank note: a piece of paper issued by the Central bank which can be used as a
medium of exchange.
Bank: an organisation which deals with finance.
Barter: act of exchanging goods and service.
Central bank: the government bank and all the bankers’ bank.
Coins: divisible of notes.
Commercial bank: financial institution offering its service to the public, government
and business.
Exchange: the act of giving something in return for another.
Investment bank: serves mainly to large firms and act as an intermediate in
managing their shares and business takeovers.
Islamic bank: a Sharia compliant bank.
Money: anything that can be used as a common medium of exchange.
Saving bank: a financial institution for the general public.
Stock: supply of anything kept for sale.
Stock exchange: regulated financial market where securities are traded.
I Learnt
Write your understanding of the chapter in about 75–100 words.
112

Key competencies
Practising Islam: learning Islamic banking and the concept of Islamic

banking, student will know interests are not allowed in Islamic Sharia
and how to avoid this. By this way, students will inculcate the habit of
practicing Islamic principles in banking. The Holy Quran 2:275 states,
“Those who consume interest cannot stand [on the Day of
Resurrection] except as one stands who is being beaten by Satan
into insanity. That is because they say, ‘Trade is [just] like interest’.
But Allah has permitted trade and has forbidden interest. So
whoever has received an admonition from his Lord and desists may
have what is past, and his affair rests with Allah. But whoever returns
to [dealing in interest or usury] - those are the companions of the
Fire; they will abide eternally therein.”
Understanding and Managing Self: learning about money and banks,
students will learn how to manage their budget. This will create an interest
to save for the future. By this way students learn to manage self, using the
banking system, most appropriate for situation.
Making Meaning: money is used every day for different purposes,
learning money and banking, students become more meaningful as they
know how in real world people use financial institutions.
Relating to People: learning exchange and barter system, students will
have learn to communicate with people and understand their needs. In
addition, each child would know their relevance to people and their daily
needs. In fact, it is a relationship between two or more people to conduct
a transaction.
Self-Assessment

Definition of exchange
Can identify examples of exchange
Definition of choice
Difficulties of barter system
Definition of money
113

Describe types of money

Characteristics of money
Functions of money
History of money
Definition of banks
What is commercial bank
What is Investment bank
What is Saving bank
What is Islamic bank
What is Central bank
Differentiate different types of banks
Definition of stock
What is stock exchange
Different types of securities
Review Questions
1. Define exchange.
2. Explain how barter system works.
3. Explain the difficulties of barter system?
4. Describe the types of money.
5. State the features of money.
6. What are the functions of money?
7. Discuss the evolution of money.
8. What are the services of banks?
9. What are the different types of banks?
10. Explain the different types of banks.
11. Discuss the importance of banks to an economy.
12. Define stock and stock exchange.
13. State the different types of securities.
14. Discuss the importance of a stock exchange.
114

Chapter 6 Population
6 Population
6.1 Demography
Demography is the study of human population You will learn
density. Primarily, it includes the study of size,
• Population and census
structure and development. In a broader perspective,
• Factors influencing population
it includes fertility, mortality and migration. It is
growth
important to understand the changes in population
• Reasons for migration
dynamics. For this purpose, ratios, rates and
proportions are used. Demographic indicators
include population size, population growth rate, crude birth rate, crude death rate, total
fertility rate, life expectancy and infant mortality rate.
Population is a group of people living in a particular area or country during a given period
of time, sharing similar features and characteristics. Population can be categorised into
three broad categories. Namely, household population, population of a country and world
population. A Household Population is a group of people residing in a single housing unit
who live and eat together. Commonly, a household population consists of two or more
people who are related. However, a household population could also include people who
are unrelated but living and eating together. Population of a country refers to the number
of people living within a country during a given period of time. World population is the total
number of people living in all the countries around the world at a given period of time.
Activity 6.1
a) Make a list of the world’s 15 most populous countries for the year 2015.
b) Make a list of the 10 most populous islands in the Maldives.
c) List three advantages of an increase in population.
d) List two disadvantages of a decrease in population.
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Census is an official counting of a

region’s or nation’s people and the
compilation of economic, social and
other data, for a given time period.
Unique information regarding
the socio economic status of the
country are collected through a
census. The socio economic data
includes information about families
or households and individual
characteristics such as age, sex,
marital status, literacy, education,
employment status and occupation Figure 6.1.1: Enumerating process
and geographical location. This
information helps governments to formulate development policies.
Activity 6.2
State a minimum of five questions that might be important to include in a census on:
a) Education
b) Employment
c) Households
Table 6.1.1: Maldivian Population by Atolls for 2006, 2014 and percentage change
Atolls 2006 2014 Percentage Change

