PRODUCTION
Production is an economic activity by which the raw-materials are converted into finished
goods to satisfy the requirements of the consumers.
Production refers to the process of converting raw materials into finished goods or services
that can be sold to consumers.
STAGES OF PRODUCTION
§ Primary production
§ Secondary production
§ Tertiary production
Primary stage
This is the first stage of production which includes the extraction of basic raw materials from
the nature. Examples include agriculture, mining, and fishing.
Types of industries
§ Genetic industry
Genetic industry is related to the reproducing and multiplying of certain species of animals
and plants. Eg. Nurseries, Cattle breeding, Agriculture, Poultry farms, Fishing, etc
§ Extractive industry
The extractive industry is engaged to the extraction of raw materials from the soil, air, water
or from the beneath the surface of the earth. Eg.Mining, Collection of minerals, quarrying,
etc.
Secondary stage
This is the second stage of production where the raw materials from primary stage are
transformed into semi-finished or finished products.
Types of industries
§ Manufacturing industry
Manufacturing industry is engaged in the conversion of raw materials and semi-finished
materials into finished products. Eg. Cement industry, sugar industry, iron and steel
industry, Cotton industry, etc.
§ Construction industry
Construction industry is engaged in the creation of bridges, roads, buildings, canals,
airports, dams etc for the development of the economy. Immovable things are produced
under this industry
Tertiary stage
This is the third stage of production which involves providing services rather than goods.
Services that facilitate the distribution of finished goods to the consumers.
This stage includes
§ Commercial services
The commercial services are services that support trade and business activities, helping the
movement, distribution, or exchange of goods and services. include transportation,
communication, warehousing, advertising, retailing, banking, insurance etc.
§ Direct services
The direct services refer to services that are provided directly to the end consumer rather
than to businesses. These services are called "direct" because they don’t involve
transforming raw materials or producing good, they instead fulfill immediate personal
needs of consumers.
Examples of Direct Services
§ Healthcare services : Doctors, nurses, and hospitals provide direct care to patients.
§ Education services : Teachers, tutors, and schools offer learning directly to students.
§ Transportation services: Taxi drivers, bus operators, and airlines move people
§ Hospitality services: Hotels, restaurants, and catering services serve people directly.
§ Personal care services: Barbers, hairdressers, spa therapists work directly with clients.
§ Entertainment services: Musicians, actors, and movie theatres provide entertainment
§ Banking and financial services: Banks and mobile money agents offer direct financial
transactions to individuals.
Factors of production
The factors of production are the essential resources used to produce goods and services in
an economy.
These factors of production can be classified
§ Land: Land is a broad term that includes all the natural resources that can be found on
land, such as oil, gold, wood, water, and vegetation. All those free gifts of nature
§ Labor: Labor as a factor of production refers to the effort that individuals exert when
they produce a good or service. All human resources, mental and physical, both inherited
and acquired.
§ Capital: All those man-made aids to further production, such as tools, machinery, and
factories, which are used up in the process of making other goods and services rather
than being consumed for their own sake.
§ Entrepreneurship: The ability to organize the other three factors, take risks, and
innovate.
COMMERCE
Commerce is a branch of production that involves the activities related to the buying, selling,
and exchange of goods and services with the aim of earning profits..
Branches of commerce
1. Trade
2. Aids to Trade
1. Trade
Trade is a branch of commerce that involves the buying and selling of goods for the aim of
earning profit.
Classification of trade
§ Home trade
§ Foreign trade
Home trade
The trade which is carried on within the boundaries of a particular country is called home trade,
where the buyer and the seller belong the same country.
Categories/Classifications of home trade
Þ Wholesale trade
Wholesale trade refers to the buying of goods in large quantities directly from the manufactures
and selling them to the retailers.
Þ Retail trade.
Retail trade refers to the buying of goods from wholesalers in large quantities and selling them
to consumers in units with the view to make a profit.
