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

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.

Malthusian theory of population

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

According to Malthus, population increases at geometric rte whereas means of life increase at arithmetic rate. The geometric growth rate means the progression in the series, 2,4,8,16,32 and so on. It is increase in population at an exponential or increasing rater. The arithmetic growth means the progression like in the series 2,4,6,8,10,12,14 and so on. It means the means of life increases at constant rate. According to Malthus, it is because of operation of law of diminishing return. As population grows faster than means of life, the human beings have to suffer scarcity of means of life. The population becomes too explosively large in comparison to the means of life. Ultimately nature brings natural disaster to control the population. The disasters reduce the population. After disasters, population grows again at geometric rate. It becomes again explosively large and there is deficiency of means of life. After growth of population, the disasters and population growth occur alternatively one after another and recurrently. According to Malthus, population becomes double after 25 years. Human beings can do a little to control the population. He has referred to some measures like

Abstinence from sex
Late marriage
Celibacy

He couldn’t refer family planning and prostitution as the effective measures to control population because these were against the social and religious values in that time. His theory can be explained with the help of table and figure as following:

TIME	POPULATION	MEANS OF LIFE ( IN TONS)
1	2000	2000
2	4000	4000
3	8000	6000
4	16000	8000
5	32000	10000

In the above table population grows in geometric rate from 2000 to 4000, 8000, 16000 and 32000 in 2nd, 3rd, 4th and 5th year respectively. But means of life in increased at arithmetic rate from 2000 tons to 4000, 6000, 8000, 0000 tons respectively. If we represent the population and means of life with respect to time we obtain exponential curve and a straight line upwardly sloped.

In the above figure, the upper curve represents the population. It is exponential in shape. It shows that the population grows geometrically. The lower curve represents means of life. It is liner in shape. It shows that means of life increases arithmetically.

Main propositions of Malthusian theory of population

Population grows in geometric rate like in the series 2,4,8,16,32 and so on. It takes 25 years to double the population. Population growth is a natural phenomenon
Means of life grows in arithmetic rate. The arithmetic growth means the progression like in the series 2,4,6,8,10,12,14 and so on. It means the means of life increases at constant rate. According to Malthus, it is because of operation of law of diminishing return.
There are two types of checks: positive checks: When the population becomes too explosively large in comparison to the means of life, nature brings natural disaster to control the population. The disasters reduce the population. And preventive checks : Abstinence from sex, Late marriage, Celibacy
Positive checks are inevitable.

Criticisms of Malthusian theory

It is pessimistic theory. According to it, natural disasters are inevitable.
Population growth is always not problematic
The population may increase or decrease with time. In many countries it is increased but not in geometric rate. In some countries, population decreases too.
It ignores the change in social, cultural, and political values. It also avoids modern family planning techniques
Technological advancement, exploration of new resources etc can bring increase in return of production too.
The preventive checks are difficult to adopt.

Partnership firm

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

Partnership is a form of business organization which as evolved to overcome the shortcomings of sole proprietor. As the size of business expands, one person is unable to provide the necessary capital and managerial skills. Therefore, two or more than two persons form a partnership to carry on business by pooling their financial resources and managerial skills. Thus, partnership is an extension of sole trading concern.

Characteristics of partnership firm

Unlimited liability
Proprietor is liable for all the debts of the business. In case the assets are insufficient to meet the debts, the personal property of the proprietor can be attached.

Difficulty in transfer of shares
Partners cannot transfer their share without the consent of other partners. There may be conflict when done otherwise.

Higher capital
Many partners invest capitals and there is higher flexibility in capital because new partner can be agreed to be associated and investing can be increased.

Reduced risk
Partners have right to take part in management. They have the duty to bear risk with proportion too.

Association of two or more persons
It must be two or more person to enter into contract. Association of two or more persons can only create partnership. In association of two or more persons, maximum and minimum number of persons is not mentioned.

