Monthly Archives: January 2016
Define ‘Classification’. Explain the purpose and methods of classification of data giving suitable examples.
Definition
Classification means arranging the mass of data into different classes or groups on the basis of their similarities and resemblances. All similar items of data are put in one class and all dissimilar items of data are put in different classes. Statistical data is classified according to its characteristics. For example, if we have collected data regarding the number of students admitted to a university in a year, the students can be classified on the basis of sex. In this case, all male students will be put in one class and all female students will be put in another class. The students can also be classified on the basis of age, marks, marital status, height, etc. The set of characteristics we choose for the classification of the data depends upon the objective of the study. For example, if we want to study the religions mix of the students, we classify the students on the basis of religion.
Purpose of Classificaiton:
Classification helps in achieving the following objectives:
1) It helps in presenting the mass of data in a concise and simple form.
2) It divides the mass of data on the basis of similarities and resemblances so as to enable comparison.
3) It is a process of presenting raw data in a systematic manner enabling us to draw meaningful conclusions.
4) It provides a basis for tabulation and analysis of data.
5) It provides us a meaningful pattern in the data and enables us to identify the possible characteristics in the data.
Methods of Classification
There are two methods of classification: i) classification according to attributes, and ii) classification according to variables.
Classification According to Attributes
An attribute is a qualitative characteristic which cannot be expressed numerically. Only the presence or absence of an attribute can be known. For example. intelligence, religion, caste, sex, etc., are attributes. You cannot quantify these characteristics. When classification is to be done on the basis of attributes, groups are differentiated either by the presence or absence of the attribute (e.g. male and female) or by its differing qualities. The qualities of an attribute can easily be differentiated by means of some natural line of demarcation. Based on this natural difference, we can determine the group into which a particular item is placed. For instance, if we select colour of hair as the basis of classification, there will be a group of brown haired people and another group of black haired people. There are two types of classification based on attributes.
1) Simple Classification : In simple classification the data is classified on the basis of only one attribute. The data classified on the basis of sex will be an example of simple classification.
2) Manifold Classification: In this classification the data is classified on the basis of more than one attribute. For example, the data relating to the number of students in a university can be classified on the basis of their sex and marital.
Classification According to Variables
Variables refer to quantifiable characteristics of data and can be expressed numerically. Examples of variable are wages, age, height, weight, marks, distance etc. All these variables can be expressed in quantitative terms. In this form of classification, the data is shown in the form of a frequency distribution. A frequency distribution is a tabular Presentation that generally organises data into classes, and shows the number of observations (frequencies) falling into each of these classes. Based on the number of variables used, there are three categories of frequency distribution: 1) uni-variate frequency distribution, 2) bi-variate fequency distribution, and 3). Multi-variate frequency distribution.
1) Uni-variate Frequency Distribution : The frequency distribution with one variable is called a uni-variate frequency distribution. For example, the students in a class may be classified on the basis of marks obained by them.
2) Bi-variate Frequency Distribution: The frequency distribution with two variable is called bi-variate frequency distribution. If a frequency distribution shows two variables it is known as bi-variate frequency distribution.
3) Multi-variate Frequency Distribution: The frequency & distribution with more than two variables is called multivariate frequency distribution. For example, the students in a class may be classified on the basis of marks, age and sex.
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ORGANSING A STATISTICAL SURVEY
ECO-07>>BLOCK1>>UNIT 2 ORGANSING A STATISTICAL SURVEY⇓
Contents
Primary Data and Secondary Data
Methods of Collecting Primary Data
Factors Affecting the Type of Enquiry
Non-probability Sampling Methods
Law of Inertia of Large Numbers
Features of a Good Statistical Unit
Significance of Reasonable Accuracy
INTRODUCTION Top⇑
Here, you will study the various steps in organising a statistical survey, the sources of data, different types of enquiries, and some laws connected with them. You will also learn certain other aspects like statistical units and degree of accuracy which are to be kept in mind, while conducting a survey.
STEPS IN STATISTICAL SURVEY Top⇑
When we conduct a statistical survey, there are certain steps which are to be followed in a sequential order, unless we follow these steps systematically, we may not be able to achieve purposeful results from the survey. The important steps concerning a statistical survey are presented below in a sequential order:
1) Defining the problem
2) Determining the objective and scope
3) Preliminaries to the collection of data
i) Source of data
ii) Type of enquiry
iii) Statistical unit
iv) Degree of accuracy
4) Collection of data
5) Editing of data
6) Classification and tabulation of data
7) Analysis of data
8) Interpretation of data
9) Writing the report
Now let us discuss briefly about all these steps.
Defining the Problem : In any statistical survey, first of all, we have to state very clearly the problem to be investigated. Clear definition of the problem is of utmost importance as it is helpful to identify the relevant data. As you know, statistics is concerned with the aggregate of facts which are numerically expressed. Therefore, while defining the problem we should ensure the possibility of quantitative measurement.
Determining the Objective and Scope : After defining the problem, the next step is to determine the objective and scope of the survey. If the objective of the survey is clearly stated it serves as a guide in the collection of required information. If objective is stated precisely, you can also adopt a uniform approach to different problems which arise during the course of survey. Scope of survey refers to the area to be covered, the period of study, the population or items to be covered, the type of information to be collected, etc. All these depend on the problem to be investigated and the objective of the study. The accuracy of the final result depends on correct assessment of all the items mentioned above. So you must determine the scope of the survey precisely.
Preliminaries to the Collection of Data : Before you proceed to collect the data, you should accomplish the following preliminaries:
i) Source of Data: You should decide about the sources from which the data is to be collected. For the collection of data, there are two approaches: (1) you may collect the data yourself, or (2) you may take the data from published sources. The data collected for the first time by the investigator is known as primary data. On the other hand if you use the data already collected by someone else, such data is referred to as secondary data.
ii) Type of Enquiry: You should determine the type of enquiry to be conducted. There are different types of statistical enquiries such as census or sample, initial or repetitive, direct or indirect, regular or ad-hoc, confidential or non-confidential, official or non-official, etc. A decision about the most suitable type of enquiry for the proposed study should be taken keeping in view the objective and scope of enquiry, the party (client) interested in the enquiry, the source of data etc.
iii) Defining the Statistical Unit: You should define the statistical unit or units in which the data is to be collected. The unit should be appropriate and be free from ambiguity. If the statistical unit is defined clearly, we can avoid the possibility of collecting erroneous data. Once the statistical unit is defined, the same unit should be adopted throughout the investigation. You will study in detail about the statistical unit later in this unit
iv) Degree of Accuracy: You should also decide the degree of accuracy to be achieved in the collection of data. Absolute accuracy, even if it can be achieved, is seldom desired in statistical investigations. This is because it is expensive and time consuming without much addition to the required standard of accuracy. But, you should attempt to achieve a reasonable level of accuracy depending on the type of data that are being used, and the purpose of the investigation.
Collection of Data : After completion of these preliminaries, the next step is the actual collection of data.
There are many methods of collecting data and any one of them can be employed. A suitable method of data collection should be decided after considering various factors such as the nature of the study, objective and scope of enquiry, availability of financial resources, availability of time, etc.
Editing the Data : Once the data is collected, the next step involved is the scrutiny of the collected information. This is known as editing of data. It is necessary because in most cases the collected data contains various mistakes and errors. But at the time of editing one should not attempt to tamper with the data.
Classification and Tabulation of Data : The mass of collected and edited data is to be organised in the form of tables or charts or graphs or in a compact form called frequency distribution. This would enable us to find out the salient features of the data. Once the data is classified and tabulated, it facilitates easy comparison.
Analysis of Data : The next step is the analysis of the data through various statistical measures such as averages, percentages, coefficients, etc. It is not possible to compare a large number of raw figures but comparison is possible when it is presented in the form of a figure which gives overall idea of the data. There are different statistical measures which describe different characteristics of the data in a summary form. Out of a long list of statistical methods for analysing, you should select only those measures which are suited to the purpose of the survey.
Interpretation of Data: After analysing the data, we have to accomplish the task of drawing inferences. This has to be done very carefully. Otherwise there is the danger of drawing misleading conclusions. It is through interpretation we can give broader meaning to survey findings. Relations and processes that underlie survey findings can be focused well by proper interpretation.
Writing the Report : The last step of a statistical survey is to write the report. The survey remains incomplete till the written report is presented. The purpose of survey is not well served if the findings are not effectively communicated to people at large. Survey results must invariably enter the general store of knowledge. All this explains the significance of writing the survey report.
SOURCES OF STATISTICAL DATA Top⇑
After defining the problem, and determining the objective and scope of the enquiry, the next step is to decide the sources from which data is to be collected. you also know that, based on the source, the data may be classified into two categories:
(1) primary data and (2) secondary data. Let us now discuss about these two categories of data in detail.
Primary Data and Secondary Data Top⇑
The data which is collected for the first time for your own use is known as primary data. The source happens to be primary if the data is collected for the first time by you as original data. On the other hand, if you are using data which has been collected, classified and analysed by someone else, then such data is known as secondary data. The sources of secondary data are called secondary sources. For instance, national income data collected by the Government in a country is primary data for that Government. But the same data becomes secondary for those research workers who use it later. We may, thus, state that primary data is in the shape of raw materials to which statistical methods are applied for analysis. At the same time secondary data is in the shape of finished products since it has already been treated in some form or the other by statistical methods.
In case you have decided to collect primary data for your survey, you have to identify the sources from which you can collect that data. Big enquiries like population census involve very large number of persons to be surveyed but in case of small enquiries like cost of living of industrial workers in a city, the persons to be surveyed may be few. If you have decided to use secondary data, it is necessary for you to edit and scrutinise such data. Otherwise it may not have the desired level of accuracy or it may not be suitable or adequate for your purpose. If you do not edit and scrutinise the secondary data before you use it in your survey, the results of your investigation may not be fully correct. Therefore, secondary data should always be used with great caution.
Bowley writes: It is never safe to take published statistics at their face value without knowing their meaning and limitations.
Methods of Collecting Primary Data Top⇑
There are several methods which one can use for the collection of primary data. The important methods are: (i) observation, (ii) interview, (iii) questionnaire, and (iv)schedule.
Let us briefly study these methods.
i) Observation: In this case you have to collect the information through personal observation and intensive study of the phenomenon when it actually occurs.
ii) Interview: The desired information is obtained by interviewing those persons who are supposed to have knowledge about the problem under investigation.
iii) Questionnaire: In this method, the information is collected from various sources by mailing the questionnaire containing a list of questions relating to the problem under investigation. The questionnaire is mailed to the persons concerned and the respondents are requested to answer the questions and return the questionnaire.
iv) Schedule: In the case of schedule method, the questionnaires are sent through enumerators. These enumerators help the informants in filling the answers.