North Thiladhunmathi (HA) 13,314 13,004 -2.3
South Thiladhunmathi (HDh) 16,214 18,570 14.5
North Miladhunmadulu (Sh) 11,830 2,127 2.5
South Miladhunmadulu (N) 10,015 10,556 5.4
North Maalhosmadulu (R) 14,643 14,934 2.0
South Maalhosmadulu (B) 8,893 8,919 0.3
Faadhippolhu (Lh) 8,346 7,996 -4.2
Male' Atoll (K) 10,149 12,232 20.5
North Ari Atoll (AA) 4,855 5,915 21.8
South Ari Atoll (ADh) 6,921 8,183 18.2
Felidhu Atoll (V) 1,502 1,622 8.0
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Mulakatholhu (M) 4,654 4,711 1.2

North Nilandhe Atoll (F) 3,662 4,140 13.1
South Nilandhe Atoll (Dh) 4,720 5,329 12.9
Kolhumadulu (Th) 8,451 8,923 5.6
Hadhdhunmathi (L) 11,743 11,841 0.8
North Huvadhu Atoll (GA) 8,007 8,477 5.9
South Huvadhu Atoll (GDh) 10,991 11,653 6.0
Gnaviyani (Gn) 7,636 8,095 6.0
Addu Atoll (S) 17,862 19,829 11.0
Source: Maldives Population & Housing Census 2014
Activity 6.3
Refer to Table 6.1.1

a) Explain the pattern of population growth in the Atolls?
b) What are the reasons for the positive and negative growth in some of the Atolls?
c) Give at least two reasons for any positive or negative growth rate and justify them.
Factors affecting population

Population plays an important role in the economy of a country. For any business to survive,
an existing demand for goods and services is essential. It is necessary that a country has
a reasonable population to create such demand. However, demand may not always be
triggered by population. The three main factors affecting population are birth rate, death
rate and net migration.
Birth Rate is the average number of children born in a country compared to the rest of
the population. Usually, it is calculated as the number of live births per one thousands of
people in a population for a given year.
Death Rate is the total number of registered deaths per one thousand of a population in a
certain area or country per year. Death rate is also referred to as mortality rate.
Net Migration is the difference between immigration (people coming in) and emigration
(people going out) of a country. A favourable value indicates that more people are moving
into the country than the number of people moving out of the country. A negative value
indicates the reverse.
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Factors affecting birth rate

Birth rate is a significant factor in population changes. Birth rates vary between countries
and changes over time due to changes in factors relating to economic development,
changes in lifestyle and beliefs.
Early marriage: When people get married at a young age it provides a longer period
for reproduction. The stretched time period for reproduction increases the probability of
couples having more children. It is a common observation that in less developed countries
more marriages happen at an early stage of life. On the contrary, it is observed that people
in developed countries, get married at a mature stage of life. Thus, it could be said that
there might be a possibility of increased birth rate in less developed countries compared to
developed countries.
Living standard: A household’s standard of living
could be determined by the extent of the quality of
DID YOU KNOW
goods and services enjoyed by the household. For
a certain extent, it could be said that the higher According to Maldives census
standard of living by a household is a reflection of 2014, the resident population
better quality of goods and services enjoyed by of Maldives is 402,071 of
the household. In many less developed countries, which 338,434 are resident
people living in poor conditions tend to have large Maldivians and 63,637 are
families to assist them in producing food and work resident foreigners.
to earn money. However, factors such as poor
living conditions may result in illnesses due to
unhealthy or unsanitary conditions. Improvement
in food quality, housing, sanitation and medical care could cause a reduction in the number
of children dying. Further, awareness and determination of couples to have smaller families
could result in lower birth rates.
Customs and societal beliefs: It has become a norm in developed countries to have
smaller families leading to fewer births. In less developed and developing countries, many
people are less aware of family planning measures. In addition, people in closed societies
tend to have societal beliefs to have large families due to lack of awareness which may
result in higher birth rate.
Female employment: Women in developed countries in comparison to developing
countries are observed to have a higher status with more women going for higher
education, employment etc. In such situations, birth rate tends to be minimum as some may
not want to take time off to raise children. In less developed countries, women are more
likely to remain at home looking after children and get involved in household chores rather
than participating in economic activities. This could result in an increase in birth rate as
these women have more time to manage larger families.
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Activity 6.4
Read the following scenario and answer the following questions.