Agreement
It is set up by agreement between partners. It must be written and legal agreement so that it will reduce dispute.

Merits of partnership firm

Easy to start and dissolve
A partnership firm can be setup easily and quickly. There are not much legal formalities and expenditures are involved in the establishment of a partnership. Similarly, a partnership firm can be closed down very easily and quickly.

Higher capital
Many partners invest capitals and there is higher flexibility in capital because new partner can be agreed to be associated and investing can be increased.

Higher innovation
Many partners use their own ideas and innovation capacity. So there is unlimited managerial ability.

Reduction of work load
Partners mustn’t work more to earn more profit. Higher profit generation is important. So, there is no dull and monotonous work.

In case of monotony, health problem to any partner then other partners can help and reduce absenteeism.

Better decision
There is specialization in decision taking. So there can be less chances of taking wrong decisions.

Harmonization of different ability
There are many partners in this firm and many partners have different skills, knowledge and capacity.

Credit facility
In this liability of partners becomes unlimited. It will help to arrange more capital. And that’s why it has more credit. It improves more financial function.

Close supervision
There is effective management and effective supervision. They look the business themselves.

Flexible
There can be change in management, capital and production. This change can be made by mutual agreement of partners.

Reduced risk
Partners have right to take part in management. They have the duty to bear risk with proportion too.

Demerits of partnership firm

No Business secrets
The partner can keep the secrets to himself but these secrets can be known to competitors or others when there is conflict among the partners.

Uncertain existence
Death of any partner can sometime cause death of entire firm. Dishonesty, conflict and lack of resource also can collapse the firm.

No Personal contact
A partner can’t be in a position to maintain intimate contacts with his customers and employees. He cannot be able enter to the requirements of each and every customer. Then there is no close personal touch which decreases the competitive strength of the business.

Unlimited liability
Proprietor is liable for all the debts of the business. In case the assets are insufficient to meet the debts, the personal property of the proprietor can be attached.

Delay in decisions
The partnership firm is completely not free to take all decisions and to implement the. The partners need to consult or seek others approval. Delay in decisions reduces the efficiency of business.

Danger of conflict
Many persons are the owners of partnership firm. There can be misunderstanding and jealousy among them and these cause problems in operation of business and profit making.

Difficulty in transfer of shares
Partners cannot transfer their share without the consent of other partners. There may be conflict when done otherwise.

Limited resources
There is low investment, may be higher than in sole trading but not sufficient for large scale production resulting in limited areas of operation.

Definition of money

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

Money is defined in different ways. It was firstly introduced just as a medium of exchange. The term money is derived from Latin word “Moneta” referred to goddess Juno. The coins were minted in the temple of Goddess Juno. That’s why the coins were known as money. Traditional definition of money is the medium of exchange and measurement of value. According to it, anything which is used as medium of exchange and measurement of value is called money. It is the functional definition of money. These functions are primary functions of money. However, money is used as not only medium of exchange but also as the medium of store of value, transfer of values, deferred payment, disbursement of credit, redistribution of income and wealth, reallocation of resources etc.

Subsistence theory of wage

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

Subsistence theory of wage

The subsistence theory of wage is also known as “iron law” of wage. It was so named by physiocrats like Lassalle, a German economist and Quesnay, a member of school of economists and developed by David Ricardo. The theory of population, expounded by Malthus was also based on this “iron law”. According to this theory, wages tend to remain at the subsistence level. Wages paid to workers is just sufficient to fulfill their basic needs. Workers don’t have surplus income. If wages rises above this level, this leads to an increase in the population because the increased prosperity of workers will encourage the workers to marry sooner and increase population. This will increase labor supply. The increased competition among workers for employment causes wages to fall again to the subsistence level. Likewise, if the wages fall below the subsistence level, there will be fewer wages and no prosperity. People will have less interest in marriage. Fewer children are born. This will reduce the supply of labor. The competition for employment is reduced and wages tend to rise to the subsistence level. Finally, the wages remain at the subsistence level. The French School of economists, as the physiocrats, looked upon this theory of wages as a natural law. Quesnay had said, “Wages are fixed and reduced to the lowest level by the extreme competition of the workers“.