To collect the primary data any of these four methods can be used depending on the circumstances, and the availability of persons, funds and time.
Sources of Secondary Data Top⇑
Secondary data can be collected from two sources: (1) published sources, and (2) unpublished sources. The sources of published data are usually the official publications of the Government, governments of foreign countries, international bodies (e.g. United Nations Organisation, World Bank, etc.), trade associations, chambers of commerce, banks, stock exchanges, technical and trade journals, books, newspapers and magazines etc. The sources of unpublished data are varied and such material may be found with scholars, research workers, labour bureaus, trade associations, etc.
TYPES OF ENQUIRIES Top⇑
While organising a statistical survey, after deciding about the source of data, you have to take a decision about the type of enquiry. There are various types of enquiries such as census or sample, original or repetitive, direct or indirect, and open or confidential. Before we discuss about these types, let us first explain the factors which affect the decision relating to type of enquiry.
Factors Affecting the Type of Enquiry Top⇑
The decision regarding the type of enquiry is influenced by a number of factors. They are explained as follows:
Objective and Scope of the Survey: This is one of the factors which determine the type of enquiry. For instance, the objective of your enquiry is to find out the total area under rice cultivation in West Bengal. In this case, the type of enquiry best suited would be one in which there is complete enumeration. If the objective is to find out the yield per hectare in West Bengal, you can take some sample plots in different locations and estimate the yield per hectare. In such case there is no need for complete enumeration. A sample survey may give fairly accurate results. Similarly, if the scope of the enquiry is wide (i.e., information is to be collected from large number of items), you go for one type of enquiry and you go for another type of enquiry if the scope is narrow.
Who Conducts the Survey: Another factor to be considered while determining the type of enquiry is who conducts the statistical enquiry. The facilities for collection of data differ depending upon whether the survey is conducted by the State or by some organisation or by some individual. The State can spend more money and also can use compulsion to extract information. If the investigation is being conducted by an institution or organisation other than the State, they can use moral pressure and persuade people to give the necessary information. The type of enquiry in such cases is bound to be of a different type. And if the survey is conducted by individuals on their own behalf, the enquiry would be of a still different type because the resources at the disposal of individuals are limited.
Financial Implications: The decision about the type of enquiry is also affected by its financial implications. As you know money is required to conduct statistical survey. A survey on a large scale requires more money than a survey on a small scale. We all know that the financial resources of different institutions or persons conducting surveys differ. A State can spend much more than a private institution and a private institution can spend much more than an individual. Therefore, while deciding about the type of enquiry, one has to think about the financial resources involved in it.
Sources of Data: One more factor which influences the type of enquiry is the source from which statistical information is obtained. If primary data has to be collected (i.e., the data are to be collected originally), the type of enquiry would differ from the type which would be ideal if secondary data is to be gathered. This is so because in case of primary data we have to define various terms, units, etc., in the light of the objects of the enquiry. But such decisions are not needed while using secondary data.
Different Types of Enquiries Top⇑
There are different types of enquiries. Let us now discuss briefly about each of those methods:
Census or Sample Enquiry: All the items in any field of inquiry constitute a universe or population. In statistics ‘population’ does not mean only human population. It means sum total of all the items which relate to a certain study. In census enquiry the whole group is to be surveyed while in a sample enquiry only a part of the group is studied.
A complete enumeration of all the items in the population is known as census enquiry. In this enquiry it can be presumed that, when all the items are covered, no element of chance is left and the highest accuracy is obtained. But in reality this may not be entirely true. There is an error called ‘bias’ in this type of enquiry which will become larger and larger as the number of observations increase. Moreover, to ‘ check this bias there is no other way except through are survey or use of sample checks.
Besides, census enquiry involves a great deal of time, money and energy. Therefore, organising census enquiry on large scale becomes difficult because of the resources involved. At times, this type of enquiry is practically beyond the reach of individuals. Perhaps, government alone can get the complete enumeration carried out. Even the government adopts this type of enquiry in very rare cases. For instance, Government of India conducts population census once in a decade. Further, many a time it may not be possible to examine every item in the population. Sometimes it is possible to obtain reasonably accurate results by studying only a part of the total population. In this case, there is no utility of census surveys.
In case of sample enquiry only a part of the population is studied. When field studies are undertaken, considerations of time, cost, convenience, etc., lead to selection of sample survey. The basic assumption in the sample survey is that the sample items selected truly represent the total population. The sample items, therefore, would enable the investigator to estimate the characteristics of the population without any bias and would produce valid and reliable results. The advantages of sample enquiry are:
i) A sample study is relatively less expensive as compared to a census study and produces results at a relatively faster speed.
ii) It enables more accurate measurements, as it is generally conducted by trained and experienced investigators.
iii) When the population is very large, sample survey is the most suitable method of data collection.
iv) Sample survey method is very suitable, when a test involves the destruction of the item under study. For instance, in physical sciences, you take fresh samples of chemicals every time.
v) It also enables us to estimate errors due to sampling.
In spite of these advantages of sample enquiry, we should remember that if the universe happens to be small, resorting to a sample survey is not useful. In fact, the decision about the type of enquiry (i.e. sample enquiry or census enquiry) depends upon a variety of factors like objective, scope, nature of enquiry, availability of resources, etc.
Original or Repetitive Enquiry : An original enquiry is one which is carried out for the first time whereas a repetitive survey is one which is conducted in continuation of previous surveys. In case of a original survey (also known as initial survey), there is freedom for adopting any method of data collection but in case of repetitive enquiry the old method is usually continued. It can only be modified to suit the new situation. However, in repetitive enquiry the definition of the various terms should not be altered, as this would make comparisons inaccurate.
Confidential or open Enquiry : A confidential survey is that where the results of the survey are kept secret and are not made known to the general public. But in case of open enquiry the results are open to the general public. The modes of treatment in open and confidential enquiries will be different. Most of the enquiries conducted by the State, private institutions and even by individuals are of the non-confidential type. But sometimes private bodies like manufacturers associations, trade unions, etc., collect information, the details of which are confined only to their members and not to anybody else.
Direct or Indirect Enquiry : Direct enquiry is one where data is capable of direct quantitative measurement. For instance, factors such as height, weight, income, etc., can be measured in quantitative terms. Indirect enquiry is one where direct quantitative measurement is not possible. For example, factors such as intelligence, efficiency, honesty, etc, cannot be measured quantitatively. In case of indirect enquiry we have to consider all the factors which have a bearing on the problem under study even though they cannot be quantitatively measured. But, those factors which cannot be quantified directly, should be measured (quantitatively) indirectly. For instance, to study intelligence of students, we may study the marks obtained by the concerned group of students.
Regular or Ad-hoc Enquiry : A regular enquiry is one in which data is collected at regular intervals over a period of time whereas, in an ad-hoc enquiry, data is collected as and when necessary without any regularity.
Official or Semi-official or Non-official Enquiry : When survey is conducted on behalf of a government, it is an official enquiry. When the survey is being done by bodies enjoying government patronage, it is termed as semi- official enquiry. The enquiry conducted by private bodies or individuals is known as non-official or private enquiry. The facilities available will differ in these three enquiries. In case of official enquiry people may be compelled to supply information.
In a semi-official enquiry people may be requested and the information can be acquired with relative ease. But in a private enquiry the investigator may have to face a lot of difficulty, in spite of his best efforts, in collecting data.
SAMPLING METHODS Top⇑
There are two types of surveys:
(1) census survey where the whole group is to be surveyed, and
(2) sample survey where a selected representative items of the group are studied.
In the sample survey, the representative items so selected are referred as sample. The technique of selecting items for the sample is usually referred as sampling method. There are several sampling methods. They are generally categorised as:
(1) probability sampling methods, and
(2) non-probability sampling methods.
Probability sampling Methods Top⇑
In the case of probability sampling method, each and every item in the population has a probability or chance of being included in the sample. Thus, in this method every member of the population has an equal chance of selection into the sample. Under this probability sampling, there are various methods such as:
1. Simple random sampling
2. Systematic sampling
3. Stratified sampling
4. Cluster sampling
5. Area sampling
6. Multi-stage sampling
Simple Random Sampling: This method is also known as chance or lottery sampling method. In this case each and every item in the population has an equal chance of inclusion in the sample and each one of the possible samples has the same probability of being selected. This is the most common method used when the population is a homogeneous group. To identify the sample unit, normally, random numbers are used.
Systematic Sampling: Under this method, population is arranged in alphabetical, serial order etc. Then the sample units appearing at fixed intervals are selected. Thus, you may select every 14th name on a list, every 10th house on the side of a street and so on. Element of randomness is introduced into this method of sampling by using random numbers to pick up the first unit with which to start. Thus, in this method, the selection process starts by picking some random point in the list of population, and the units are to be selected until the desired number is secured.
Stratified Sampling: This method is generally used when population is not a homogeneous group. Under this method, population is divided into a number of homogeneous sub-populations or strata. While doing this, care should be taken to avoid overlapping. After stratification, the sample items are randomly selected from each stratum either on proportionate or equal basis. To understand this method clearly let us take an example. Suppose we want to survey the economic conditions of the employees of a university and its various affiliated and constituent colleges. There are different categories of employees: (i) principals, professors, (ii) readers, (iii) lecturers, (iv) administrative staff, and (v) class IV staff. Each of these groups is more or less a homogeneous group. These five groups will, therefore, be called ‘strata’. From each of these five groups, you can randomly select a suitable size of sample. This method of selection is called stratified sampling.
Cluster Sampling: This method involves grouping the population into heterogeneous groups called ‘clusters’ and then selecting a few of such groups (or the clusters) by simple random sampling method. All the items in the selected clusters are studied for accomplishing the survey work. Let us consider the same example discussed under stratified sampling method. Each of the affiliated and constituent colleges and the different departments of the University have all the five categories of employees: (i) principals, professors, (ii) readers, (iii) lecturers, (iv) administrative staff, and (v) class IV staff. So from the point of economic conditions, employees of an institution form a heterogeneous group. Each institution will therefore be called a ‘cluster’. You select a few institutions by a simple random sampling method and then survey all the employees of the selected institutions. This method is called cluster sampling.
Area Sampling: This method is very close to cluster sampling. It is generally followed when the total geographical area to be covered under the survey is spread very widely. In this sampling method, the geographical area is first divided into a number of smaller areas and then a suitable number of these smaller areas are randomly selected. All units of these selected small areas are then studied and examined for accomplishing the survey work.
