TyroCity: Economics Notes

Economics XI Questions

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Meaning

Meaning of Government Finance

Meaning of Government Finance

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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

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

General

Human Resources

Agriculture

Poverty

General Industry

Tourism Industry

Concept of capital market

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

The market which deals with medium and long term financial instruments is called capital market. There are long term security transactions in capital market for more than one year to 25. Bonds, shares, debentures, etc are long termed securities. There are also transactions of non-security component for example long term loan provided by banks.

There are two sectors i.e. organized and unorganized. Banks, finance companies, insurance companies, stock exchange centers and center bank are included under the organized sectors as well as traditional money lender, traders, merchants, etc are under unorganized sectors.

According to World Bank, the market in which long term financial instruments such as equities and bonds are raised and traded.

Public Expenditures

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

Government revenue collected from different sources is allocated for different purposes. Generally public expenditure is classified into development expenditure and administrative expenditure. The government allocates resources through its ministries, departments and local authorities. These types of expenditures are made either for their own maintenance or for the promotion of social welfare of the people. In the government expenditure we include development expenditure, administrative expenditures, diplomatic expenditure, difference expenditure, payments of public debts and interest and miscellaneous expenditure.

Role or importance of public expenditure

To maintain law and order’
To maintain national security
To provide administrative services
To invest in social overheads like transportation, communication, irrigation, energy, education, health, security, law and justice
To ensure economic equity in the society.
For development and promotion of basic and strategic industries

Classification of public expenditure

1. Development expenditures:
Expenditures on the construction of infrastructures of transportation, communication, sanitation, irrigation, education, health, power, energy etc is called development expenditure

2. Expenditure on public utilities:
After the construction of infrastructures the government spends the money to provide facilities of education, sanitation, drinking water, communication, transportation etc. these expenditures are expenditure on public utilities.

3. Defense expenditure:
The expenditure on arms and armaments to protect the country and the people from foreign aggression is called defense expenditure

4. Expenditure on general administration:
For the good governance, to keep peace, security and justice in the country, the government makes the expenditures through different ministries, departments and constitutional bodies etc. These expenditures are called general administration expenditure

5. Conservation of resources:
To avoid depletion in the quantities and qualities of the resources and for their sustainability the government makes expenditures on their conservation. It includes expenditure on forestry, soil fertility management, irrigation, flora fauna management

6. Preservation and renovation of monuments:
For the preservation of culture, traditions, arts, skills of the people of the country the government makes the expenditure. The government spends the money also to renovate the historical, archaeological, religious monuments.

Positive cross elasticity of substitute goods

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

Cross elasticity of demand is positive because when the price of one commodity i.e. x commodity increases demand for another commodity i.e. y also increases. We can express by the help of given figure.

On the above figure, in initial stage price of x commodity is OP and demand for y commodity is OQ. When price of x is increased from p to P1 then quantity demand for y commodity increases from Q to Q1.

Meaning of Production

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

Meaning:
The process of transformation of input into output is known as production. In other words the process of creating utility is known as production.

Production Function:
Production function explains the technological relationship between inputs and outputs. It shows the functional relationship between physical input and output. Or it shows how much physical output can be produced by using the given physical input and given state of technology. Mathematically production function is expressed as
Q = F (L, Ld, C, M, T, N, ……..)
Where,
Q = quantity of output
F = functional relationship
L = labor
Ld = land
C = capital
M = management
T = technology
N = national resources

But generally production function is written as Q = F (L, C)

Production function is divided into two parts:

Short run production function:
Short run is short time period where producer can change the output only by changing labor not capital. So, in short run production function is written as Q = F(L, C)
Where,
Q = output
F = functional relationship
L = labor
C = constant capital
Long run production function:
Long run is the long time period and in the long time period producer can change all input to change the output. So, in long run Q = F ( K, L)
Where,
Q = output
F = functional relationship
K = capital
L = labor

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.

Importance of Tourism Industry

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

1. Sources of foreign exchange earnings

Tourism industry is the main influential type of industry in the world. Nepal has also taken tourism industry as its major sector of income in the fiscal year 2009/11.

2. Employment Opportunities

Tourism industry is also one of the influential sectors. It generates employment opportunities. It provides employment to unskilled, semi-skilled and skilled manpower. Guide, load man etc are the personal or labour required in Tourism industry.

3. Sources of public as well as private income

Tourism industry is the source of income for both public also well as private sector government charges tax, sales tax, service tax etc. which is known as government revenue is the income of public. And handicraft, arts etc are the things that attract tourist and most of them buy them and the seller makers some profit which is called private income.

4. Cultural Exchange

Tourism industry facilities cultural exchange tourist carry over various cultural concepts of other countries where they visit. Local people can learn their language, art, skill, culture etc and vice versa.