Criticisms

Ignores the demand side of labor:
This theory is one-sided. It explains the wages from the supply side only. It completely ignored the demand for labor. But if a rise in wages leads to an increase in population, the larger supply of labor may be balanced by an increase in the demand for labor.
No direct relationship between wage level and population:
According to this theory, population increase if the workers are paid above the subsistence level but empirical evidences show the decrease in population or its rater of growth in developed nations even if there is increase in wage level. People spend money on education, family planning, skill development too.
Ignores trade unions:
This theory has ignored trade unions through which the workers make the collective bargaining for their benefits.
Not flexible wage level:
Wages of all workers is at the subsistence level and is not flexible towards up and down. However, wages can differ from occupation to occupation and from place to place.
Exploitative:
There is tendency toward exploitation in this theory. Because, according to the theory wages must be equal to the subsistence level, and-not for comforts and luxuries.

Features of agriculture

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

1. Sustenance farming

Nepal carries out sustenance farming rather than commercial. In the Nepali Market, demand of food is equal to its supply. In last 3-4 decades Nepal use to export wheat to Bangladesh but now its vice versa. The production of agro-products makes just equal to its demand.

2. Monsoon based agriculture

Due to lack of irrigation facilities, almost all the farmers depend upon monsoon rain. Nepal’s government has not made any irrigation plant till today. Only few places are reaching to irrigation facilities. Only 69.48% of land has irrigation facilities where only 50% of land or cultivable lands have year round facilities.

3. Predominance of food crops

Food crops are the type of crops that are basically used as primary source of food. Such as paddy, maize, etc. From centuries back in Nepal has been continuously growing more amounts of food crops and today also it shares around 48.9% of total food which is nearly half.

4. Traditional technology
Nepal is practicing traditional method of farming since past. To plough the field, we never use improved seed and pesticides. GON also does not have any attention towards it.

5. Low productivity

It’s obvious to have low productivity because farmers entirely depend upon monsoon rain which is uncertain. No proper irrigation facilities and traditional method of farming causes low production.

Economics XII

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

Unit 1: Market Economy, Demand, Supply, Equilibrium of Demand Supply

Market Economy

Demand

Supply

Equilibrium

Equilibrium

Unit 2: Elasticity of Demand

General

Economics XII: Meaning

Types of elasticity of demand

Unit 3: Theory of Consumers Behavior

Topics

Unit 4: Factors of Production

Topics

Unit 5: Theory of Production

Topics

Unit 6: Revenue and Cost Curves

Revenue

Cost

Unit 7: Theory of Price and Output Determination

Unit 8: Theory of Factor Pricing

Topics

Unit 9: Money

Topics

Unit 10: Banking

Topics

Unit 11: Government Finance

Unit 12: International Trade

Topics

Criticism of Consumers’ Surplus

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

Criticism of Consumers’ Surplus:

1. Title of consumers surplus is wrong: In consumer surplus we study the utility or surplus received while purchasing the commodity. Therefore, according to Prof. Boulding it should be named as Buyer’s surplus instead of consumers’ surplus.

2. Imaginary concept: According to critics, it is an imaginary concept because a person can only imagine that he/she is getting more satisfaction than the payment has made. In reality nobody is ready to pay than the actual price.

3. Utility can’t be measured in numbers: Utility derived from the consumption of commodity can’t be expressed in terms of number.

4. Potential price may be less than actual price: If the potential price is less than actual price at that time, there is no possibility of consumer surplus. This is because there is no guarantee that there will always be surplus.

5. Constant marginal utility of money: In consumer surplus, marginal utility of money is constant but practically the utility of money depends on the volume of money.