Muraka Island has a population of over 5000 people. The island is considered to
have a medium sized population with infrastructures such as a school, a hospital, and
other government authorities such as a council office, a court and a power station.
After a change in management of the school, there had been positive improvements
in the performance of students during the past few years with more students initiating
tertiary education. However, the school has also seen years during which the results
of students were not very promising and leading students to either join the work
force or getting married. Recently, in an effort to create awareness and reduce
issues related to early marriages leading to breakups, the island council established
policies to ensure that young couples are accessible to counselling before and after
their marriage. To support the council’s policies, the island, hospital has initiated
an awareness campaign on early marriages and family planning. With increased
awareness and changes in societal beliefs, more women are engaged in economic
activities leading to the economy of Muraka Island to flourish.
Questions:
a) From the above scenario identify factors that will effect birth rate of Muraka Island.
b) Identify any two factors which are not mentioned in the scenario.
c) From the identified factors in question a) and b), explain any three.
d) Discuss how you foresee the population of Muraka Island.
Factors affecting death rate

Death rate is influenced by many factors such as nutrition, living conditions, medical
facilities and working conditions etc. Death rate varies between countries and changes over
time because of changes in the following:
Availability of advanced medical and health care facilities: Improved medicine and
health care has prevented or cured many diseases resulting in increased life expectancy.
The main epidemics and killer diseases of the nineteenth century like cholera, tuberculosis
and smallpox can be cured by modern medicine, resulting in reduced death rates. In some
countries, especially less developed countries, diseases such as Human Immunodeficiency
Virus (HIV) or Acquired Immune Deficiency Syndrome (AIDS) are prevalent and have
reduced life expectancy resulting in many challenges to the health system of those
countries.
Earlier, a greater percentage of the population of the Maldives had limited access to
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proper healthcare. This was mainly due to the lack of access to proper healthcare facilities,
the geographical distribution of the Maldives and difficulties in transport services. Today,
with improved transportation and established medical facilities at various regions of the
Maldives, people are able to seek healthcare at more ease. Further, the introduction of a
public healthcare insurance scheme has encouraged people to seek medical consultancy at
early stages of sickness avoiding medical complications, increasing life expectancy.
Living standard: Better quality food, housing and sanitation can improve life expectancy
resulting in reduced death rate. The World Health Organization’s (WHO) global status
report on non-communicable diseases 2010, revealed that eating unhealthy diet, use
of tobacco, insufficient physical activity, and harmful use of alcohol has increased non-
communicable diseases (NCD). According to WHO, NCD’s are the most common cause
of global deaths. About eighty percent of NCD deaths occur in low and middle income
countries.
Natural and manmade calamities: Natural and man-made calamities such as
earthquakes and tsunamis, famines, wars and escalating violence have also had a big
impact on death rate especially in many less developed countries. For example, the civil war
in Sierra Leon from 1991 to 2002 had resulted in estimates of about 70,000 people being
killed and 2.6 million people displaced from their homes (Evaluation of UNDP assistance to
conflict-affected countries, 2006). Another example would be the Syrian civil war from 2011
to 2014 during which time the United Nations human rights office reported 190,000 people
as killed.
Activity 6.5
According to the National Bureau of Statistics of the Maldives, since 1990’s the
Maldives has seen a decline in growth rate and reaching a growth rate of 1.65
in 2014.
Explain why the Maldives might have had a decrease in growth rate after 1990.
Migration and factors influencing migration

