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

Role of international trade

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

Specialization:
Every country can take more benefit specializing in the production of goods which can be produced using local resources, technology and human resource. International specialization leads to proper allocation of world’s resources and leads to production of goods under very favorable conditions.

Consumer satisfaction and benefits:
Consumers of a country can enjoy the consumption of goods and services produced in foreign markets, which may be cheaper than the national products and which may not be produced in their own country.

Relief and help in economic crisis:
In times of inflation, disasters, scarcity, famine, depression, a country can solve the problems through imports too.

Qualitative production:
There arises completion among the local and foreign markets. It helps in production of qualitative products.

Agricultural and industrial development:
Countries which lack of raw materials and other products can easily acquire them through imports. This helps in industrial development. Agriculture sector also can be developed through import of fertilizers, pesticides and improved seeds.

Employment:
International trade helps the country to create employment opportunities. There in increase in production and so there is requirement of increment in labor in field of insurance, trade, industry, transportation and so on.

Exchange of culture:
Cultural exchange takes place between countries development when they enter into mutual trading.

Others:
It enhances the domestic competitiveness and also takes advantage of international trade technology. It helps in Increase sales and profits and Extend sales potential of the existing products. It maintains cost competitiveness in your domestic market and enhances potential for expansion of your business. It helps in gaining a global market share and reduction dependence on existing markets. It also stabilizes seasonal market fluctuations.

Balance of trade

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

It is defined as net export i.e. relative export to import. It is systematic records of export and import. The difference between total export and total import of a country in a fiscal year gives balance of trade. On the basis of total export and total import, there are three types of balance of trade. They are

1. Favorable balance of trade:
If the total export is greater than total import, the country is said to have favorable balance of trade. In this case, the inflow of money from export is greater than outflow of money due to import. This type of international trade is said to be in surplus.

2. Unfavorable balance of trade:
If the total import is greater than total export, the country is said to have unfavorable balance of trade. In this case, the inflow of money from export is less than outflow of money due to import. This type of international trade is said to be in deficit.

3. Zero balance of trade:
If the total export is equal to total import, the country is said to have zero balance of trade. In this case, the inflow of money from export is equal to outflow of money due to import. This type of international trade is said to be in balance.

Income elasticity of demand greater than one

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

If the percentage change in quantity demand is greater than the percentage change in income is known as income elasticity of demand greater than one.
For example, change in demand by 10% due to change in income by 5%.

We can explain it by the help of given figure:

On the above figure x and y-axis measures quantity demand and income respectively. DD is demand curve. In initial stage, income and demand is OI and OQ. When income is increased from I to I1 by 5% then demand is increased from Q to Q1 by 10%. This case is known is income elasticity of demand greater than one.

Meaning of Demand

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

Meaning of demand

Desire backed up by ability and willingness to pay
Quantity of a commodity that a consumer want to purchase at a certain price during a certain time period.

Mere desire is not sufficient for demand. The consumer must have ability to pay and willingness to pay for fulfillment of desire. For demand all desire, ability and willingness to pay are required. In absence of one or more of them demand doesn’t arise.

To express demand the following things must be specified

Quantity
Price
Time duration
Ability to pay
Desire
Willingness to pay

Example

If a beggar has the desire of a big apartment then that is not demand ( no ability to pay)
A man with salary of Rs 25000 a month, wants to buy vegetable of Rs. 35 for a week then that is called demand ( all price, time, ability, willingness and desire)

Differences between demand and desire

Serial no	Demand	Desire
1	It is the desire or want backed up by ability and willingness to pay.	It is simply human want
2	It is limited	It is unlimited
3	It is always for the things available in the market	It may be for intangible and imaginary things too
4	It has a market value	It may or may not have market value
5	Ability and willingness to pay is mandatory.	Ability and willingness to pay are not mandatory.
6	It is expressed with reference to price and time duration	It is not expressed with time and price duration.

Concept of revenue

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

1. Total revenue (TR):
It refers to the total amount of income received by a firm by selling the total number of output. It is obtained by multiplying the per unit price of commodity with total number of quantity of output sold in market.

Total revenue = Price cper unit × Total quantity of output sold

Or, TR = P × Q

2. Average revenue (AR):
Average revenue refers to the revenue earned per unit of output sold. It is obtained by dividing the total revenue by total quantity of output sold.

Average revenue = total revenue (TR) / total quantity sold (Q)
Or, AR = TR /Q
= (P × Q) / Q
= Q
AR = P =Demand

3.Marginal revenue (MR):
Marginal revenue refers to the change in total revenue sue to the change in an additional unit of output sold.

MR = ∆TR / ∆Q

where,
MR = marginal revenue
∆TR = change in total revenue
∆Q = change in quantity of output sold

Problems of Medium and Large scale Industries

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

1. Lack of capital
For the establishment of medium and large scale industries huge amount of capital is required which is very difficult to be formed in the context of Nepal. So, lack of capital is the problem of medium and large scale industries.

2. Lack of infrastructure

Infrastructures such as transportation, communication and electricity are the most essential elements for a industry to be operated. In our country all there mentioned infrastructure are not available in adequate number or are not sufficient.

3. Lack of skilled–manpower

Generally, medium and large scale industries need skilled manpower for handling the delicate task but there is a situation of Brain Drain in our country. So, there is scarcity of skilled manpower.