Balance of payment

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

It is defined as systematic records of all types of transaction of a country with the rest of the world. It is the records of amount paid to and amount received from the rest of the world. The amount received may be repayable or not and amount paid may be receivable or not. The amount receive are called receipts and amount paid are called payments. There are 2 sides of balance of payment. They are receipts and payments. The transactions recorded in balance of payment may be visible or not, repayable or not, receivable or not. It includes expenditures made by a foreigner in the reporting country and expenditure made by a domestic person in foreign countries, export and import, diplomatic expenditure of foreign countries in the reporting country, factor income earned from and rest of the world and factor income earned by foreigner form the reporting country, foreign lending and borrowing, foreigner’s investment in the reporting county and investing of domestic entrepreneurs in foreign countries etc.

There are two accounts in balance of payment. They are

1. Current account
The systematic records of short term transactions of a country with the rest of the world is called current account. The transactions recorded in this account have effect for less than one year. It includes foreign tourist expenditure in reporting countries, expenditure of domestic people in foreign countries, interest received from and paid to other countries, remittance received and paid, diplomatic expenditures etc. Short term receipts are recorded in receipt side of current account and short term payment are recorded in the payment side of current account.

2. Capital account
The systematic record of long term transactions of a country with the rest of the world is called capital account. The transactions recorded in this account have effect for more than one year. It includes capital inflow and outflow, foreign lending and borrowing, repayment of foreign debt and principle of foreign debt received. Long term receipts are recorded in receipt side of capital account and long term payment are recorded in the payment side of capital account.

There are 3 types of balance of payment. They are as detailed below

1. Favorable balance of payment:
If the total receipts are greater than total payment of a country form rest of the world, the country is said to have favorable balance of payment. It means total inflow of money from the rest of the world in a year is greater than total outflow of money to the rest of the world. Total receipt is the sum of total short term receipt and total long term receipts. Total payment is the sum of total short term payment and total long term payment.

2. Unfavorable balance of payment:
If the total receipts are less than total payment of a country form rest of the world, the country is said to have unfavorable balance of payment. It means total inflow of money from the rest of the world in a year is less than total outflow of money to the rest of the world.

3. Zero balance of payment:
If the total receipts are equal to total payment of a country form rest of the world, the country is said to have zero balance of payment. It means total inflow of money from the rest of the world in a year is equal to total outflow of money to the rest of the world.

Weighted price index

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

The price index constructed by giving different weights to different commodities is called weighted price index. Weights are given on the basis of regularity in consumption and the amount spent and the number of consumers. The commodities consumed by all or majority of consumers spending large amount of income is given more weights and vive versa. The average price is calculated dividing the sum of weighted price by sum of weights.

weighted average price = sum of weighted prices / sum of weights
The major methods of weighted price index are fisher’s method, Laspeyre’s method, Pasche’s method etc. Weighted price index is calculated under

We can explain it with the help of table as following

commodities	Weight (W)	Price in 2011 (P1)	P1*W	Price in 2012 (P2)	P2*W
Rice	10	Rs 35	Rs 350	Rs 40	Rs 400
Pulses	4	Rs 80	Rs 320	Rs 95	Rs 380
Clothes	3	Rs 250	Rs 750	Rs 275	Rs. 825
Vegetables	5	Rs 50	Rs 250	Rs 70	Rs 350
Firewood	2	Rs 100	Rs 200	Rs 150	Rs 300
total	24	Rs 515	Rs 1870	Rs 630	Rs 2255
Average			77.92		93.96
Price index			100		120.58

In the above table, we have taken only 5 commodities. Sum of the weighted prices of the base year 2011 is Rs 1870. The sum of weighted price of 2012 is Rs 2255. If we divide these sums of weighted prices by the sum of weights we obtain average price of the year2011 as Rs 77.92 and of the year 2012 Rs 93.95. Indexing price level of base year as 100 we can obtain the price index of the year 2012 as 1220.58. There is said to be rise in price level by 20.58%.