Migration refers to the movement of people from one place to another for settlement
purposes. People tend to migrate to other countries where there are more job opportunities,
better education facilities, better working conditions and environment, improved living
standard etc.
Immigration is the movement of people into a country. Immigrants are the people
who come into the country. Emigration is the movement of people out of a country and
emigrants are the people who go out of the country.
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Net migration is the difference between the number of people coming into a country
(immigrants) and the number of people leaving a country (emigrants) over a particular
period of time.
Natural growth of population is the difference between the birth rate and death rate of
a population in a country for a given period. Natural growth rate is the rate at which the
number of people increases in a given period of time.
Natural growth rate of population = Birth Rate – Death Rate
Internal migration is the movement of individuals within a country or state. The
geographical nature of the Maldives is such that the population is scattered into small
islands, spread over the Indian Ocean. The people moving from one island to the other
are considered as internal migrants. They are people moving in search for opportunities
such as education and improved living standards and who would stay in their destined
place for a considerable period of time. For example, a large percentage of the Maldivian
population have migrated to the capital city Male’ for various benefits such as employment,
better healthcare and education. Internal migration may cause social inconveniences as it
causes rapid expansion and overcrowding. On the contrary, internal migration encourages
more economic activities due to creation of demand. Further, it makes government projects
on social infrastructure more viable as the projects would serve a greater percentage of
population of the country.
Consolidation
Programme (not
Tsunami 2%
related to Tsunami)
3%
As Parent/Guardian
Other reason
3%
2%
Marriage
Education
8% 24%
Family migration
to live with them
13% Employment/
seeking work
18%
Return migrant to
live in this island
27%
Figure 6.1.2: Resident Maldivian population with a different previous residence with reasons for
migration, 2014
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As shown in Figure 6.1.2, the main reason for migration in the Maldives is to live in another
island, better educational opportunities and employment purposes and due to family
migration. A high proportion of school children who migrate for educational purposes
may not return to their home Island once they complete their education due to lack of job
opportunities in less populated islands with low economic activities.
Activity 6.6
“The capital Male’ is increasingly becoming the major business centre of the country
attracting a lot of migrants from the other islands. This trend has exacerbated during
the 2000 and 2006 inter-censal period. While the total population of the country
grew at 1.7 percent annually, the high level of migration of the island population to
Male’ has resulted in a first time ever decline in the atoll population in 2006. The atoll
population declined at a rate of –0.1 percent, while population of Male’ grew rapidly
at an average annual rate of 5.8 percent. This has resulted in the proportion of
population living in Male′ to increase from 27 to 35 percent during 2000 and 2006”.
Source: Census Analysis 2006
According to this report, there is a significantly large number of internal migration
from Islands to the capital city Male.
a) What are reasons for people to migrate from Islands to Male’ City?
b) Give at least three reasons for your answer and justify them.
Activity 6.7
Read the following scenario and answer the questions.

According to Census 2014, the Maldives had a total population of 407,660. The
population consisted of a resident population of 402,071 and 5,589 locals living
abroad. The residential population consisted of 338,434 locals and 63,637 foreigners.
Following the notion of previous censuses, the ‘total Maldivian population’ enumerated
in Census 2014 was 344,023 compared to 298,947 in 2006, an increase of 15
percent. Due to the difficulties in enumerating non-resident Maldivians, it can be said
that the number of non-resident Maldivians are understated in the census.
Questions:
a) What is the term used for foreign workers and explain the term.
b) Explain three reasons why foreign workers come to Maldives.
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c) What is the term used for the Maldivians who live abroad, and explain it?
d) Calculate the net migration over the given period of time.
e) Do you think the net migration figure in census 2014 represents the real scenario
of immigration and emigration in the Maldives? Justify your answer.
Natural rate and actual rate of increase in population

Information about population growth is an important indicator in planning ahead towards
delivery of essential facilities and communal services to the population of a region or
country. Natural rate of increase and actual rate of increase are two main indicators of
population growth. While the natural rate of increase in population is the difference
between birth rate and death rate, the actual rate of increase is calculated after taking
into account the net migration. These indicators facilitate comparison among populations of
different sizes.
6.2 Population Distribution

Age Distribution refers to the proportionate
You will learn
number of people or percentage of the population
in successive age categories in a given country • Population distribution
or region. Age distribution is also known as the • Dependency ratio
age composition. The changes in fertility are the • Working age population
main reason for the differences in age distribution • Population pyramid
among countries. However, migration can also
cause changes in the composition as there will be increased number of young people due
to migration while not much changes would be seen in the category of aged people. In
the Maldives, by law, children of age 18 years and below are considered as minors and
the official retirement age is set at 65 years. Although the employed population (working
population) are all the people who actively participate in the workforce, the working age
group is classified as the people aged between 15 to 64 years. However, the working age
group should not be confused with the employed (working) population.
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Age Distribution
Dependent age Working age