Multi-stage Sampling: This method is suitable for big surveys extending to a considerably large geographical area or the population is heterogeneous. For instance, in a survey you want to select some families from all over the country. Under this multi-stage sampling method, the first stage may be to randomly select a few states. At the next stage, from each sample state you can randomly select a few districts. Then at the third stage you can select a few towns from each of the selected districts. Finally, certain families may be randomly selected within the selected towns. Thus, in this method stratification is done at four stages to constitute a final sample. It may be noted that in this multi-stage sampling, each and every item of the population has a chance of being selected but this chance need not be same for all items.
Non-probability Sampling Methods Top⇑
This method involves purposive or deliberate selection of particular item(s) of the universe for constituting a sample. This means that if the investigator thinks that certain units are ‘not representative’ such units may not get equal chance of being included in the sample. Hence the method is called non-probability sampling. The following methods come under this category:
Convenience Sampling: When you select the sample items from the population based on the ease of access, the method is called convenience sampling. For example, we want to collect data from the consumers of petrol. We may select a few petrol pump stations within our reach and then may interview the persons who buy petrol at these stations. This would be an example of convenience sample of petrol buyers.
Judgment Sampling: When investigator’s judgment is used for selecting sample items for constituting a representative sample, we call it judgment sampling. Judgment sampling is generally used in case of qualitative research surveys where the purpose is to develop hypotheses rather than to generalise larger populations.
Quota Sampling: This is another variety of non-probability sampling. Under it the population is first divided into homogeneous groups and the interviewers are simply allotted quota to be filled from each group. The actual selection of sample items is left to the interviewers’ judgment. The size of the quota for each group is usually proportionate to the size of that group in the population.
So now it is clear that there are several sampling methods. You can adopt any of these methods whichever is suitable for your enquiry. However, if you resort to random sampling, errors due to personal judgment entering into selection of items can generally be eliminated. In this case sampling error can also be estimated, because, there are methods for estimating sampling errors
Purposive sampling is desirable when the universe is small and a known characteristic of it is to be studied intensively. Sample designs other than random sampling may be used only for reasons like convenience and low costs. Therefore, sampling methods to be used must be decided by taking into consideration the nature and scope of enquiry and other related factors like the time, money, staff, convenience, etc.
LAW OF STATISTICAL REGULARITY Top⇑
The law of statistical regularity tells us that the random selection of items from the universe is very likely to give a representative sample. This law, thus, states that on an average the sample chosen at random from the universe will have the same composition and characteristic as the universe.” For instance, if there are 700 boys and 300 girls in a school, a random selection of 100 students would yield about 70 boys and 30 girls. Conversely, it can as well be stated that if a random selection of 100 students from a school reveals 70 boys and 30 girls, it is not unreasonable to conclude that, out of 1,000 students in the school, there will be about 700 boys and 300 girls. In this case, the results Obtained from the study of 100 items are applied to 1,000 items and this is precisely the purpose of sampling. This law of statistical regularity will operate when the following two conditions are fulfilled:
i) The selection of items for the sample should be random. It means that every item in the population/universe should have an equal chance of being included in the sample.
ii) The number of items to be included in the sample should be reasonably large enough so that sample is sufficiently representative.
Thus, if from the universe a moderately large sized sample is chosen at random, it is almost certain that on an average the sample so taken will show the same characteristics as that of the universe.
LAW OF INERTIA OF LARGE NUMBERS Top⇑
Law of Inertia of Large Numbers is a corollary to the law of statistical regularity. There is a relationship between the size of a sample and its accuracy. The reason for this lies in the fact that in large numbers the chances of compensatory errors are greater. In other words, data collected from large samples has a higher degree of stability than the data collected from small samples. For instance, if a coin is tossed 40 times, heads are expected 20 times. But in actual tossing, head may appear 25 times and tail only 15 times. If the coin is tossed further, a reverse situation may arise. If the coin is tossed 1,000 times, it is quite possible there are 500 heads and 500 tails. This is so because when the number of tosses become larger and larger, sometimes errors (difference between actual and expected) move in the opposite direction thus cancelling out each other. In the above example, the larger the number of such tosses, the greater are the chances of one irregularity compensating the other.
On this basis we say that large numbers have ‘inertia’. In simple words, this means that large numbers are more constant. The production of rice in a given district might show great variations year after year. But the production in the whole state would not vary much, because if in some districts the crop is above normal, it is just possible that in other districts it might be below normal. Thus, the production at the state level would be stable. Similarly, the rice production figures for the whole country would show only a small variation from one year to another. This very phenomenon is referred as the ‘Inertia of Large Numbers’.
However, from this discussion we should not infer that the law of inertia of large numbers does not allow any change in figures with the passage of time. All that it means is that there are no violent or significant fluctuations in large numbers. The fluctuations in large numbers are slow and gradual. As the number of items becomes larger and larger, the proportionate deviation from the expected value becomes smaller and smaller.
STATISTICAL UNIT Top⇑
While planning the statistical survey, it is essential that the unit in which the data is to be collected should be properly defined. Statistical unit may be defined as the unit in terms of which the investigator measures the variable (or counts attributes) selected for enumeration, analysis and interpretation. Proper definition of statistical unit is essential in order to collect relevant data. In the absence of a well defined unit, it is just possible that the data which should have been collected may be omitted and the data which should have been omitted may be collected. The task of defining a unit is not so easy as it may appear to be in the first instance.
Features of a Good Statistical Unit Top⇑
While deciding the statistical unit for the enquiry, we must pay attention to the following requirements:
i) The unit must be appropriate: The statistical unit must suit the purpose of the enquiry. For instance, you know there are different types of prices such as retail price, wholesale price, cost price etc. When you select the price unit for your enquiry, you should select the price suitable for the enquiry. If the retail price is suitable and you select the wholesale price, you get misleading results.
ii) The unit should be specific and unambiguous: The unit should be defined very specifically and the meaning should not be ambiguous. Otherwise, the data collected may not be fully correct and become inaccurate.
iii) The unit must be stable : If there are fluctuations in its value, the data collected at different times or at different places may not be comparable. At times, the results may mislead.
iv) The unit must be homogeneous: Once the statistical unit is defined, it must be uniform throughout the enquiry so that valid comparisons can be made on the basis of collected data.
v) The unit must be simple: The statistical unit must be simple to understand and complete in itself.
Types of Units Top⇑
Now let us study about the types of statistical units.
1. The statistical unit may be either a physical unit or an arbitrary unit. Units of measurements like ton, kilogram, metre, inch, pound etc., are examples of physical units. Such units are prevalent in common usage and do not need any explanation. In many studies these physical units are not suitable. For instance, you are conducting an enquiry on workers’ wages in an industry. In this case the statistical unit to be defined is wage. There are different types of wages such as money wage, real wage, piece wage, monthly wage, and so on. In such a situation, you have to arbitrarily decide which wage you have to collect and give it a proper definition.
2. The statistical units also can be categorised as (i) units of estimation or enumeration, and (ii) units of analysis and interpretation. ,
i) Units of enumeration are those in terms of which the data is collected. Units of enumeration may be either simple units or composite units. A simple unit is one which represents a single condition without qualifications. Examples of such units are worker, house, ton, meter, hour, etc. A composite unit is formed by adding a qualifying word to a simple unit with the result that its scope becomes restricted and its definition becomes relatively difficult. For example, take the two units, ‘worker’ and ‘skilled worker’. Here the first unit is a simple unit and the second unit a composite unit. In the second case we should know not only the meaning of worker but also that of the term ‘skilled worker’. Other examples of composite units are machine-hour, passenger mile, kilowatt-hour, and so on.
ii) Units of analysis and interpretation are those units which are used for comparison and interpretation of statistical data. They include ratios, rates, percentages, coefficients, etc.
DEGREE OF ACCURACY Top⇑
While conducting an enquiry we have to decide the degree of accuracy to be achieved in the collection of data. While determining the degree of accuracy we should bear in mind two aspects: (i) the accuracy which is normally possible, and (ii) the degree of accuracy that is considered necessary in that particular investigation. It is very difficult to achieve absolute accuracy to describe a phenomenon exactly as it is. We may not be able to describe the phenomenon with perfect accuracy either because of the imperfection of the investigator and/or because of the imperfection of the measuring instruments. Hence, it is futile to expect complete accuracy in statistical investigation. Even in physical sciences, where controlled experiments are performed, absolute accuracy cannot be achieved. Then it is of no use to talk about it in social sciences.
Significance of Reasonable Accuracy Top⇑
There is no need of absolute accuracy in statistical investigations. When reasonably accurate estimates are available, there is no difficulty in understanding or analysing a phenomenon. For instance, when we weight food grains in quintals, we do not correct the weight to a gram. It is enough if the weight is corrected to a kilogram. Similarly, the distance between two cities is expressed in kilo meters, and a few meters have no significance. Even in counting also absolute accuracy is a rare happening. The population census requires the greatest possible degree of accuracy to count the actual number of people. But even in such a case, it is possible that some persons are left out while carrying out the enumeration. Similarly, accuracy in respect of ages in ordinary use need not be as great as in the case of population census. It is sufficient for all general purposes if ages are given in completed years only. Thus, there is no need of absolute accuracy, only reasonable accuracy can serve the purpose. Now the question arises, what is reasonable accuracy?
We cannot say anything categorically about this. The reasonable accuracy depends upon the nature and objective of the enquiry and the type of data required. In many cases there are conventional standards of accuracy. In measuring the distance between two cities a few metres can be left out but in the measurement of cloth even a few centimetres cannot be ignored. If we are weighing coal, we may ignore few grams, but we cannot do so while weighing gold. In statistical investigations, we may follow these conventions while deciding the reasonable degree of accuracy. The investigator should adopt those methods and units which will give him the requisite degree of accuracy. The accuracy of measurement depends upon two factors; (i) the fineness of the measuring instruments, and (ii) the care with which it is being employed by the investigator. For instance, if a ruler is marked up to only centimetres, it is unreasonable to measure lengths correct to millimetres. In the same way, when the ages of the persons are stated in years and months in an enquiry, information down to actual days cannot be obtained there from.
Concept of Spurious Accuracy Top⇑
Now you should also study about spurious accuracy. You can understand the meaning of spurious accuracy by an example. Let the ages of five Xth class students be 16 years 7 months, 17 years 2 months, 16 years 8 months, 15 years 9 months, and 15 years 10 months respectively. From these figures it would be obviously misleading to say that the average age of the students is
(16+17+16+15+15)/5 = 15.8 years. The highest degree of accuracy that can be attained in this case is to express the average age in years, i.e., as 15 completed years.
The degree of accuracy imputed by the figures 15.8 years is called ‘spurious accuracy’.
In expressing numerical facts it is necessary to guard against such spurious accuracy.