Foreign trade
It is the trade between two countries
Categories/Classifications of foreign trade
Þ Import trade
Refers to the purchase of goods and services by one country from another
Þ Export trade
Refers to the sale of goods and services by one country to another country
2. Aids to trade
These activities or services that help/facilitate the distribution of goods.
The services include
§ Transport services: Moving goods from manufacturers to markets or retailers
§ Warehousing: Storing goods before they are sold or distributed
§ Banking and finance: Providing capital and financial transactions for businesses
§ Insurance: Protecting businesses from risks
§ Advertising and marketing: Promoting goods and services to increase sales
§ Communication services: Facilitating information exchange
§ Logistics and distribution: Coordinating supply chains and deliveries
Advantages Of Retail Trade
§ Convenience and Accessibility
Retail outlets are usually located in neighborhoods, towns, or marketplaces, making it easy
for consumers to access goods without traveling far.
§ Provide Variety of Goods
Retailers offer different brands, models, sizes, colors, and price ranges, giving consumers
options to choose from according to their preferences and budgets.
§ Provide Credit Facilities
Some retailers allow trusted customers to buy goods on credit and pay later. This helps
people manage their budgets, especially in emergencies.
§ Provide After-Sales Support
Some retailers offer warranties, product exchanges, or repairs, especially for electronics
and appliances.
§ Link Producers and Consumers
Retailers act as a bridge between producers/wholesalers and the final consumers, helping
products reach people in both urban and rural areas.
§ Promotion and Display of Goods
Retailers help promote products by using attractive displays, advertisements, discounts, or
demonstrations, which increases sales.
§ Storage and Inventory Handling
Retailers hold inventory, which reduces the burden on manufacturers and wholesalers to
store goods.
§ Collect Market Feedback and Consumer Preferences
Retailers are in direct contact with consumers, so they can gather opinions, complaints, and
suggestions and pass this information to producers.
§ Provide Employment Opportunities
Retail trade provides jobs at various levels: shopkeepers, cashiers, salespeople, stock
handlers, delivery workers, etc.
§ Encouragement of Entrepreneurship
Retail trade allows individuals to start small businesses with minimal capital, boosting self-
employment.
§ Stimulation of Local Industry
By stocking locally made goods, retailers support local producers, artisans, and
manufacturers.
§ Contribution to Government Revenue
Retailers contribute to national income through taxes like VAT (Value Added Tax),
business licenses, and other fees.
§ Improved Living Standards
Easy access to essential and luxury goods through retail trade improves the overall quality
of life for people.
§ Low Initial Investment
Many retail businesses can start small and grow gradually.
Advantages Of Wholesale Trade
§ Bulk Purchasing
Wholesalers buy goods in large quantities, allowing manufacturers to sell large volumes
quickly and reduce unsold stock.
§ Reduced Marketing Costs for manufacturers
Manufacturers do not need to spend heavily on advertising or finding individual retailers
because wholesalers handle distribution.
§ Reduce risks associated with storage to manufacture
Wholesalers take on the risks of storage, damage, or loss once they purchase goods from
the manufacturer.
§ Market Reach Expansion/ Distribution Made Easier
Wholesalers often have networks of retailers across different regions, helping
manufacturers penetrate markets that would be difficult to access directly.
§ Quick Access to a Variety of Goods
Wholesalers stock products from multiple manufacturers in one place.
§ Convenient Supply Source
Wholesalers serve as a one-stop shop for many different products, making it easier for
retailers to stock their shops.
§ Credit Facilities
Wholesalers often offer credit to trusted retailers, allowing them to sell goods and pay later.
§ Advice and Market Insight
Wholesalers provide advice on fast-moving goods, pricing trends, and customer
preferences, helping retailers make better buying decisions.
§ Employment Opportunities
The wholesale sector creates jobs in transportation, warehousing, sales, logistics, and more.
§ Price Stabilization
By holding stocks and releasing goods gradually, wholesalers help prevent sudden
shortages or gluts, keeping prices stable.
§ Supports Mass Production
By buying in bulk, wholesalers encourage producers to manufacture in large volumes,
reducing production costs per unit.