group group
All those people who are below All those people who are aged between
15 years of age and who are above 15 to 64 years
the age of 64 years
Figure 6.2.1: Age distribution of a population
Dependency ratio relates the number of dependent people in a country or region to the
number of people in the working age group. In Maldives, the dependant population would
be the age categories 0 to 15 years and 65 years and above. The dependency ratio can be
a broad indication of the requirement of social support needs for the social and economic
development of a country. Changes in population structure is reflected in the dependency
age group. The dependency ratio is calculated as a percentage, by dividing the number
of dependant age group from the number of people in the working age group. Structure is
reflected in the dependency age group. The dependency ratio is calculated as a percentage
by dividing the number of dependant age group by the number of people in the working age
group.
number of people in dependent age groups
Dependency ratio == x 100
number of people in working age group
Example
A country has a total population of 34 million people with 25 million in the working age
group. Calculate the dependency ratio and interpret it.
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Solution
Number of dependent people == 34 – 25 == 9 million
9 million
Dependency ratio == x 100
25 million
== 36 percent
This means for every 100 people of working age, there are 36 people in the dependent
age group.
The birth rate can be considered as one of the main causes of changes in the dependent
age group. If a country has low birth rate, then the country is likely to have a lower
dependent age group. Similarly, increased birth rate would also result in higher dependent
age group. Further, increased life expectancy due to better health care systems could also
affect the dependency ratio.
DEPENDENT AGE
BIRTH RATE
GROUP
Figure 6.2.2: Effects of birth rate on dependent age group
Activity 6.8
Aisha is a student who is studying at grade 12 and lives in her island with her family.
The total population of her island is 7500. In her island there are about 3000 people
who are in the working age group. Of this, 2000 people actively participate in the
workforce.
In one of her lesson, her economics teacher had shared Census information with the
class and she realised that the estimated birth rate in her island is going to increase in
the coming years.
a) Calculate the number of dependent people in Aisha’s Island.
b) Calculate the dependency ratio.
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c) Interpret the dependency ratio.

d) What could have made Aisha to think that the population in her island would
increase? Explain your suggestion with justifications. HOTS
Consequences of high dependent age group

A higher percentage of dependant age group increases the requirements of the
government in terms of providing social benefits such as education, healthcare and
retirement benefits. The increase in dependant age group also lays extra burden on the
working age group. High dependent age group will have a high dependency ratio and is
likely to have lower living standards. The changes in dependency ration are also reflected in
the consumption behaviour of the people. Likewise, an increased dependency ratio is likely
to have a change in consumption pattern and lead towards more consumer goods being
produced compared to capital goods. This may decrease investment and economic growth,
resulting in fewer job creation opportunities.
Dependency ratio and living standards: The dependency ratio may increase either due
to an increase in young people or due to an increase in old aged people. Any increase on
the dependent age group suggests that there will be an increased burden on the working
population, which might result in a decreased standard of living due to lowered disposable
income. In Maldives, individuals are entitled to an elderly pension when they are at the age
of 65 and above. This pension known as ‘basic pension’ is paid to all individuals of age 65
and above regardless of his or her contribution to the working population. This state funded
pension scheme is a lifelong pension program which is provided as a security net for the
elderly.
Activity 6.9
With reference to the scenario given in Activity 6.8,

a) Define dependent age group.
b) Explain the consequences of an increase in birth rate in Aisha’s Island.
c) Discuss any effects this will have on the living standard of Aisha’s Island.
d) Compare the effect of high dependent ratio on the economy.
Working age group

Working age group consists of all those people who are above school leaving age and
below the retirement age of a country. Working age group has greater importance because
the younger age group, the retired people and the unemployed people depend on them
for survival. If the working age group is high, it can be expected that there would be an
126

increase in the standard of living. However, the standard of living would depend on many
factors such as the disposable income of an individual. In the Maldives, the working age
group is considered to be between the age of 15 and 64. The official retirement age is set
at 65 years in the Maldives and the age group 18 and below are considered as children.
The working population consists of people who are employed (either employees or self-
employed person) and who are seeking employment and those outside of the labour force.
Migration rate
Change in working
School leaving age
age group
Retirement age
Figure 6.2.3: Changing working population
Consequences of increase in working age group

Increase in working age group is expected to have a positive impact on the economy due
to the increase in national output resulting from a larger work force. However, there will
be a need to create more jobs for the youth. In addition an increase in working age group
will also lower the dependency ratio with more people enjoying higher living standards
depending on the availability of jobs with reasonable pay. Government revenue from direct
and indirect taxes will increase. More goods and services will be produced and the country
is likely to enjoy high economic growth.
Activity 6.10
The retirement age of Country X has been changed from 65 years to 70 years.
a) Describe what will happen to the working age group of Country X.
b) Discuss the impact of the change in retirement age of Country X on its economy.
c) Analyse any effects that may have on the production of goods and services of
Country X due to the change in retirement age.
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Ageing population
A country is said to have an ageing population when there
are more people in the old age group compared to other
ages groups of the population. A decline in both birth
rate and death rate will lead to an increase in the ageing
population.
Figure 6.2.4: Aged population
birth rate and ageing

death rate population
Figure 6.2.5: Effects of birth rate and death rate on ageing population
Consequences of high ageing group