LET US SUM UP Top⇑
Statistical surveys, which are fact finding enquiries, concerning phenomena of interest, are to be properly planned and executed so that their results may depict realities. In organising a statistical survey you have to follow several steps: (1) defining the problem, (2) determining the objective and scope of the survey, (3) accomplishing the preliminaries like deciding the sources of data, type of enquiry, statistical unit and the degree of accuracy desired, (4) data collection, (5) editing the data, (6) classification and tabulation of data, (7) analysis of data, (8) interpretation of data, and (9) writing the report.
Sources of statistical data may either be primary or secondary. If data is collected for the first time by the investigator as original data, such data is called primary data. The sources from which primary data is collected are called primary sources. When already collected data is used, it is secondary for the investigator. Sources of such data are called secondary sources. There are several methods of collecting primary data such as personal observation, questionnaire, interview, schedule, etc. You must decide which method to use depending upon the nature, object and scope of the enquiry along with time and money constraints. There are several sources like books, reports, journals, newspapers, and other published sources from where secondary data can be obtained. They may even be obtained from unpublished sources.
The survey can be of several types. It may either be census survey or sample survey, In the former case the entire group is surveyed, but in the later case only a part of the group is studied. In practice, sample surveys are very popular because of several advantages. Other type of enquiries can be direct or indirect, original or repetitive, open or confidential, regular or ad-hoc, and so on. While deciding about the type of enquiry to be undertaken, you have to keep several factors in mind.
In the case of sample survey, there are various methods for the selection of the sample.
Those methods can be broadly categorised as: (1) probability sampling methods, and (2) non-probability sampling methods. Relating to sampling, two laws are important: 1) law of statistical regularity, and (2) law of inertia of large numbers. The law of statistical regularity states that, if a moderately large sized sample is taken at random from the universe it will, on an average, possess the same characteristic as the universe. The law of inertia of large numbers is a corollary to the law of statistical regularity. It states that large numbers are relatively more stable than small numbers. Fluctuations in large numbers are only slow and gradual.
Statistical unit is one in terms of which you measure the variables or count attributes selected for enumeration, analysis and interpretation. The statistical unit selected should be specific, simple, unambiguous, stable, complete and appropriate. In statistical surveys, generally it is very difficult to attain absolute accuracy. Our purpose is well served by reasonable accuracy which to a large extent depends upon the nature and object of enquiry.
Meaning and Scope of Statistics
ECO-07>>BLOCK1>>UNIT I MEANING AND SCOPE OF STATISTICS
Contents
Statistics Defined in Plural Sense
Statistics Defined in Singular Sense
Descriptive and Inferential Statistics
INTRODUCTION TO STATISTICS Top⇑
Statistics is not a new discipline but is as old as the human activity itself. Its sphere of utility, however, has been increasing over the years. In the olden days, it was considered as the ‘science of statecraft’ and was regarded as a by-product of the administrative activity of the State thereby limiting its scope. The governments in those days used to keep records of population, birth, deaths, etc., for administrative purposes. In fact, the word ‘statistics’ seems to have been derived from the Latin word ‘status’ or Italian word ‘statists’ or the German word ‘Statistic’ each of which means a political state. Statistical methods are now widely used in various diversified fields such as agriculture, economics, sociology, business management, etc. In this unit you will study the meaning and definition of statistics, distinction between descriptive and inferential statistics, functions of statistics, importance and limitations of statistics, and distrust of statistics.
MEANING OF STATISTICS Top⇑
The word ‘statistics’ has been used in a variety of ways. Sometimes it is used in the plural sense to refer to numerical statements of facts or data. On the other hand it is also used in the singular sense to refer to a subject of study like any other subject such as (mathematics, economics, etc. For instance, when we refer to a few ‘statistics’ relating ‘to our country like -there are 932 females per 1,000 males in India, the per capita national product at current prices has increased from Rs. 246 in 1950 651 to Rs. 2,596 in 1985-86 -we are using the word statistics in the plural sense (meaning data). To prepare these numerical statements, one must be familiar with those methods and techniques which are used in data collection, organisation, presentation, analysis and interpretations. A study of these methods and techniques is the science of statistics. The use of the word statistics here is in the singular sense. In this sense the word statistics means statistical methods or the science of statistics. Now let us study in detail about these two approaches.
Statistics Defined in Plural Sense Top⇑
Statistics has been defined differently by different writers. According to Webster
“Statistics are the classified facts representing the conditions of the people in a state.
Specially those facts which can be stated in numbers or any tabular or classified arrangement.”
According to Yule and Kendall statistics means “quantitative data affected to a marked extent by multiplicity of causes.” These definitions are too narrow as they confine the scope of statistics to only such facts or figures which either relate to the conditions of the people in a state or specify some characteristics of the data.
A more comprehensive definition of statistics was given by Horace Secrist. According to him statistics means “aggregate of facts affected to marked extent by multiplicity of causes, numerically expressed, enumerated or estimated according to a reasonable standard of accuracy, collected in a systematic manner for a predetermined purpose and placed in relation to each other. ” This definition is quite comprehensive and points out the characteristics that numerical facts (data) must possess so that they may be called statistics. Let us discuss about these characteristics one by one.
a) They must be aggregate of facts: Individual and isolated figures cannot be called statistics. They should form a part of aggregate of facts relating to any particular field of enquiry. For example, Ram’s monthly income is Rs. 2,000. This is not a statistical statement. However, when we say that monthly incomes of Ram, Mohan, and Sohan are Rs. 2,000,2,500 and Rs. 3,000 respectively, they will be called statistics.
b) They are affected by multiplicity of factors: There are several factors that affect a phenomenon. For instance, the consumption of a household on any item would be affected by several factors as income, taste, education, etc. Similarly, production of wheat is affected by soil, seeds, rainfall, temperature, etc. The data relating to such phenomenon can be called statistics. But if we write the numbers one to ten along with their squares, then these figures though more than one, cannot be called statistics. These figures are not affected by multiplicity of causes.
c) They must be numerically expressed: To call a statement as statistics, it must be expressed numerically. Therefore, qualitative characteristics such as beauty, colour of eyes, etc., cannot be measured directly and hence, in general, they do not fall under the purview of statistics. We have to quantify these characteristics before they become statistics. For example, in college we may count the number of girls having black eyes or blue eyes or brown eyes.
d) They are enumerated or estimated according to a reasonable standard of accuracy: Statistics are either enumerated or estimated, but reasonable standards of accuracy must be maintained. The degree of accuracy will depend on the nature and the object of the study being undertaken. Suppose, as the Principal of a College you are interested in understanding the average level of performance of the students, who take admission to B.Com class. For this purpose you must collect the marks obtained by the students at the senior secondary level. It may be done in two ways. First you can have a complete enumeration of the marks of all the students and derive their average. Secondly if complete enumeration is not possible due to some reason, you may select a sample. On the basis of the result of the sample, you may then estimate the average level of performance of all students. Thus, statistics may be obtained by enumeration or estimation. Let us take another example to understand the point reasonable standard of accuracy. If you are estimating the total production of food crop in India the appropriate units of measurement (or the level of accuracy) may be lakhs of tons. But if you are reporting the total production of gold, the appropriate unit of measurement may be kilograms. Thus, degree of accuracy depends on nature and objective of the study.
e) They must be collected in a systematic manner for a predetermined purpose: The data should be collected in a systematic manner. Data collected in a haphazard manner will not serve much purpose. The purpose for which data is collected, must be decided in advance. The purpose should be specific and well-defined. If the purpose of the enquiry is not specified, either we may collect too much or too little data.
f) They must be placed in relation to each other: The numerical facts should be comparable if they are to be called statistics. For instance, statistics on production and export of an item during a year are related. What they put together are statistics.
But if you have three figures: 1) production of rice in India in 1986 2) number of children born in USA in 1987, and 3) number of cars registered in UK in 1988. These figures may be facts alright, but taken together they cannot be called statistics as they have no relation among themselves.
It is thus; clear that all statistics are numerical statements of facts but all numerical statements of facts are not statistics. They will be called statistics only if the above characteristics are present in them.
Statistics Defined in Singular Sense Top⇑
Numerical information must be collected, organised, presented, analysed and interpreted if it has to be used for making wise decisions. We require methods that help us in this regard. Thus, statistics, when used in the singular sense, has been defined as a body of methods which provides tools for data collection, analysis and interpretation.
Here too, different writers have interpreted statistics differently. Now let us also discuss about some of these definitions.
Bowley, for instance, has given a number of definitions. But none of them is comprehensive. They in fact point to the development of science of statistics over time. Some of these definitions are:
i) Statistics may be called the science of counting.
ii) Statistics may rightly be called the science of averages.
iii) Statistics is the science of measurement of social organism, regarded as a whole in all manifestations.
Croxtoa and Cowden have given a simple and precise definition of statistics. According to them “statistics may be defined as the collection, presentation, analysis and interpretation of numerical data.”
The definition given by Selligrnan is equally simple but comprehensive. According to him “statistics is the science which deals with the methods of collecting, classifying, presenting, comparing and interpreting numerical data collected to throw some light on any sphere of enquiry.”
The last two definitions are quite precise, comprehensive, and point out the scope of statistical methods. The science of statistics teaches us the methods and techniques which are required for 1) collection of data, 2) classification and tabulation of data, 3) presentation of data, 4) analysis of data, and 5) interpretation of data.
Thus, from the above discussion, we can conclude that the word ‘statistics’ may be used either in plural sense to refer to data or in singular sense to refer to a body of methods for making wise decisions in the face of uncertainty.
DESCRIPTIVE AND INFERENTIAL STATISTICS Top⇑
AS you know, when used in singular sense, statistics is a study of the principles and methods used in the collection, presentation, analysis and interpretation of data in any sphere of enquiry. These methods and techniques are so diverse that statisticians generally categorise them into two: 1) descriptive statistics, and 2) inferential statistics.
Descriptive Statistics refer to various measures that are used to describe the characteristic features of the data. Such measures include measures of central tendency, measures of dispersion, etc. Graphs, tables and charts that display data are also examples of descriptive statistics. Suppose the number of first year B.Com students is 100 and you compute the average marks of these students. Here you are using descriptive statistics. Similarly, when you are computing the average marks of a sample of 25 students from the same class but without attempting any generalisation about the entire class, you are still using descriptive statistics.
Inferential Statistics on the other hand refer to statistical process of drawing valid inferences about the characteristics of population data on the basis of sample data. The word population in statistics does not mean only human population. It stands for totality of items related to any field of study. If the teacher, in the above example, decides to estimate the average marks of the entire class on the basis of the sample average, we would say that he is using inferential statistics. It is noteworthy that most of the time we use sample data to understand the features of the population data. Inferences about population drawn from sample measures may involve some error or discrepancy. The magnitude of such errors can be estimated on the basis of probability theory.
