TyroCity: Economics Notes

Meaning of Government Finance

TyroCity.com — Sun, 18 Aug 2013 05:41:42 +0000

Government finance is the deliberate manipulation of revenues and expenditures of the government. It is the financial plan of the government. The government uses the different types of revenues and expenditures as fiscal tools to achieve different objectives. The main objectives are high economic growth, price stability, favorable balance of trade and payment, equitable distribution of income and wealth, proper allocation of resources, balanced and stable economic growth and so on. The government should avoid inflation and deflation, recession or depression. Improper use of resources, price fluctuation, high inequality and so on. For all these things revenues and expenditures are increased and decreased as per the situation of the country.

Government finance has two sides, they are

Government revenues
Government expenditures

In government revenues, the money received by the government in the form of royalties, taxes, escheats, penalties, fines, cess etc are included. In the government expenditure we include development expenditure, administrative expenditures, diplomatic expenditure, difference expenditure, payments of public debts and interest and miscellaneous expenditure. They are used as fiscal tools to solve different economic problems.

Economics XI Questions

TyroCity.com — Sun, 18 Aug 2013 05:41:42 +0000

Meaning

Meaning of Government Finance

Difference between Money and Capital Market

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Basis	Money Market	Capital Market
Maturity of instruments	Less than one year	More than one year to 25 years
Risks	Less	High
Instruments	Treasury bills, bills of exchange, promissory notes	Bonds, debentures stock, etc
Finance	Short	Long
Relation with central bank	Direct	Indirect

Problems of tourism industry

Economics 11 Notes — Sun, 08 Apr 2012 05:41:42 +0000

1. Lack of transportation and communication:

Nepal is economically poor country. Nepal has not been able to provide transportation and communication facilities in all sectors. So, tourists who visit Nepal cannot get a chance to observe all parts of Nepal.

2. Lack of trained tourism manpower:

Tourism industry needs trained and untrained manpower. Trained manpower is scarce in Nepal. Such as: Geographical experts, Trained and Export guides etc.

3. Lack of good quality hotels:

According to the fiscal year 2009/10, there were 103-star hotels with 9613 beds. The hotels are not well managed and unhygienic. So, tourists do not prefer to visit Nepal due to unhygienic, unmatched and unmanaged hotels.

Utility

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Utility refers to the benefit derived from the consumption of commodities. It is the subjective approach because it is different on the basis of time, place and person to person. This is because due to consumption of same amount of commodity one may get high satisfaction and other may get less satisfaction.

Relationship between MC and AC

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Relationship between MC and AC:

MC always cuts the minimum point of production.
Before point A, AC is greater than MC.
At point A, AC is equal to MC.
After point A, MC is greater than AC.
The shape of AC and MC is similar to each other.

Determinants of demand

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

1. Price : Demand is inversely related to price. If price increases, demand decreases and vice versa. But in case of Giffen goods (goods that are inferior and basic like low quality rice and bread for Nepalese), demand is directly related to price.

2. Price of complementary goods : Demand is inversely related to price of complementary goods. The goods which are consumed together to fulfill a single need like brick and cement, pen and ink are called complementary goods. If price of complementary goods rises demand for the commodity decreases and vice versa.

3. Price of substitutes : Demand is directly related to price of substitutes. The goods among which we choose one to fulfill our need are called substitutes. They are alternative of and competitive to each other like Coke and Pepsi. If prices of substitutes rise, demand increases and vice versa.

4. Income : Demand for normal goods is directly related to income of consumer. If income increases, demand too increases and vice versa. But demand for inferior goods is inversely related to income.

5. Population : Demand is directly related to population and number of consumer. If population increases demand too increases and vice versa.

6. Taste and preferences : If taste and preference of consumer change in favor of goods, demand increases. If it changes against the goods, demand decreases.

7. Tax rates : If government imposes more taxes, the demand decreases and vice versa.

8. Advertisement : Demand is directly related to expenditure and advertisement expenditure. More advertisement for a good brings more demand.

9. Interest rates : Demand is inversely related to interest rate. If interest rate raises people save more, deposit in banks or lend to earn interest. Due to this reason demand decreases and vice versa.