A country with more ageing population would need to provide them with more medical
assistance and social security benefits. It also requires more resources to be allocated in
order to provide the ageing population with specialty goods and services. Further, in a world
with technological advancement, the ageing population may find it difficult to adjust to new
technological developments.
Activity 6.11
The population structure of country X is affected by low birth rate for the past three
generations.
a) What is the issue faced by Country X?
b) What are the consequences of this issue?
c) Analyse the effects that may have on the production of goods and services in
Country X due to low birth rate.
A Population Pyramid is a graphical representation of the age and sex distribution of a

country’s population in a given period. It is a horizontally drawn bar chart which shows a
detailed breakdown of the population of different age groups with gender comparison. The
population pyramids of developed and developing countries are different in their shapes.
A population pyramid of a developing country reflects high birth rate and high death rate.
Conversely, a developed country shows low birth rate and death rate.
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Age 80+
80+ 75-79
75-79 70-74
70-74 65-69
65-69 60-64
60-64 55-59
55-59 Male Female
50-54
50-54 45-49
45-49 %female
40-44
40-44 % male
35-39 35-39
30-34 30-34
25-29 25-29
20-24 20-24
15-19 15-19
10-14 10-14
05-09 05-09
00-04 00-04
5 4 3 2 1 0 1 2 3 4 5 10 5 0 5 10
Millions percent
Figure 6.2.6: Population pyramid of a developing country (left) and developed country (right)
Activity 6.12
a) Define population pyramid.

b) Draw a population pyramid of a developing country and a developed country.
c) Compare the difference between the population pyramids of a developing and
developed country. HOTS
Population density is the total number of people living per unit of area. Population density
is commonly measured per square kilometer or square mile. When calculating population
density, the population is based on the de facto definition of population, which counts all
residents regardless of legal status or citizenship. Refugees who are not permanently
settled in the country are excluded. Land area includes country’s total area excluding inland
water bodies such as rivers and lakes.
Total number of people
Population density ==
Number of square kilometers
Example: According to census 2014, total resident population of Maldives is 402,071. The
land area is 298 square kilometers. Find the population density of Maldives.
Solution:
Total number of people
Population density ==
Number of square kilometers
402071
==
298
== 1349.23
== 1350 people per square kilometer
According to census 2014, Male’ city is the most densely populated area in the Maldives
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with a population of 153,904 living in an area of 1.97 square kilometers. The main reason
for the high density could be considered as the high migration of population to Male’ city for
the convenience of better health care, education and job opportunities.
Figure 6.2.7: Male’ city is the most densely populated island in the Maldives
Table 6.2.1: Population density of SAARC countries 2011–2014
Country 2011 2012 2013 2014

Afghanistan 44 46 47 48
Bangladesh 1,179 1,193 1,207 1,222
Bhutan 19 20 20 20
India 420 425 430 436
Maldives 1,257 1,283 1,310 1,337
Nepal 190 192 194 197
Pakistan 225 230 235 240
Sri Lanka 333 326 328 331
Source: http://data.worldbank.org/indicator/
Population density is independent of economic development. For example, both
Bangladesh and Japan are very densely populated, but Bangladesh is considered as
a least economically developed country while Japan is among the most economically
developed countries.
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6.3 Developing and Developed Economies