FUNCTIONS OF STATISTICS Top⇑
You have studied the meaning and definitions of statistics. You have also learnt the difference between descriptive statistics and inferential statistics. Let us now discuss some of the important functions of statistics:
To present facts in a proper form: Statistical methods present general statements in a precise and definite form. For example, you may say that in India average yield of cotton per hectare is 180 Kg. This statement is more precise and convincing than saying that the average yield of cotton in India is very low.
To simplify unwieldy and complex data: Statistical methods simplify unwieldy and complex data to make them understandable easily. The raw data is often unintelligible. One cannot grasp their characteristics unless the data is classified according to some common characteristics. Suppose, you are given the weekly wages of 1,000 workers in a factory. You will not be in a position to draw any inference from the data unless they are condensed through classification such as the following:
| Weekly Wages | No. Of workers |
| Below -600 | 100 |
| 600-700 | 200 |
| 700-800 | 400 |
| 800-900 | 200 |
| Above 900 | 100 |
| Total: | 1000 |
To provide the technique for making comparison: The primary purpose of statistics is to facilitate a comparative study of different phenomena either over time or space. For instance, the estimation of national income is not done for its own sake. But it is done to compare the income over time to get an idea whether the standard of living of people is rising or not. Suppose, as compared to 1987, the per-capita income in India has increased by 10% in 1988. On the basis of this information, we shall be in a position to throw some light on the standard of living of an Indian in 1988.
To formulate policies in different fields: Statistical methods are very useful in formulating various policies in social, economic, and business fields. The government for instance, utilises vital statistical data for formulating family planning programme. Similarly, the government utilises the information on consumer price indices for granting dearness allowance to its employees.
To study relationship between different phenomena: Statistical measures such as correlation and regression are used to study relationships between variables. Such relationships are important for making decisions. For instance, you may find a relationship between the demand of a product and its prices. In general, if the prices rise, the demand for the product is likely to decline.
To forecast future values: Some of the statistical techniques are used for forecasting future values of a variable. On the basis of sales figures of the last 10 years, a marketing manager can estimate the likely demand for his product during the next year.
To measure uncertainty: With the help of probability theory, you can measure the chance of occurrence of uncertain event. Probability concepts are quite useful in decision-making. Suppose, if you are interested in estimating the chance of your passing the B.Com examination, you may get an idea about it by studying the pass percentages of students during the last 10 years.
To test a hypothesis: Statistical methods are extremely useful in formulating and testing hypotheses and for the development of new theories. For instance, a company is desirous of knowing the effectiveness of its new drug to control malaria. It could do so by using a statistical technique called Chi-square Test.
To draw valid inferences: Statistical methods are also useful in drawing inferences regarding the characteristics of the universe (population) on the basis of sample data.
IMPORTANCE OF STATISTICS Top⇑
In the ancient times statistics was used as the science of statecraft only. Data on a wide range of activities such as population, births and deaths were collected by the State for administrative purposes. However, in recent years, the scope of statistics has widened considerably to bring to its fold social and economic phenomena. The developments in the statistical techniques over the years also widened its scope considerably. It is no longer considered to be a by-product of the administrative setup of the State but now it embraces practically all sciences, social, physical, and natural sciences. As a matter of fact, now statistics finds its applications in various diversified fields such as agriculture, business and industry, sociology; economics, biometry, etc. Thus, these days statistics finds its application in almost all spheres of human activity.
Statistics and State
In earlier times, the role of the State was confined to the maintenance of law and order. For that purpose, it used to collect data relating to manpower, crimes, income and wealth, etc., for formulating suitable military and fiscal policies. But the role of State has enlarged considerably with the inception of the concept of Welfare State. Thus, today statistical data relating to prices, product, production, consumption, income and expenditure, etc., are extensively used by the governments worldover for formulating their economic and other policies. To raise the standards of living of its population, developing countries such as India are following the policy of planned economic development. For that purpose the government must base its decisions on correct and sound analysis of statistical data. For instance, in formulating its five year plans, the government must have an idea about the availability of raw materials, capital goods, financial resources, the distribution of population according to various characteristics such as age, sex, income, etc., to evolve various policies.
Statistics in Economics
Statistical analysis is immensely useful in the solution of a variety of economic problems such as production, consumption, distribution, etc. For example, an analysis of data on consumption may reveal the pattern of consumption of various commodities by different sections of the society. Data on prices, wages, consumption, savings and investment, etc., are vital in formulating various economic policies. Likewise data on national income and wealth are useful in formulating policies for reducing disparities of income. Use of statistics in economics has led to the formulation of several economic laws such as Engel’s Law of Consumption, Law of Income Distribution, etc. Statistical tools of index numbers, time series analysis, regression analysis, etc., are vital in economic planning. For instance, the consumer price index is used for grant of dearness allowance (DA) or bonus to workers. Demand forecasting could also be made by using time series analysis. For testing various economic hypotheses, statistical data is now being increasingly used.
Statistics in Business and Management
With the growing size and increasing competition, the activities of modern business enterprises are becoming more complex and demanding. The separation of ownership and management in the case of big enterprises has resulted in the emergence of professional management. The success of the managerial decision-making depends upon the timely availability of relevant information much of which comes from
statistical data. Statistical data has, therefore, been increasingly used in business and industry in all operations like sales, purchases, production, marketing, finance, etc. Statistical methods are now widely applied in market and production research, investment policies, quality control of manufactured products, economic forecasting, auditing and many other fields. One element common to all problems faced by managers is the need to take decisions under uncertainty. And statistical methods provide techniques to deal with such situations. It is, therefore, not surprising when Wallis and Roberts say that “statistics may be regarded as a body of methods for making wise decisions in the face of uncertainty.”
LIMITATIONS OF STATISTICS Top⇑
We have discussed the importance and functions of statistics. Now we shall discuss about the limitations of statistics. The following are some of the limitations of statistical methods which should be kept in mind while using them:
Statistics deals only with the quantitative characteristics: Statistics deals with facts which are expressed in numerical terms. Therefore, those phenomena that cannot be described in numerical terms do not fall under the scope of statistics. Beauty, colour of eyes, intelligence, etc., are qualitative characteristics and hence cannot be studied directly. These characteristics can be studied only indirectly, by expressing them numerically after assigning particular scores. For example, we can study the level of intelligence of a group of persons by using intelligence quotients (IQ’s).
Statistics does not deal with individuals: Since statistics deals with aggregate of facts, a single and isolated figure cannot be regarded as statistics. For example, the height of one individual is not of much relevance but the average height of a group of people is relevant from statistical point or view. In this context, you may recall the definition given by Secrist here.
Statistical laws are not exact: Unlike the laws of natural sciences, statistical laws are not exact. They are true under certain conditions and always some chance factor is associated with them for being true. Therefore, conclusions based on them are only approximate and not exact. They cannot be applied universally. Laws of pure sciences like Physics and Chemistry are universal in their application.
Statistical results are true only on an average: Statistical methods reveal only the average behaviour of a phenomenon. The average income of employees of a company will, therefore, not throw much light on the income of a specific individual. They are therefore, useful for studying a general appraisal of a phenomenon.
Statistics is only one of the methods of studying a problem: A problem can be studied by several methods. Statistical methods arc only onc of them. Under all circumstances, statistical tools do not provide the best solution. Quite often it is necessary to consider a problem in the light of social considerations like culture, region, etc. Therefore, statistical conclusions need to be supplemented by other evidences.
Statistics can be misused: The various statistical methods have their own limitations. If used without caution they are subject to wrong conclusions. So one of the main limitations of statistics is that, if put into wrong hands, it can be misused. This misuse can be, at times, accidental or intentional. Many government agencies and research organisations are tempted to use statistics to misrepresent the facts to prove their own point of view. Suppose you are told that during a year the number of car accidents in a city by women drivers is 10 while those committed by men drivers is 40. On the basis of this information, you may conclude that women are safe drivers. If you conclude like that you are misinterpreting the information. You must know the total number of drivers of both types before you could arrive at a correct conclusion.
DISTRUST OF STATISTICS Top⇑
Despite its importance and usefulness the science of statistics is looked upon with suspicion. Quite often it is discredited, by people who do not know its real purpose and limitations. We often hear statements such as: “There are three types of lies: lies, damned lies, and statistics”. “Statistics can prove anything”. “Statistics cannot prove anything”. “Statistics are lies of the first order”. These are expressions of distrust in statistics. By distrust of statistics, we mean lack of confidence in statistical data, statistical methods and the conclusions drawn. You may ask, why distrust in statistics? Some of the important reasons for distrust in statistics are as follows:
Arguments based upon data are more convincing. But data can be manipulated according to wishes of an individual. To prove a particular point of view, sometimes arguments are supported by inaccurate data.
Even if correct figures are used, they may be incomplete and presented in such a manner that the reader is misled. Suppose, it has been found that the number of traffic accidents is lower in foggy weather than on clear weather days. It may be concluded that it is safer to drive in fog. The conclusion drawn is wrong. To arrive at a valid conclusion, we must take into account the difference between the rushes of traffic under the two weather conditions.
Statistical data does not bear on their face the label of their quality. Sometimes even unintentionally inaccurate or incomplete data is used leading to faulty conclusions.
The statistical tools have their own limitations. The investigator must use them with precaution. But sometimes these tools or methods are handled by those who have little or no knowledge about them. As a result, by applying wrong methods to even correct and complete data, faulty conclusions may be obtained. This is not the fault of statistical methods, but of the persons who use them.
We may conclude by taking an illustration. Suppose a child cuts his finger with a knife. His parents started blaming the knife. Here the fault does not lie with the knife but with the child who misused the knife. It should be kept in mind that statistics neither proves anything nor disproves anything. It is only a tool (i.e. a method of approach) which should be used with caution and by those who are knowledgeable in the subject.
LET US SUM UP Top⇑
The word statistics can be used either plural sense or in singular sense. When used in plural sense, the word statistics refers to numerical statements of facts or data. To be called statistics, numerical data should possess the following characteristics:
1) they must be aggregate of facts,
2) they must be affected by multiplicity of factors,
3) they must be numerically expressed,
4) they must be enumerated or estimated according to a reasonable standard of accuracy,
5) they must be collected in a systematic manner for a predetermined purpose, and
6) they must be placed in relation to each other.
The word statistics, when used in singular sense, refers to a body of knowledge which provides methods and techniques required for,
1) collection of data,
2) classification and tabulation of data,
3) presentation of data,
4) analysis of data, and
5) interpretation of data.