10. Nature of commodity : The demand depends upon the nature of commodities too. The demand for basic goods is relatively inelastic. But demand for luxurious goods is usually elastic.

World trade organization (WTO)

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

The World Trade Organization (WTO) is an international, multilateral organization which deals with the global rules of trade between nations. It is the policeman of global trade. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible. Headquarter of WTO is located in Geneva, Switzerland. It was established in 1 January 1995. The first concept initiation was done by Uruguay Round negotiations (1986-94). Till the data of 2 March 2013 there are 159 countries as a member in WTO. It has estimated budget of 197 million Swiss francs for 2013. There are 640 secretarial staff. The director general of WTO is Pascal Lamy (Director-General)

Objectives:

Administering WTO trade agreement
Raising standard of living and incomes
Promoting full employment,
Expanding production and trade
Optimum utilization of world’s resources
Forum for trade negotiations
Handling trade disputes
Monitoring national trade policies
Technical assistance and training for developing countries
Cooperation with other international organizations

Principles:

Trading system should be discrimination free in the sense that a country cannot favor another country or discriminate against foreign product or services.
A trading system should be more free and there should be little trade barriers.
A trading system should be predictable where foreign companies and governments can be sure that trade barriers would not be raised and markets will main open.
A trading system should be more competitive.
A trading system should be more accommodating for less developed counties giving them more time to adjust, greater flexibility and more privileges

Deflation

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

It is defined as persistent fall in price level. During deflation the goods and services become less and less expensive in average, as value of money increases with decrease in price level. The deflation can be defined as the persistent rise in value of money too. Deflation is long term fall in price level. The temporal fall in price level is not said to be deflation. Fall in price level should be for more years to be deflation. The deflation is caused by less aggregate demand than aggregate supply. During deflation, the goods and services demanded in the country are less than goods and services supplied. If aggregate demand is less than aggregate supply due to any reason, the price level falls the process continuously takes place till the aggregate demand remains less than aggregate supply.

Causes of deflation

decrease in income level
decrease in population
decrease in remittance
decrease in propensity to consume
decrease in government expenditure
decrease in export and decrease in import
Demonstration effect and modernization
Rise of internal debt and foreign borrowing
decrease in prices of raw materials, fuels and energies
decrease in wage rate, interest rate and rate of rent
decrease in profit margin desired by firm
introduction of technology and increase in resources available

Limitation of diminishing marginal utility

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

Limitation of diminishing marginal utility:

1. Income, taste and habit: When income, taste and habit is changed then at that time consumer can get more satisfaction from additional unit.

2. Time period: If there is very long time period interval between the consumption of different units of commodity at that time consumer may get more satisfaction from additional units.

3. Rare collection: In the case of rare collection this law is not applicable because if a person has hobby to collect rare items like old stamp, coin, painting, etc then he/she gets more satisfaction from the collection of more commodity.

4. Durable/ Individual goods: In the case of these goods this law is not applicable because consumer purchase this goo once at a time per personal use, as a result we can’t compare the marginal utility of different items.

5. Abnormal man: In the case of abnormal man this law is not applicable for example druggist, drunker, gambler, mad man, etc get more satisfaction from the consumption of last unit.

6. M.U of money remains constant: When one have high money its value is low but when there is less money its value is high but economics says that marginal utility of money remains constant so this law is not applicable.

7. Utility can’t be measured in numbers: Utility is to be measured in rank i.e. high, low, satisfaction but can’t be expressed in numbers.

Income elasticity of demand equal to one

Economics 12 Notes — Sun, 08 Apr 2012 05:41:42 +0000

If the percentage change in quantity demand is equal to percentage change in income is known as income elasticity of demand equal to one. We can explain on the basis of the given figure:

On the above figure, initial income is OI and quantity demand is OQ. When income is increased from I to I1 by 10% then the quantity demand is also increased from Q to Q1 by 10%.