According to United Nations Department of
Economic Affairs, the world population has exceeded
You will learn
7 billion as of 2015. Of these people, the majority • Developing and developed
live in what is described as developing countries countries
with some living in extreme poverty. The World Bank • Characteristics of developing
stated, in the year 2013, 12.7 percent of world’s and developed countries
population lived below a daily income of US Dollar
1.90. One of the international development goals identified by the member countries in the
2000 millennium summit is to eradicate extreme poverty and hunger and to reduce the 1990
poverty rate in half by 2015. According to the World Bank, this target has been achieved
five years ahead of the schedule. However, progress seen is uneven although poverty rates
have declined in all regions.
A developing country is a non-industrialised country with limited resources seeking to
develop its resources through industrialisation. Developing countries tend to have lower
Gross Domestic Product (GDP) and lower per capita income resulting in lower standards
of living. Although resources may be available, those resources in these countries are
underutilised or controlled by foreign companies. The lower income results in slow industrial
growth with less capital formation. Examples of developing countries are Maldives, India
and Pakistan.
A developed country is a country where people have a higher income rate and is heavily
industrialised with lots of industrial activities. The high GDP and per capita income results
in increased disposable income leading to better standards of living. Better utilisation
of resources help administrative authorities in providing better healthcare services and
benefits increasing the life expectancy and living standards of its people. Examples of
some developed countries are United States of America, Australia, Japan and the United
Kingdom.
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Activity 6.13
Given below are the economic and demographic information about two countries.
Read the information carefully and answer the given questions.
Republic of Iceland is located between North Atlantic and the Arctic Ocean with
a land area of 103,000 square kilometers. According to statistics, the country’s
population was 329,100 as of 2015, and had a low growth rate, birth rate, death and
net migration rate with a life expectancy of 82 years. The country has an estimated
Gross Domestic Product (GDP) of US Dollars 17 billion and GDP per capita of US
Dollars 52,967.
Lesotho is a small, mountainous, country completely landlocked by South Africa with
a land area of 30,355 square kilometers. As per statistics of 2014, the country is
estimated to have a population of 1,942,008. Due to AIDS and other communicable
diseases the country has a life expectancy of 52.65 years with high infant mortality,
high death rates and low population growth rates. For the year 2015, GDP of Lesotho
was US Dollars 2.03 billion and GDP per capita of US Dollars 1,051.61.
a) Determine the developed and developing country?
b) Which country is better performing?
c) Evaluate the economic and demographic data of these two countries. Write your
findings in 100-150 words.
Key Terms
Birth rate: also known as the crude birth rate is the total number of live births per
1,000 of a population in a year.
Census: official counting of total number of people in a region or country.
Death rate: also known as the crude death rate the number of deaths per 1000, of
population in a year.
Demography: Study of human population.
Developed country: is a country that has a highly developed economy and advanced
technological infrastructure relative to other less industrialised nations.
Developing country: is a country where there is low economic growth and low living
standards.
Emigration: movement of people out of a country.
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Immigration: movement of people into a country.

Infant mortality rate: the number of deaths per one thousands of live births in a
given geographical area for a given period of time.
Labour force: those who are employed and those who are seeking employment.
Life expectancy: the average number of years a person is expected to live.
Migration: movement of people from one place to another for settlement purposes.
Net migration: difference between the number of people coming into a country
(immigrants) and the number of people leaving a country (emigrants) over a
particular period of time.
Population: total number of people living in a particular area or country during a
given period of time.
Population pyramid: Graphical representation of the age and sex distribution of a
country’s population during a given period.
Total fertility rate: is the average number of children that would be born to a woman
over her lifetime.
Working age group: all those people who are above school leaving age and below
the retirement age of a country.
I Learnt
In this chapter you have learnt local statistics regarding demographic indicators. Use
the data from census 2014, about population and migration, to prepare a report of
100 words.
Key competencies
Practising Islam: Regardless of the burden on the economy from the

dependent age group, Islam encourages on taking care of young ones
and the elderly and to treat them with love and kindness. In one hadith,
the Prophet (peace and blessings be upon him) disavows those who do
not venerate the elderly and considers them alien to the Muslim society:
“He is not one of us who does not show mercy to our young ones and
esteem to our elderly.” (At-Tirmidhi and Ahmad).
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Relating to people: Although people living in developing and developed

countries have their differences, students understand that we as humans
are equal and treat every individual equally irrespective of their status,
caste or ethnicity.
Thinking critically and creatively: Through the learning of demography,
population distribution and status of countries, students are able to seek
information of what is happening around them while relating it to their
environment in different perspectives.
Living a healthy life: Through learning of death rate, birth rate and
population density, students become aware of the causes of these
indicators and enable them to take appropriate measures for a healthy
living to avoid future disappointments.
Using technology and the media: Through various reports published
by organisations, students understand the changing environment around
them in relation to changes in world population and relate the same to
their domestic environment by analysing the available data.
Understanding and managing self: Each individual has a responsibility
towards the development of the economy. Students understand that their
behaviour towards building healthy families has a part in the economic
development of the country.
Self-Assessment

Definition of household population, population
and census
Factors which effect population growth
Factors which influence birth rate and death rate
Migration, immigration and emigration
Factors influencing migration
Natural rate of increase in population
Age distribution of population
Difference between working age and working
population
134

Calculation of dependency ratio

Causes of change in dependent age group,
working age group and ageing population
Importance of productive age group in an
economy
Population pyramid
Population density
Difference between developed and developing
countries
Review Questions
1. Complete the missing words.