4. Lack of competitiveness

Most of the Nepalese industrial products are of low quality. Such low quality products pose a formulate difficulty to complete in both domestic and international market. Car telling is the major problem of Nepalese market.

5. Limited Market

The domestic market for Nepalese industrial products is very limited due to low purchasing power of the people. There is lack of transport and communication facilities to sell the commodity throughout the country.

Features of market economy

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

No governmental intervention:
In market economy, government is facilitator not doer. It does not make the investment. It does not decide about Production, utilization of resources, determination of prices, employment, distribution of benefits etc. there is personal freedom to the people and business organization
Market led:
The economy is led by market. Production, utilization of resources, pricing, employment level etc are according to market demand and supply of goods and services. Only the goods demanded are produced. Wage and employment level too are determined by demand and supply of labor. Rent and interest rate are determined by demand and supply of land and capital respectively.
Consumer’s sovereignty:
In market economy, consumers are sovereign. The goods and services are produced as per the wants, needs and preferences of the consumers. The producer cannot put pressure on the consumers to purchase their goods. The resources are allocated according to consumer’s choices.
Personal freedom and motives:
Since there is no governmental intervention in the activities of people and business organizations, each of them has freedom to choose occupations, subject of interest and way of life. Each of them performs activities according to their own motives. The government just facilitates them.
Personal property:
The people and business organization have their own properties. They may or may not be ceilings if holding assets.
Perfect competition:
Each industry has large number of firms producing similar or homogeneous goods. There is competition between them on the basis of prices, quantities, and qualities. According to classical economists, perfect competition exists in market economy.

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.

Concepts of short run average cost

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

Concepts of short run average cost:

1. Average fixed cost (AFC):
AFC refers to the fixed cost spend per unit of output produced. It is obtained by dividing total fixed cost by total quantity of output produced.

AFC = TEC / Q

where,
AFC = average fixed cost
TFC = total fixed cost
Q = total quantity of output produced

2. Average variable cost (AVC):
AVC refers to the variable cost spend per unit of output produced. It is obtained by dividing total variable cost by total quantity of output produced.

AVC = TVC / Q

where,
AVC = average variable cost
TVC = total variable cost
Q = quantity of output produced

3. Average total cost (ATC):
It refers to the total cost spend per unit output produced. It is obtained by dividing total cost (TC) by quantity.

ATC = TC / Q

Quantity theory of money

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

theory by Irving Fisher

According to quantity theory of money if the money in circulation is increased, the price level also rises. The percentage or proportion of rise in price level is just equal to percentage or proportion of increase in money in circulation. The price level has direct proportional relation with money in circulation. Here money in circulation means amount of currency issued by monetary authority. Since, the value of money is inversely related to price level, it decreases with increase in money in circulation and vice versa.

Symbolically,

If M ↑ P ↑ but value of money ↓
If M ↓ P but ↓ value of money ↑

To explain this theory, Irving Fisher has used an equation of transaction the equation is

MV = PT (or MV=PQ)

Where,
M= money in circulation
V= velocity of money in circulation
P= price level
T= volume of trade

Velocity of money in circulation is the number of times the money in circulation is revolved in a year. The multiple of M and V gives the total supply of money and the multiple of P and T gives total demand for money. According to fisher, if M is increased arbitrarily by monetary authority by a certain percent or proportion the P too rises by equal percent or proportion. The V and T remain constant. The change in M brings change only in P.

This theory can be explained with the help of table and figure as following

Money in circulation (M)	Price level (P)	Value of re. 1 (1/P)
Rs 500 billions	Rs 10	0.1
Rs 1000 billions	Rs 20	0.05
Rs 1500 billions	Rs 30	0.033

In the above table, when money in circulation is increased from Rs 500 billions to Rs 1000 billions and Rs 1500 billions, the price level is increased from Rs 10 to Rs 20 and Rs 30 respectively. It shows the direct proportional relationship between price level and money in circulation. If we represent price level with respect to money in circulation we obtain an upwardly sloped straight line from origin. In the above table value of re 1 is decreased from 0.1 units to 0.05 and 0.033 units when the money in circulation is increased from Rs 500 billions to Rs 1000 billions and Rs 1500 billions respectively. if we represent value of re 1 with respect to M we obtain a monotonically downwardly sloped curve as shown below:

In the above first figure the curve liner in shape and upwardly sloped from origin represents direct proportional relationship between price level and money in circulation. In the second figure relationship between value of money and money in circulation is shown by convex curve.

In the above Fisher’s equation bank money is not included therefore the equation is reformed into
MV +M’V’ = PT
Where
M’= bank money
V’ = velocity of bank money’

Assumptions

Money is a neutral factor. Change in money in circulation doesn’t bring change in real factors like investment, production, volume of trade and employment etc.
Money is demanded only to buy and sells the goods and services.
M is arbitrarily determined by monetary authority regardless the economic situation.
P is passive factor because it doesn’t affect the volume of money in circulation, volume of trade, employment etc.
V and T are independent of M and P and are constant.
P is directly proportional to M.

Criticisms

Money is not neutral factor. Change in money in circulation brings change in real factors like investment, production, volume of trade and employment etc.
Money is not demanded only to buy and sells the goods and services.
M is not arbitrarily determined by monetary authority.
P is not passive factor. It is active because it affects the volume of money in circulation, volume of trade, employment etc.
V and T are not independent of M and P and are not constant.
P is not directly proportional to M.