Nature of Economics

Economics 11 Notes — Sun, 08 Apr 2012 05:41:42 +0000

1. NATURE OF ECONOMICS
DEFINITION OF ECONOMICS
The term economics is derived from the word “oeconomicus” by Xenophon in 431 B.C. It is derived from two words economy and science. Economy means proper utilization of resources. It means economics is the science of economy or science of proper utilization of resources. It is comprised of theories, laws, principle related to utilization of resources so as to solve the economic problems, satisfy the human wants or need and so on. However, the economics is defined in different ways by different economists.
There are mainly three definitions of economics:-

a. classical or wealth definition (Adam Smith)-1776 A.D

b. neo-classical or welfare definition (Alfred Marshall )-1890 A.D

c. modern or scarcity and choice definition (Lionel Robbins)-1932 A.D

a. classical or wealth definition (Adam Smith)-1776 A.D The famous classical economist Adam smith for the firs time defined economics as “science of wealth”. The definition was given in the book “an enquiry to the nature and the causes of wealth of nations” published in 1776 A.D. the book is popularly known as “wealth of nations”. According to smith, labor is the main source of income or wealth. More wealth is accumulated only if more labor is used. Economics explains the human behavior and activities they do for wealth. This definition was based upon the assumptions of full employment, perfect competition, no governmental interventions, money just as a medium of exchange and so on.
This definition has following main proposition:-

i. economics is science of wealth

ii. labor is the only source of income

iii. there is perfect competition in product as well as labor market

iv. the government should not interfere the activities of people and business organizations

v. this definition is influenced by physiocracy and mercantilism.

Criticism:-
Wealth definition has over emphasized wealth. Economics is science of human activities rather than only wealth. Adam smith considers only material things or wealth as subject matter of economics but human beings require some immaterial things like self esteem or dignity, social prestige, national identity and so on too. The immaterial things are called essential things for human satisfaction. Wealth definition is based upon the theory of subsistence wage which is known as iron law of wage. The law was against the workers and in favor of employers. Adam smith doesn’t explain about scarcity of resource and choice of best alternative for the use of resources. The problem of scarcity and choice is burning issue in the modern economics but he fails to explain about the problems of scarcity and choice. The wealth definition is based upon assumptions of full employment and perfect competition but none of these two is in existence. This definition is based upon the assumption of no intervention of government in economic activities of people and business organization but we find in every country more or less governmental intervention.

b. neo-classical or welfare definition (Alfred Marshall )-1890 A.D
In 1890, Alfred Marshall, a famous neo-classical economist and a great contributor to micro economics defined economics as the science of material welfare. Here, the material welfare means the quantities of physical goods consumed by people. if the people are consuming large quantities of goods, they are said to have high level of welfare into two types

1.material welfare

2.immaterial welfare

According to him, only the material welfare is the subject matter of economics. He assumes every person is rational and s/he uses the resources in his/her possession very properly so as to maximize their own welfare. Economics is therefore the science that studies the rational behavior revealed by the people. Major propositions of Marshall’s welfare definition are:-

Economics is science of material welfare
Economics is social science i.e. science of mankind
Economics is the study of rational behavior of people revealed for maximization of material welfare.

Criticisms:-
This definition of economics a science of material welfare was assumed correct until the arrival of Lionel Robbins. He criticized the definition under the following aspects:-

Classificatory activities of Marshall into material non material welfare, economics and non economic goods is only classificatory not analytical because single human cannot be material as well as non material according to the nature and purpose of work.
Non material activities like feeling of social service, human desire also satisfy human needs. This idea has not been prioritized
Non welfare consumption like harmful drugs, tobacco, and alcohol don’t promote social welfare but still are in the study of economics
Economics should study about total human beings but wealth definition doesn’t study about isolated people like saints, nuns, monks etc.