a) The …………………… rate of growth of a population is obtained by
subtracting the ……………………… rate from the ………………… rate.
b) Developing countries tend to have low rate of ……………………. due to low
income but ………………. rates of population growth.
c) The birth rate of a country is likely to be low if a ………………………
proportion of women go to university, a ……………………….. of women work
and it is …………………… to bring up children.
d) Net immigration will tend to ……………………………. the labour force of a
country and reduce the ………………………… ratio as most immigrants are
of working age.
2. For questions (a) to (d) choose the correct answer.
a) What is meant by the birth rate?
i) The number of births compared to number of infants deaths
ii) The number of children each women has on average each year
iii) The number of births per 1000 population
iv) The number of children women are expected to have each year
b) What is meant by the death rate?
i) Number of deaths compared to number of births
ii) Number of registered deaths per thousand population
135

iii) Number of deaths in working age group

iv) Number of deaths of infants compared to total number of deaths
c) In country X, there are more boys born than girls, however there are more
women than men in the population. How can this be explained?
i) A lower death rate of men
ii) More women emigrating than men
iii) Women living longer than men
iv) Infant mortality is high
d) What is meant by sex distribution of a population?
i) Proportion of working age group people
ii) The proportion of females and males in the population
iii) Number of retired people
iv) Proportion of working age females and males in the population
a) Define household population, population and census. Explain these terms.
b) What are the factors affecting population?
c) Define birth rate and state four factors which affect birth rate.
d) Explain four factors which affect birth rate.
e) Define death rate and state three factors which affect death rate.
f) Explain three factors which affect death rate.
g) What is migration? Discuss the effects of migration on population.
h) Explain the reasons for migration.
i) What is the natural growth rate of population?
j) Explain age distribution of population.
k) What is dependent age group and its effects on a country’s economy?
l) What is working age group and its effects on a country’s economy?
m) What is dependency ratio and explain the effects of high dependency ratio
in a country.
n) Discuss the effects of ageing population on a country’s economy.
o) Compare the population pyramid of developing and developed countries.
p) What are the main characteristics of developing and developed countries?
136

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The Business Studies Syllabus in the National Curriculum is

designed to foster an understanding of the underlying business

Exploring Business Studies 7

Email: schools@cambridge.org ISBN 978-1-316-64668-7

© Cambridge University Press

Cambridge University Press is part of the University of Cambridge.

notice to teachers in the uk

© Cambridge University Press

Author: Waseema Fikuree

© Cambridge University Press

1. Business Fundamentals . . . . . . . . . 1 4. Business Organisations . . . . . . . . 81

1.1 Basic Economic Concept. . . . . . . 1 4.1 Types of Business

4.4 Public Sector Businesses . . . . . 92

2.3 Documentary Records . . . . . . . . 36

5.2 Evolution of Money . . . . . . . . . 102

3. Entrepreneurship . . . . . . . . . . . . . . 63 5.3 Banking System. . . . . . . . . . . . 108

3.1 Allocation of Resources . . . . . . 63 5.4 Stock Exchange. . . . . . . . . . . . 111

3.2 Economic Systems . . . . . . . . . . 65

3.3 Production . . . . . . . . . . . . . . . . . 68 6. Population . . . . . . . . . . . . . . . . . . 115

3.4 Methods of Production . . . . . . . 70 6.1 Demography . . . . . . . . . . . . . . 115

3.5 Sectors of Production . . . . . . . . 71 6.2 Population Distribution . . . . . . . 123

3.6 Division of Labour . . . . . . . . . . . 72 6.3 Developing and Developed

© Cambridge University Press

1.1 Basic Economic Concept

resources. Whether we are aware or unaware of it, we • Resources

Needs are basic requirements or

Figure 1.1.1: Needs

© Cambridge University Press

Figure 1.1.2: Wants

© Cambridge University Press

Figure 1.1.3: Examples of natural resources

© Cambridge University Press

trees fisherman photocopy machine river

© Cambridge University Press

increased wants we have to sacrifice some goods

An iPad OR Video game player

The opportunity cost is

Opportunity cost = the sacrifice of the

Figure 1.1.5: Example of opportunity cost

© Cambridge University Press

Fish market Local market

Figure 1.1.6: Different examples of market

© Cambridge University Press

From the given pictures, identify a good or service.

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Demand refers to how much (quantity) of a product or Price

Figure 1.1.7: Typical demand curve

For example, when there are limited shows and

Supply represents how much the market can offer

of PlayStation in the market. Therefore, even with

Figure 1.1.8: Typical supply curve

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Materials required: paper money, chocolates, pens, rubber, sweets

1.2 Factors of Production

Factors of production refer to an

© Cambridge University Press

Figure 1.2.1: Examples of land

© Cambridge University Press

Figure 1.2.2: Banks provide investments for businesses

© Cambridge University Press