§ Boosts Trade and Economic Growth
Wholesale trade increases the movement of goods across regions and borders, contributing
to overall economic activity.
Advantages/Benefits of Foreign/International Trade
§ Wider Market for Goods
Foreign trade allows countries to sell their goods to international markets, increasing sales
and production.
§ Earn foreign currency
It enables the Exporting Countries to earn Foreign Currency. Example,Tanzanian coffee
can be sold in Europe or Asia, earning foreign exchange.
§ Variety of goods
It enables a country to obtain a variety of goods and services. Countries can import
products that they cannot produce themselves due to climate, technology, or raw material
limitations.
§ Encourages Specialization
Countries focus on producing goods where they have a natural advantage (like climate,
labor, or resources), increasing efficiency and productivity.
§ Boosts Economic Growth
Increased trade leads to higher production, more jobs, better incomes, and economic
development.
§ Promotes Healthy Competition
Local companies compete with international products, which can improve quality and
reduce prices.
§ Access to Advanced Technology
Countries can import machinery, tools, and modern methods of production, helping local
industries develop.
§ Creates Employment
Expanding production for export increases demand for labor in agriculture,
manufacturing, and transport.
§ Strengthens International Relations
Trade builds economic partnerships that can lead to political and diplomatic cooperation
between countries.
§ It promotes international exposure
§ Tax Revenue: International Trade provides Revenue to the Government in form of Import
Duties and Export Duties.
§ Improvement in Infrastructure.
Disadvantages of Foreign/International Trade
§ Dependence on Other Countries
A country may rely heavily on imports for essential goods, making it vulnerable to foreign
supply disruptions or price changes.
§ Harm to Local Industries
Cheaper or better foreign goods can destroy infant or small-scale local industries that cannot
compete.
§ Trade Imbalance
When a country imports more than it exports, it leads to a trade deficit, which can weaken
the economy.
§ Cultural Erosion
Increased importation of foreign products and services can lead to loss of local culture and
traditional values.
§ It encourages dumping
Some rich countries use other poor countries as dumping places. offload surplus goods with
poor quality at very low prices
§ Risk of Foreign Exchange Fluctuations
Changes in exchange rates can affect the cost of imports or the income from exports.
§ Exploitation by Developed Countries
Richer nations may take advantage of poor countries by buying raw materials cheaply and
selling expensive finished products.
§ Employment Opportunities in the home country are limited.
§ Imports of harmful commodities, which may worsen the health conditions of individuals.
§ Imported Inflation.
When the prices of imported goods and services rise, causing a general increase in
the domestic price level
§ It may lead to Overspecialization
Too much specialization often leads to problems when there is fluctuation in price and
change in demand of the product in the world market countries will suffer economic
hardship, especially when some countries relies heavily on export of one commodity only
MEASURES OF INTERNATIONAL TRADE
Balance of Payments
The balance of payments (BOP) is a comprehensive record of all financial transactions
between a country and the rest of the world OR Is the record of all international financial
transactions made by the residents of a country.
Balance of payment includes the following account
• Current Account: Includes trade balance, services, income, and current transfers.
• Capital Account: Includes capital movements
• Financial Account: Includes investments
Trade Balance/ Balance of trade
Balance of trade (BOT) is the difference between the value of a country's exports and imports
for a given period .The balance of trade is a part of the balance of payments and is represented
in the current account.
Balance of Trade =Exports−Imports
When a country exports more than it imports we have a trade surplus
When a country imports more than it exports we have a trade deficit
When a country’s import are equal to its exports we have a balanced trade
Example 1
Tanzania’s exports in 2024 are worth 100 million TZS, and its imports are worth 80 million
TZS. Calculate the Balance of trade
Solution:
Balance of trade = Exports - Imports
= 100 million - 80 million
= 20 million
Answer:
The balance of trade is 20 million, which means that the country has a trade surplus of 20
million. Tanzania’s exports more than its imports
Example 2
The United States imported $239 billion in goods and services in the year 2020 but exported
only $171.9 billion in goods and services to other countries. Calculate the balance of trade
Solution:
Balance of trade = Exports - Imports
= 171.9 million - 239 million
= - 67 million
Answer:
The United States had a trade deficit of $67.1 billion because the country’s imports more than
it exports
Example 3
A country’s exports in a year amounted to $150 billion, while its imports for the same year
were $130 billion. Calculate the Balance of Trade.