Statistical methods can be divided into: 1) descriptive statistics, and 2) inferential statistics.
Statistical methods are helpful in:
1) presenting facts in proper form,
2) simplifying unwieldy and complex data,
3) providing techniques for making comparison,
4) formulating policies in different fields,
5) studying relationships between different phenomena,
6) forecasting future values,
7) measuring uncertainty of events,
8) testing statistical hypotheses, and
9) drawing valid inferences.
Statistical methods are useful in various fields such as state administration, economics, business management, etc. With the growing complexity of managing today’s business, statistical tools are proving quite handy and useful in the decision-making process. However, there are limitations in using these tools. Statistics does not study qualitative phenomenon nor does it study individuals.
Statistical laws are not exact and may be misused. A blind fold application of these tools, particularly by those who are not fully conversant with them, has resulted in lot of distrust. The science of statistics is a useful servant to those who understand its proper use.
What is a public enterprise? State the features and objectives of public enterprises.
The government owned enterprises are also called Public Enterprises (PEs). Strictly speaking the term public enterprise, as a business entity, refers to any industrial or commercial undertaking which is owned and managed by the central, state or local government and of which the output is marketed i.e. not supplied free. Thus public enterprises include manufacturing, trading as well as service organisations which are essentially business undertakings. Public enterprises consist of nationalised private organisations as well as new enterprises promoted under government ownership and control. Life Insurance Corporation, Indian Airlines Corporation, Coal India Ltd., etc., are examples of public enterprises established by nationalising private organisations. Hindustan Machine Tools, Hindustan Antibiotics
Ltd., Chittaranjan Locomotive Works, etc., are examples of public enterprises promoted by govemment.
Difference between a Public Enterprise and a Private Enterprise
Private enterprises, on the other hand, refer to industrial and commercial organisations which are set up under individual or group ownership within the general framework of regulatory laws and rules of the government. These include manufacturing and commercial companies, medium and small firms organised as proprietary and partnership concerns. Private enterprises are primarily motivated by private profit. Public enterprises are governed by public policies framed by government and aimed at maximising social welfare and upholding public interest. The objectives of public enterprises in India are laid down in conformity with the objectives of the development plans. They are accountable to the government and the parliament or state legislatures regarding the fulfillment of their objectives. Private enterprises are free to set their objectives and to undertake any business activity except those which are illegal. However, private enterprises are also regulated by government controls of different kinds.
::::::::Features:::::::::
The main features of public enterprises as distinguished from private enterprises are as follows:
1) Public enterprises are owned and managed by the government or agencies set up by the government.
2) The whole or major part of the capital required for the public enterprises is provided by government.
3) A public enterprise can be organised as a departmental undertaking or as a statutory corporation or as a government company.
4) These are governed by public policies laid down by the government in the public interest and are not entirely guided by profit motive.
5) Their objectives are laid down in conformity with the development plans. They are accountable to the Parliament or state legislature for their performance and fulfillment of objectives.
Objectives
It should be clear from the reasons which prompted the growth of public enterprises, that the principal objectives of these undertakings are many. The objectives are outlined below:
I) TO achieve rapid economic development through industrial growth in accordance with the development plans.
2) To channelise resources in the best possible manners for economic growth.
3) To secure public welfare and to reduce inequalities in the distribution of income and wealth.
4) To ensure balanced regional development of industry and trade.
5) To prevent the growth of monopoly and concentration of economic power in a few private hands.
6) To control the prices of essential consumer goods in the market to prevent public hardship.
7) To mobilise public savings through financial institutions to meet the demands of public and private enterprises in accordance with planned priorities.
8) To provide satisfactory employment conditions to the personnel as model employers.
Explain the circumstances which lead to the formation of business combinations.
CRITERIA FOR THE CHOICE OF ORGANISATION
By comparing the four forms, we realised that none of them is ideal in all respects. Each form of organisation is good in some respects and not good in other respects. It means that looking for one best form of organization will be like looking for a shirt that fits everybody in the family. Thus, a particular form of organisation which is suitable in one situation may not be suitable in other situations. So, the best form of organisation is one which fulfils the requirements of a particular business in a satisfactory manner. The basic consideration governing the selection is the attainment of the objectives decided upon by the entrepreneur. Since these objectives also vary from one business to the other, no single form of organisation can be considered as the best suited for all kinds of business. Now, let us analyse what considerations help us in making our choice of the form of business organisation. The decision regarding the choice of organisation assumes importance at two stages of a business.
a) At the time of starting a business.
b) At the time of expansion.
Criteria at the Time of Starting a Business
Choice of a suitable form of business organisation assumes great importance at the time of initiating or launching a new business enterprise because it is the form of organisation which ultimately determines the power and responsibility of the entrepreneur. The choice is dependent on the following factors.
Nature of business: Choice of a suitable form of organisation is dependent on the nature of the proposed business. The organisational requirements are different for different types of business. For example, a big cement manufacturing activity and a retail cement shop cannot have the same form of organisation. Similarly, the form of organization suitable for a textile mill is not suitable for a tailoring shop.
Volume of business: The expected volume of business also influences the decision about the suitable form of organisation. If the volume of business is small, you need small amount of capital and run less risk. In that case sole proprietorship may be quite suitable. But if the volume of business is large, you need more capital and run more risk which a single owner may find it difficult to cope with. So, partnership form or a company form would be considered more suitable.
Area of operation: The area of operation of the business also influences the choice of form of organisation. If the area is limited and confined to a particular locality, the suitable form of organisation may be sole proprietorship. In case the area is widespread, the suitable form may be a joint stock company.
Desire for control: The extent of control and supervision will also determine the choice of organisation. If it is desired to have a direct control over the business operations, a sole proprietorship or a partnership form of business should be adopted. In case if you feel that there is no need for direct control, the company form of organization is the best.
Capital requirements: The form of organisation will also depend on the extent of financial requirements of the business. A business which requires a small amount of capital can be organised on sole proprietorship or partnership basis. But if the financial requirements are huge, then the joint stock company form of organisation may be preferred.
Extent of risk and liability: You know business operations involve risk. If the promoters of a business enterprise are deterred by the risk involved, they will start the business on the basis of a limited liability. That means they can go for a company. In case they have capacity to bear the risk involved, it can he organised on sole proprietorship or partnership basis.
Government regulations: As you know the governmental controls and regulations are more in company form and cooperative form of organisations compared to the remaining two forms. If you do not want too much government control and regulation, you should choose either sole proprietorship form or partnership form.
Criteria at the Time of Expansion
Growth is a normal phenomenon in business. When your business is successful, naturally, you may plan to expand it. The expansion programmes may have the following implications.
i) Need for larger financial resources.
ii) Need for internal re-organisation and control.
iii) Need for specialised services like communicalion, accounting, marketing, etc.
iv) Increase in governmental controls and regulations.
v) Increase in tax liability.
vi) Increase in the problem of control and coordination.
In fact the nature of these problems will depend upon the nature of the existing business and type of expansion programme undertaken. To implement your expansion programme, you can either continue with the existing form of organisation or adopt a new form of organisation. Whatever alternative you choose, it must be able to meet all requirements of expansion. If your existing business is organised as a sole proprietor concern, you can think about employing a manager or taking a partner. In case it is a partnership firm, you may have to choose between increasing the number of partners or converting it into a private limited company. Similarly, if your existing business is in the form of a private company, you have the choice of converting it into a public limited company or not.
On the basis of the above discussion, we can conclude that the small businesses like grocery stores, hair dressers, small restaurants and hotels, small auto workshops, stationery shops, confectionaries, bakeries, dry cleaners, shoe manufacture and suppliers, small electric and electronics repair shops, barbers, tailors, etc., are predominantly sole trade organisations. The reasons for preferring sole proprietorship form of organisation for these types of businesses are abundantly clear. They function on small scale, cater to the needs of a limited market or deal with a restricted number of customers or dealers, and require a very limited capital. Moreover, they require the personalised attention of the owners to deal with a face-to-face situation. The managerial supervision can be tackled easily by the owner himself and the owner generally likes to be his own boss and active manager.
Business on a relatively larger scale is generally organised as partnership firm. Service enterprises like auto workshops, larger restaurants and hotels, large scale retail houses and medium scale industrial organisations are generally organised under partnership form. In these cases the entrepreneurs would like to pool their capital, skills, experience, etc., as partners of a firm. The internal organisation of such undertakings is looked after by the partners who specialise in a particular activity in the enterprise.
In those enterprises where the risk involved is quite significant and scale of operation is medium, the likely choice will be the private company. Transport undertakings, hire purchase units, finance and leasing companies, medium scale manufacturing companies are generally organised as private limited companies. In these undertakings the requirements of capital are larger as compared to those of a partnership firm. For large scale business operations, the most suitable form of business organisation is the public limited company. The large scale manufacturing plants, large transport undertakings, engineering and electronic companies, departmental stores, multiple shops, etc., are usually organised on the basis of public limited company.
The principal reasons are the necessity of larger capital and the large amount of risk involved.
On the other hand, the cooperative form of organisation is suitable when the interest of a particular segment of society is to be promoted. Thus, the cooperative form of organization is used largely for consumers, producers, farmers, etc.
Explain various modes of creating charge by banks while lending.
MODES OF CREATING CHARGE BY BANKS
While lending money, the bank has to keep three principles in mind viz., liquidity, safety and profitability. In order to minimise risks in advancing money, banks usually insist on good security and would like to create a charge on the tangible assets of the borrower in favour of the bank. When a charge is created, the bank gets certain rights on the tangible assets. In case the borrower fails to repay the advance, the bank can recover its money by disposing of those assets in the market. The important methods of creating a charge are: (1) pledge, (2) hypothecation, and (3) mortgage.
Let us now study them briefly.