c. modern or scarcity and choice definition (Lionel Robbins)-1932 A.D
According to Lionel Robbins, economics is the science of scarcity of the resources and the choice of best alternative for their utilization. The resources are limited in supply. Each resource is usable for different purposes. The wants or need of people are unlimited. The wants differ in importance. They differ from place to place, from time to time and from person to person. Some wants are more important whereas some are not. All wants cannot be fulfilled because of insufficiency of resources. Therefore, we have to go on utilizing the resources in such a way, so that, our more wants can be fulfilled leaving no one in most important wants unfulfilled. For it, we must select best ways for the utilization of the resources. We should have the complete information of resources available, needs of the country and their importance and ways for the utilization of resources. This definition is given in 1930 A.D after WWI. During third decade of the twentieth century, the European countries were badly in need of large quantities of resources for rehabilitation, construction of infrastructures, renovation etc. they were destructed in war. This definition is both normative and positive in nature. The major propositions are:-

there is unlimited human needs or wants
there is scarce means of resources
there are alternative use of resources
there is need of choice

Criticisms:

The definition is criticized in the following ways:-

economic problems arises not only due to scarcity but due to under, miss or over utilization of resources
economic problems arises due to inequality too
there is political consideration
needs and resources may vary

Superiority of Robbins definition over Marshall’s definition:-

the definition is scientific
the definition is universally accepted
the definition has wide scope
the definition has science of choice

Microeconomics:-
The term microeconomics is derived from the word micro economy and science. The term micro is also derived from the Greek word micros which means small or tiny. Microeconomics is defined as the science of small or tiny part of the economy. It provides us the detail information of microeconomics units. The units are single consumer or consumer of a firm or an industry. A single firm or firms belonging to an industry is called worm’s eye view of an economy. In microeconomics we study about the relationships between microeconomic variables like utility, cost of purchasing, demand, supply, price, cost of production, and revenue from sale, profit or loss and so on, it is the study of behavior of consumers and firms.

Scope of microeconomics:-
The scope of microeconomics means its subject matter. it means area of application too. The scopes are:-

study of consumers behavior

           -cardinal utility theory

          – ordinal theory

          -revealed preference theory

          -cardinal behavior theory

Study of production and cost function
Mathematically.

               Q=output (quantity)

               C=cost of production

               K=capital

Q=f (K and other inputs)

C=f (Q)

      Therefore, C ∞ input

Study of price and output determination Profit=revenue-cost

Markets = monopoly, duopoly, oligopoly, monopolistic competition and perfect competition

Study of microeconomic distribution
Factors of production-land, labor, capital and organization

Factor wages-rent, wage, interest, profit

Macroeconomics
Macroeconomics is derived from the word macro, economy and science. The term “macro” is also derived from Greek word “macros” which means large or big. Therefore, macroeconomics can be defined as the science of large segment of the economy or economy as a whole. It provides bird’s eye view of the economy. It gives general features of the economy. It is study of features of economic problems, causes and remedies of the problems in different sectors. The sectors are divided into household sectors, government sector, foreign trade sector, business sector. In macroeconomics we study about the relationship between macro economic variables, the variables are:

a) Aggregate consumption

b) Aggregate income

c) Aggregate saving

d) Aggregate investment

e) Aggregate demand

f) Aggregate supply

g) Price level

In macroeconomics we study about the causes and remedies of trade and payment, price instability, Inequality etc

Scope or subject matter of macroeconomics:
Scope means the subject matter. It means the area of application…

1. Study of wage level and employment level

The macroeconomics deals with wage level and employment level. The level of employment depends upon demand for labor and supply of labor. Both of these factors depend upon wage level. There are different theories of employment like classical theory, Keynesian theory, Kaltorian theory and other modern theory

2. The study of price level and output level

Macroeconomics is concerned with determination of equilibrium price level and output level. The price level means average of the prices of goods and services bought and sold in the country in a year. The level of output depends upon aggregate demand and price level. There are different theories of determination of price level and output level. Among them, Keynesian theory of effective demand is very popular. The theories are the subject matter of macroeconomics.

3. The study of trade cycle
Macroeconomics is concerned with trade cycle too. It explains how the economics ups and downsoccur, what are their causes, how the country can overcome fluctuation. There are different theories of trade cycle. Some of them are Schumpeter theory, Hessian theory, Calder’s theory etc.

4) Study of macroeconomic distribution
The macroeconomics is the study of distribution of income, wealth or resources in the country among the people. It is the study of different theories, laws and principles of distribution of income in the form of wage, interest, profit and rent. It gives us knowledge of effects of high inequality in the distribution of income and wealth. It gives us remedies of unequal distribution and the economic problems due to the inequality.