Solution:
Balance of Trade=Exports−Imports
Balance of Trade=150 billion−130 billion=20
Answer:
The Balance of Trade is a trade surplus of $20 billion. This is results of country’s exports
greater that the country’s imports
Example 4
A country’s exports in a given year amounted to $200 billion, while its imports were $200
billion. Calculate the Balance of Trade.
Solution:
Balance of Trade=Exports−Imports.
Balance of Trade=200billion−200billion=0billion
Answer:
The Balance of Trade is balanced. This is results of country’s exports are equal to the country’s
imports
Terms of Trade
Terms of trade (TOT) represent the ratio between a country's export prices and its import
prices. OR The terms of trade measure the relative prices of a country’s exports compared to
its imports.
Terms of trade = Price Index of Export × 100
Price Index of Import
If the export prices increase more than the import prices that is TOT is greater than 100, a
country has a Favourable terms of trade
If the import prices increase more than the export prices that is TOT is less than 100 a country
has a unfavourable terms of trade
If the import prices is equal to the export prices that is TOT is 100 a country has a Balanced
terms of trade
Example 1
Suppose in 2024 the export price index of Tanzania is 140 and the import price index is 160.
Calculate terms of trade
Solution:
Terms of trade = Price Index of Export × 100
Price Index of Import
Terms of trade = 140 ×100 = 87.5
160
Terms of trade in 2024 is 87.5 This indicates that the country’s export prices are less than its
import prices leading to a unfavourable terms of trade
Example 2
In a given year, the price index for a country’s exports is 120, while the price index for its
imports is 100. Calculate the Terms of Trade (TOT).
Solution:
Terms of trade = Price Index of Export × 100
Price Index of Import
Terms of trade = 120 ×100 = 120
100
Terms of trade in 2024 is 120 This indicates that the country’s export prices are higher than its
import prices leading to a Favourable terms of trade
Example 3
In a given year, the price index for a country’s exports is 110, while the price index for its
imports is 110. Calculate the Terms of Trade (TOT).
Solution:
Terms of trade = Price Index of Export × 100
Price Index of Import
Terms of trade = 110 ×100 = 120
110
Terms of trade in 2024 is 100.This indicates that the country’s export prices are higher than its
import prices leading to a Favourable terms of trade
Factors affecting / Determinants of the terms of trade
§ Changes in Export and Import Prices
If export prices increase (while import prices stay the same), ToT improves.If import
prices increase (while export prices remain constant), ToT worsens.
§ Global Demand and Supply
High global demand for a country's exports can raise export prices → improving ToT.
Oversupply of exports can lower their prices → worsening ToT.
§ Level of Industrialization
Industrialized countries often export high-value goods and import raw materials. Less
industrialized countries may export raw materials (with unstable prices), making ToT more
volatile.
§ Exchange Rates
If a country’s currency appreciates, imports become cheaper → improving ToT. If the
currency depreciates, imports become expensive → worsening ToT.
§ Inflation Rates
A higher domestic inflation rate can raise export prices (if demand stays), improving ToT
temporarily.But it can also reduce competitiveness, leading to lower export volumes.
§ Trade Policies & Tariffs
Imposing tariffs or subsidies can affect export/import prices.Trade agreements can also
influence the terms of trade positively or negatively.
§ Nature of Goods Traded
Primary goods (like minerals or agriculture) often have unstable prices.Manufactured
goods usually have stable prices, which helps maintain better ToT.
§ Technological Advancement
Improved technology can reduce production costs, allowing competitive pricing of exports
and potentially improving ToT.