Pledge
Section 172 of the Indian Contract Act defines pledge as “a bailment of goods as security for payment of a debt or performance of a promise”. So, a pledge is a contract whereby a borrower delivers his movable property to the lender as a security for the loan on the understanding that the property pledged will be returned to the borrower on repayment of the debt. The borrower who pledges the property is called the ‘pledged’ or ‘pawner’ and the person with whom the property is pledged is known as ‘pledgee’ or ‘pawnee’. From the above, you must have understood that delivery of goods and return of goods are the two essential features of pledge. Delivery of goods may be either physical delivery or constructive (symbolic) delivery. When the pledgee puts his own lock on the godown or when the keys of the lock are handed over to the bank, it amounts to delivery of goods. Similarly, handing over the duly endorsed documents of title to goods like railway receipt, bill of lading, etc., amount to delivery of goods. While accepting a pledge as a charge, the bank should ensure that the contract is in writing to minimise the misunderstanding of the terms. The contract should be complete in all respects and should incorporate all the usual clauses of pledge. It is advisable for the bank to get a declaration from the borrower to the effect the goods deposited with the bank are left as a security for the advance. The bank should see that the borrower has a valid title to the property pledged. The bank should ensure that the goods are kept safely in the godown. It is desirable that the bank should ensure goods against theft, fire, riot, etc. You must remember that when goods are pledged, only the possession over the goods is given and not the ownership. The pledger or the borrower continues to be the owner of the property. If the borrower fails to repay the loan in time, the bank has a right to file a suit against the borrower for the recovery of the amount, and retain the goods as collateral security. But since this is a lengthy process, the banks are given the right to sell the pledged goods and recover their money. But before selling the goods, the bank must give a reasonable notice to the borrower about his intention to sell the goods. If the proceeds of sale are less than the amount due, the borrower is still liable to pay the balance. But if the proceeds of sale is in excess of the amount due, the bank has to pay the surplus amount to the borrower. In case the goods are sold without giving a reasonable notice to the borrower, the sale cannot be set aside, but the bank will become liable to the borrower for damages.
From the above, it must be clear to you that for securing a charge on the property, the method of pledging is very simple and therefore, it is very popular. It should also be noted that the right to retain the goods pledged is applicable only in case of a particular debt for which the goods are pledged. The bank has no right to retain the security, as security for other debts owned by the borrower.
Hypothecation
Hypothecation is a mode of creating charge on goods or related document surrender of possession of goods. According to Prof. Herbert Hart, “Hypothecation is a legal transaction whereby goods may be made available as security for a debt without transferring either the property or the possession to the lender”. Hypothecation is resorted to such cases where transfer of possession of the property from the borrower to the creditor is either impracticable or inconvenient. For example, if the borrower wants to borrow on the security of motor vehicle, which is being used as a taxi, it shall not be advisable to pledge the vehicle with the bank, as it will deprive him of his livelihood. In the case of hypothecation, an equitable charge is created on the goods for the amount of debt but the hypothecated goods actually remain in the physical possession of the borrower. The borrower who hypothecates the goods is known as ‘hypothecator’ and the lender is termed as ‘hypothecatee’. Generally, hypothecation is done by the borrower by executing a document called a ‘letter of hypothecation’ in favour of the lender. In this letter it is stated that the said goods or property are at the order and disposition of the lender until the debt is cleared. It also empowers the lender to sell the hypothecated property in the event of default or repayment by the borrower.
As the hypothecated goods remain in the possession of the borrower, there is considerable scope for fraud. The same goods may be hypothecated with another person. It is a risky method no doubt. That is why this facility is granted to parties of unquestionable integrity and honesty. Even then the banker should obtain a declaration from the borrower to the effect that the goods are not hypothecated earlier with some other lender and that the borrower has a clear title to the property hypothecated. The bank should carry out regular inspection and physical verification of the hypothecated goods.
Mortgage
When immovable property like land and building is offered as security for debt, a charge is created thereon by means of a mortgage. A mortgage is the transfer of the interest in a specific immovable property by one person to another for the purpose of securing an advance of money. The transferor is called ‘mortgagor’ and the transferee is known as ‘mortgagee’. The advance of money in respect of which the mortgage is effected is called the ‘mortgage money’ and the instrument by which the mortgage is effected is called the ‘mortgage deed’. In a mortgage, the possession of the property need not always be transferred to the mortgagee. Usually, it remains with the mortgagor. Since the mortgagee gets the interest in the property, he has a right to sell of the property and recover his loan. When the borrower repays the amount of loan together with interest, the interest in the property is re-conveyed to the mortgagor.
While accepting a mortgage as a charge, the bank should ensure that the borrower has a valid title to the property and this can be done by examining the original title deeds. The bank must not part with the title deeds to the borrower when the mortgage is pending. If the advance against mortgage is given to a joint stock company, then the charge should be registered with the Registrar of Companies within 30 days of the creation of the charge. The mortgaged property should be inspected periodically to ensure that it is in good condition. If the property mortgaged is building, the bank should ensure that it is insured against fire, riot etc. There are several forms of mortgage. They are (i) simple mortgage; (ii) Usufructuary mortgage; (iii) English mortgage; (iv) Mortgage by conditional sale; (v) Equitable mortgage or mortgage by deposit of title deeds and (vi) anomalous mortgage.
Outline the factors which you keep in mind while deciding channels of distribution for your product.
FACTORS INFLUENCING THE CHOICE OF DISTRIBUTION CHANNEL
There are a number of channels used for distributing the goods. There are direct channels and indirect channels, short channels as well as long channels. We also learnt that the different channels are used for different types of products. When there are alternatives available, the selection of an appropriate channel becomes a very important decision for the producers. The choice of channel for distribution of any product should be such that it effectively meets the need of customers in different markets at reasonable cost.
The following factors generally influence the choice of the channel of distribution:
1. Distribution policy
2. Characteristics of the product
3. The target customers in view
4. Supply characteristics
5. Types of middlemen in the field
6. Channel competition
7. Potential volume of sales
8. Costs of distribution
9. Profits expected in the long-run
1. Distribution policy: Where the manufacturer is interested in distributing his products through all possible outlets, it is desirable to use more than one channel to reach the target customers. This is known as intensive distribution policy. The purpose in this case is to make the product available as near to the consumers as possible. Consumer goods of frequent use like pens, pencils, paper, soap, hair pin, etc., are distributed through a large number of wholesalers and retail traders. If goods are meant for customers who are very particular about their quality and usefulness, manufacturers adopt a selective distribution policy. In that case, few selective channels which can be relied upon for their efficiency of operation are used. For examples, goods like computers and TV sets, which require special services, are distributed through selected outlets like dealers with established reputation of dealing in those products and having a sound financial position. Sometimes, companies, manufacturing complex machinery, scientific instrument, etc., appoint particular agents for distribution of the products. In other words, the manufacturers prefer a single outlet. The agents or distributors become exclusive dealers of the items because of their technical knowledge and experience of dealing in that particular product line. This is known as exclusive distribution policy. Thus, the choice of the distribution channel is dependent on the distribution policy adopted by the producer of goods.
2. Characteristics of the product: The nature of the product influence the choice of channel. For example, perishable products like eggs, milk, etc., are supplied either directly or through the short channels. In the case of heavy and bulky products (e.g. cement, steel) where distribution and handling costs are more, short channels are preferred. Sophisticated electrical and electronics equipment which require careful handling are also generally distributed directly or through short channels. On the other hand, long channels are found in the case of light-weight and small-size items like dress material, readymade garments, pocket calculators, stationery, toothpaste, toothbrush, etc. Similarly, simple mechanical products like electronic toys, time-clocks, etc., are supplied through long channels for intensive distribution.
3. Characteristics of target customers: If the number of customers is large and geographical area is extensive, long and multiple channels are necessary for intensive distribution of goods. This is also suitable where the consumers are in the habit of making frequent purchases of small quantities at irregular intervals. Short channels and direct selling are possible in the case of few customers who purchase large quantities at regular intervals and they are concentrated in a small area.
4. Supply characteristics: Goods produced by a small number of producers concentrated in one region are generally distributed through short channels. Paiticularly this is more so if each producer controls a fairly large share of the market. Long channels are suitable if a large number of producers in different regions produce and supply the goods.
5. Types of middlemen: Availability of suitable middlemen in the channel of distribution is another factor in the selection of the channel. This is because different functions like standardisation, grading, packing, branding, storage, after sale servicing, etc., are expected to be performed by middlemen. Efficiency of distribution depends upon the size, location and financial position of middlemen. If the middlemen in a specific channel are dependable and efficient that channel may be preferred by producers.
6. Channel competition: There are different situations in which manufacturers compete with each other for availing the services of particular wholesalers. Similarly, wholesalers often compete with each other to deal with particular retailers or carrying particular brands of products. Sometimes producers use the same channel which is used by their competing producers. If an producer arranges exclusive distribution through a particular wholesaler, other producers also do the same. Thus, selection of a channel may depend on the competition prevailing in the distribution system.
7. Potential volume of sales: The choice of the channel depends upon the target volume of business. The ability to reach target customers and the volume of sales varies between different channels. One outlet may not be adequate for achieving the target in which case more channels need to be used. Of course, the competitive situation must be taken into account while examining the potential volume of sale through different channels:
8. Cost of distribution: The various functions carried out in the channel of distribution add to the cost of distribution. While choosing a channel, the distribution costs of each channel should be calculated and its impact on the consumer price should be analysed. A channel which is less expensive is normally preferred. Sometimes, a channel which is convenient to the customers is preferred even if it is more expensive. In such cases the choice is based on the convenience of the customers rather than the cost of distribution.
9. Long-run effect on profit: Direct distribution, short channels, and long channels have different implications with regard to the profits in the short-run and long-run. If demand for a product is high, reaching the maximum number of customers through more than one channel may be profitable. But the demand may decline in course of time if competing products appear in the market. It may not be economical then to use long channels. So, while choosing a channel one should keep in mind the future market implications as well.
Explain the advantages and problems of foreign trade for the economic development of a country.
Importance of Foreign Trade
Production of goods and services requires different resources like men, materials, money, machines and management. If we compare the resources possessed by nations it will be found that no country is self-sufficient and there are differences in the quality and quantity of domestic resources available in different countries. Indeed, it is this difference in the relative abundance or shortage of resources in different countries that has given rise to foreign trade involving exchange of goods and services between countries. Through international trade, it is possible for a country to avail of goods which it cannot produce or cannot produce as economically as other countries. Hence, a country’s well-being is determined to a great extent by the nature and extent of its foreign trade. Let us discuss the importance of foreign trade to people in different countries.
1. Specialisation and eminency of production: Foreign trade leads to specialisation in productive activities undertaken by different countries. Depending on available natural resources, and development of science and technology, every country can produce only those goods and services for which it has the greatest relative advantage and efficiency. No country has facility and resources within its own boundaries for economical production of all its requirements: Some countries are more suitably placed to produce certain goods/services economically and sufficiently than other countries. Therefore, they can specialise in the production of such goods and get the goods they need in exchange for those goods, For example, India has comparatively greater advantages for the production of agro based products such as coffee, tea, sugar, textiles, etc. Similarly some developed countries such as USA, Japan, Britain, etc. have greater advantages for the production of industrial machinery, automobiles etc. Some gulf countries such as Iran, Libya, Iraq, Saudi Arabia, etc. produce crude oil, petroleum, etc, in abundance.