Normative or positive economics
Economics is both positive and normative science. It is the study of facts as well as ideal theories and principles too. It can be explained as following:
a) Positive economics

Economics is positive science. It is the study of facts or things in reality or existence. In economics the large number of economic problems or questions like what are produced, how goods are priced and distributed, how much profit is earned by firms, what different type of resources are available, hoe the resources are utilized, who are performing different economic activities, why the economic problems are occurring, why is the country suffering from unemployment, price instability, economic instability, import dependency and so on are put and answered. There are different theories laws and principles based upon facts we study in economics. That’s why economics is called positive science

b) Normative economics

Economics is normative science. It is the study of things ought to be. In economics, we study different ideal theories and principles. They are concerned with different economic problems. They give us ideas for overcoming of different economic problems. They are helpful to formulate proper policies and plans. They are helpful to solve the problems of unemployment, import dependency, improper allocation of resources, price and economic instability, unequal distribution of income and wealth and so on. Economics helps us to decide how much goods should be produced, hoe much they should be priced, hoe the government should control money supply, interest rate, public debt, government expenditure etc , how the consumer should allocate the money to get maximum satisfaction from the expenditure, how the firms should combine the inputs to earn maximum profit and so on. This all have ethical importance. That’s why economics is call normative science.

Economics is a science or an art

Economics is both art and science. It is called a science because it is the scientific study of relationships between economic variables, behavior of consumers and firms, nature of market and economy, effect of change in one or more economic variables on the others and so on. The different theories, laws and principles are studied in economics. All of them are generalized and simplified on the basis of facts so as to make them easily understandable. Therefore, economics is said to be science.

Economics is an art. The different theories, laws are explained with the help of graphs, figures, tables, charts, equations etc simplifying and generalizing them. Simplification is to make them easily understandable and generalization is to make them applicable to all economies. In order to explain theories, laws and relationships between economic variables we make some assumptions. The assumptions define the conditions for the application of theories, laws and the relationships. That’s why economics is an art.

Importance of microeconomics:

Important to the consumers

Microeconomics provides the ways for proper allocation of money on different goods and services so that they can get maximum utility. There are different theories of consumers behavior, the theories explain how the consumers should spend the limited money they have to maximize their satisfaction

Important to the firms or businessmen

The firms or businessmen use the microeconomic theories of consumer behavior, production, cost, market, revenue and so on to make proper economic decisions. The microeconomics helps them to know the purchasing power of ability to pay, proper combination of inputs to maximize cost or maximize profit, effects of change in tax rates, subsidies and so on

Important to the government

Government can determine taxes, subsidies, wage level, allowances etc on the basis of effects of change in these factors on the demand for goods and services. Some goods are levied while some are subsidized. The salaries and allowances are adjusted on the basis of relationship between these variables and demand. Interest rate, exchange rate and money supply too are changed with the help of microeconomic theories.

Important for the study of other economic science.

Microeconomics helps us to study of other economic sciences like macro economics, public finance, monetary economics, labor economics, and international trade economics and so on. The theories and laws of these economic sciences are based upon micro economics theories and laws.

Importance of macroeconomics

To know the relationship between macro economics variables:

The macroeconomics helps us in the study of relationship between large numbers of macro economics variables. The variables are Aggregate consumption, Aggregate income, aggregate saving, Aggregate investment, Aggregate demand, Aggregate supply, Price level.

To know the functioning of economy

Macroeconomics helps us to know how the economy functions, how it is regulated, For it macro economics provides us the knowledge of product market, labor market, capital market, land market, international trade market etc. it in forms us the country can achieve equilibrium only if all of the markets are in equilibrium.

To correct unfavorable balance of trade and payment

Macroeconomics provides us different theories of international trade. It provides us different remedies of import dependency and greater outflow of money from the country. The government or country may adjust custom duty, exchange rate, transaction of gold etc to promote export and to reduce import.

To achieve high economic growth and employment level

With the help of theories and models of economic growth and employment we can induce investment increase in income and employment opportunities

Thus, these are the importance of micro and macro economics.