2. Utilisation of resources: Every country possesses some natural resources. The economic development of a country heavily depends upon exploitation of these resources. For example, India has adequate off-shore oil resources. But, it requires exploitation through sophisticated machines, technology, etc. which we do not have.
Machinery and technology can be imported from the developed countries like USSR,
USA, Japan, etc. This leads to best possible use of natural resources.
3. Facilitates economic development: Rapid economic development and growth of national income can be facilitated on the basis of exports and imports. Indeed, it is on the basis of imports of raw materials and exports of manufactured goods that countries like U.K., Japan etc, have achieved a high rate of economic growth.
4. Equalisation of prices: International trade equalises prices of goods throughout the world. Whenever the prices of commodities tend to rise in a country, it can increase the level of its imports to check the rise in prices. Similarly, whenever prices of products decline, the trend may be counteracted by exporting the same.
5. Employment ppportunities: Foreign trade facilitates the growth of agricultural as well as industrial activities which in turn generates more employment in the country.
6. Harmonious relationship between countries: Because of foreign trade every country may have access to goods that it does not produce at home. Similarly, a country with a surplus of certain goods can make them available to other countries experiencing shortage of those goods. This promotes harmonious and cordial relationship among various countries.
Problems in Foreign Trade
Because of cultural and other environmental differences between various countries and the distance involved, foreign trade involves certain problems which do not arise in connection with home trade. Let us examine these problems in detail.
1. Suitability of the product for the market: Securing information about the suitability of products in the foreign market is a challenging task for every international marketer.
This involves heavy expenditure and requires special skill and knowledge. Besides, the quality and price of goods must be more attractive as compared with similar products manufactured abroad. This requires intensive market research on the potential sale of goods to be exported.
2. Changes in supply and demand conditions: International markets are often subject to changes in the supply and demand for particular products due to the entry of new competitors, or increased competition of local producers, or because of changes in buyers’ preferences. These changes cannot be easily anticipated by the exporters.
3. Frequent price changes: The price of products in the international market may be affected by different factors. The changes may be due to changes in exchange rates of the currencies of importing and exporting countries, higher import duties, or freight rates. These factors increase the risks of foreign trade a great deal.
4. Credit risk: International trade which is generally on a large scale involves heavy amounts to be paid by the importer. The exporters often sell their products on credit and therefore have to bear the credit risk arising from the buyer’s default, bankruptcy, etc.
5. Changes in exchange rate: An additional risk of foreign trade is the risk of changes in exchange rates. The rate at which the currency of importing countries can be converted into the currency of exporter may cause losses to the exporter or the importer.
6. Rules, regulations and procedures: Every country imposes certain restrictions in the export and import of goods to protect its economic and political interests. Besides, the rules and regulations differ from country to country and are changed from time to time. For example, the provisions of Imports and Exports Control Act, 1947 changes in export import policy and the restrictions on trade often create complications and problems for importers and exporters.
7. Credit worthiness of importer and reliability of exporters: The value of goods involved in external trade is fairly high and the exporter has to grant credit facilities to the importer. Since there is no direct contact between exporter and importer, it is necessary that the exporter must take steps to verify the credit worthiness of the importer and importer should check the reliability of the exporter for supply of goods. This may take a long time and cause delay in the availability of goods.
8. Transportation and cargo risks: International trade takes place either by land, air or water transport, and goods has to be transported over long distances. Water transport occupies a predominant place in transporting goods across the national boundaries because ships can carry large volumes of cargo at low cost. In spite of the developments in transportation, the risks of loss or damage to cargo by fire, storm, collision, leakage, explosion, spoilage, etc. exist.
9. Time gap: The distance involved is usually greater in transporting goods from one country to another country, and hence the transit time is longer. This time gap involves exporter’s capital being locked up over a long period.
10. Political and legal problems: Political risks may arise as a result of changes in governments or capture of cargo by enemies, etc. Commercial laws may be different between the trading countries. Moreover, conducting legal proceedings in a foreign country is complicated and expensive.
Why do prices of securities fluctuate in the stock exchange?
FACTORS AFFECTING PRICES IN A STOCK EXCHANGE
The prices of securities, particularly those of equity shares, sometimes fluctuate very widely and critically. The changes in price take place mainly because of buying and selling activities of speculators. But underlying their speculative dealings, there are one or more other factors responsible for the price fluctuations. Generally speaking, the fluctuations are due to the following factors.
1. Interest rate: If there is a change in the rate of interest charged by banks on loans and overdrafts, there is a change in the speculative activities, and security prices also change as a consequence of it. Thus, if banks allow credit at lower interest rate, it may induce people to borrow money from banks and engage more in speculative activities to make profits. Hence, price of securities may go up as a result of speculative buying. However, if the interest on bank credit goes up, borrowing will be reduced and demand for securities will be relatively lower. Hence prices of securities will tend to go down.
2. Activities of the financial institutions: When financial institutions start buying securities on a large scale, prices tend to move up because it leads to high expectation among the public about the prospects of the company and there is increased demand all around. Similarly, if there is large scale selling of securities by financial institutions, the price tends to go down.
3. Performance of the company: The prospects of a company as regards future profits and dividend payment are often reflected in the rising or falling prices of its shares. This is because the profit earning capacity and expected dividend rates influence the expectations of investors about the rate of return on investment and future rise in prices. If the prospects are good, there is increased demand for shares, and prices move up. On the contrary, if a company’s performance in terms of profit earning and dividend payment slows an unsatisfactory trend, the price of its shares start declining due to reduced demand.
4. Business Cycles: Business conditions are periodically found to be subject to prosperity and depression. Prices of securities continue to rise during prosperity as bull speculators are active and go on purchasing securities. However, when speculators are unable to meet their liabilities due to lack of adequate funds, they are forced to bargain for sale as a result of which prices rapidly decline and cause a state of depression in the market.
5. Changes in Board of Directors: Sometimes, security prices change as a result of changes in the Board of Directors of particular companies. The death or resignation of a well known director may cause doubt or apprehension about the future prospects of the company concerned. In that situation, generally, there would be an adverse effect on the price of shares of that company.
6. Sympathetic fluctuation: The prices of securities traded in more than one stock exchange often change due to changes in another exchange. If the prices of some securities fall in one stock exchange due to some particular reason, it leads to a decline in the prices of the same securities in other exchanges too. This happens due to immediate communication among speculators.
7. Political events: Changes in the composition of government, changes in international relations, conflicts and political upheavals and wars between nations are always found to cause changes in the securities prices. This is because conditions of business and industry are generally affected by political events.
8. Changes in government policy: The changes in government policy with regard to taxation, import-export, price controls, licensing, etc. also influence the prices of securities, For example, if government decides to exempt dividends from income tax, the share prices will go up. If, on the other hand, government decides to raise income tax rates on company profits, the prices may fall. In fact, these days the policy changes by the government have become a major cause for an upswing or a downswing in prices of shares.
9. Miscellaneous factors: Various factors which may not be directly related with stock exchanges also affect prices of securities due to the psychological reaction of speculators. For example, unexpected changes in weather conditions, inadequate or excessive rainfall (which affects agricultural output), may bring about changes in the prices of shares of companies manufacturing fertilisers, edible oils, cotton textiles, etc. Similarly, lockout for a prolonged period may cause prices of shares to decline or illness of a powerful head of government may cause fall in security prices.
What is a joint stock company? Explain how it overcomes the limitation of partnership form of business organisations?
Sole proprietorships and partnerships have the disadvantages of limited resources, unlimited liability, limited managerial skills, etc. The life and stability of these organisations also depend on the life and stability of the proprietors/partners. Hence, they are not considered suitable for large scale business.
For large scale business, you require large investment and specialised managerial skills. The element of risk is also very high. This situation led to the emergence of company form of business organisation. In case of joint stock company, capital is contributed by not one or two persons but by a number of persons called shareholders. Thus, it is possible to raise large amount of capital. A joint stock company is an association of persons registered under Companies Act for carrying on some business. It is called an artificial person as it is created by law, with a distinctive name, a common seal and perpetual succession of members. It can sue and be sued in its own name. The most widely quoted definition of a company (called Corporation in USA) is the one given by Chief Justice Marshal. According to him “a corporation is an artificial being, invisible, intangible and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or an incidental to its very existence.” Lord Justice Lindley has defined it as “associations of many persons, who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.”
The Indian Companies Act (1956) defines joint stock company as “a company limited by shares having a permanent paid up or nominal share capital of fixed amount divided into shares, also of fixed amount, held and transferable as stock and formed on the principles of having in its members only the holders of those shares or stocks and no other persons.”
1. Large capital: Since company form of organisations are allowed to have a large number of shareholders, it is possible to raise capital in large amounts. Whenever new capital is required, it can issue shares and debentures. For this reason, only the company form of organisation is best suited.
2. Limited liability: The liability of shareholders, unless and otherwise stated, is limited to the face value of the shares held by them or guarantee given by them. Their private property is not attachable to recover the dues of the company. Thus, this form of organisation is a great attraction to persons who are not willing to take risk as is inherent in sole proprietorship and partnership.
3. Stability of existence: A company has a separate legal entity with perpetual succession.The corporation is not affected by lunacy or insolvency of a shareholder, director or officer. The continuity of the company is desirable in the interest of not only its members but also the society.
4. Economies of scale: As companies operate on a large scale, they can take advantage of large scale buying, selling, production, etc. As a result of these economies of large scale operations, companies call provides goods to consumers at a cheaper price.
5. Scope for expansion: As there is no limit to the maximum number of shareholders in a public limited company, expansion of business is easy by issuing new shares and debentures. Companies normally keep part of their profits as reserve and use them for expansion.
6. Public confidence: Companies are subject to Government controls and regulations.
Their accounts are audited by a chartered accountant and are to be published. This creates confidence in the public about the functioning of the company.
7. Transferability of shares: The shares of the public limited company can be sold at any time in the stock exchange. Shareholders can sell their shares whenever they want. There is no need to take the consent of other shareholders. Thus, shareholders can convert their shares into cash at any time without much difficulty.
8. Professional management: You know that the management of a company is in the hands of the directors who are elected by shareholders. Normally, experienced persons are elected as directors. You also know that day-to-day activities are managed by salaried managers. These managers are the experts in their respective fields. As companies have large scale operations and profits, attracting good professional managers are easy by paying attractive salaries. Thus, company form of organisation gets the services of professionals on the Board of Directors and in various management
positions.
9. Tax benefits: Companies pay income tax at flat rates. There is no provision for slab
system in the taxation of companies. As a result, companies pay lower taxes on higher incomes compared to other forms of organisations. Companies also get some tax concessions if they are established in backward areas.
10. Risk diffused: As the membership is very large, the business risk is divided among the several members of the company. This is an advantage for small investors.
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