5. Publicity of nation

Nepal is a small country, difficult to be located in the world map. Tourism helps to publicize the country in different parts in the world. It helps to publicize. Nepalese art, skills tradition, cultural beauty and hospitality to the world.

Types of Poverty

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

Poverty is a situation in which people cannot fulfill their basic needs.

Types of poverty

Absolute Poverty
Relative Poverty

1. Absolute Poverty:
Absolute poverty refers to a situation which individuals are unable to attendant necessities of life such as food, cloth, shelter, safe drinking water, health facilities, primary education etc.

In other word, it is a situation in which the level of income of the people is so low that they cannot afford must of their basic needs.

2. Relative poverty:
Relative poverty is the situation in which a person has enough income to sustain the life but the income and living standard is lower compared to rest of the community. It is also the condition of less income in a country compare to the worldwide income average income.

Change in Optimum Population

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

The optimum population, however, is not fixed, for over a period of time. Conditions are liable to change. If it were possible to increase the supply of other factors with increase in population, the optimum might be raised. Optimum population is relative to resources and technology. So if there is increase in capital stock or natural resources or level of technology. There will be an upward shift in the average and marginal product curves. The per capita output will increase. This means that the level of optimum population too will increase. This has been represented in figure below:

As shown in figure, with given resources and technology, the per capita output curve is AP. Here optimum population is and maximum output per capita is NF. When capital and natural resource increase or there is improvement in technology, the per capita output curve shifts upward in the form AP, Now the optimum population is N, and maximum output per capita is N,F,. Here both level of optimum population and maximum output per capita is higher than before. Likewise, further increase in resources and technology will shift the per capita output curve upward in the form of AP2. Now the level of optimum population and maximum per capita output are N2 and N2 F2 respectively which are higher than before.

Dalton has given a formula to measure the extent to which the actual population of a country deviates from the optimum population. The extent of deviation is called maladjustment

M = Maladjustment
A= Actual population
O = Optimum population

Joint Stock Company

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

Joint stock companies first came into being in the 18th century in Britain, and were mainly concerned with foreign trade. Initially, the organizational form was viewed with suspicion, it being supposed that it encouraged managerial efficiency and corruption. A corporation, chartered by the state in which it is headquartered is considered by law to be unique entity, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors (BOD) to oversee the major policies and decisions. The company has a life of its own and does not dissolve when ownership changes.
A company is a voluntary association, an incorporated association, an artificial person created by law, having a common seal and perpetual succession. Shareholders are owners of the company but management lies in the hands of BOD. Company means a company registered under an act.

According to H.L Haney: “A joint company is a voluntary association of individual for profit, having its capital divided into transferable shares the ownership of which is the condition of membership.”

Characteristics of Joint Stock Company

Compulsory incorporation:
A company is a voluntary association of persons formed and incorporated under the existing Corrine law. Only when it gets certificate of incorporation it comes into existence as a body corporate.

Artificial person:
A company is an artificial person created by law. It is created by legal process and not by natural birth. Even though it has no natural personality, it has legal personality. Therefore, it can enter into contracts, sue and can be sued, own property, appoint employees and borrow money like any other natural person.

Common seal:
Since a company is an artificial person having no physical features like a natural person, it cannot sign. Hence every company by law must have a common seal in which its name is engraved. The common seal can serve as its signature. The common seal is fixed on all important documents and contracts which is witnessed by signature of two directors and countersigned by secretary where ever required. The common seal is kept under the custody of directors.

Perpetual succession:
Since every company has separate existence from its members, directors and employees, their death, insolvency or insanity will not affect its life and existence. Men may come and they may go but a company remains forever. It can be wound up under the provision of the act.

Limited liability:
Usually the liability of members of a company is limited to the extent of uncalled or unpaid shares held by them. Their personal property cannot be seized to meet the company’s liability beyond the above mentioned liability.

Share capital:
The capital required by the company is raised by the issue of its shares. The share is a document that acknowledges the ownership of the company. The members who hold the share of a company can transfer its ownership to any other person, without the company’s permission.

Separation of ownership and capital:
In company organization the ownership and management are separate. The shareholders who are the owners do not take active part in the everyday affairs of the company. Instead they elect their representative known as directors, who with the help of managers and employees manage the company. Thus, there is division of labor and specialization.

Legal entity:
Since the company is created by law, it has separate legal existence compared to its members. Therefore the members cannot be personally held responsible for the acts of company and company cannot be held liable for the acts of the members.

Large membership:
The Company is owned by a large number of members- maximum of 50 in the case of private limited company and unlimited number of member in the case of public limited company.

Merits of joint stock company

Large capital:
A company can collect huge capital for the business through shares and debentures, public deposits, loans etc. Due to huge capital the company can conduct business on a large scale.

Continuity and stability:
Death, insolvency or insanity of any member of the company will not affect its life and existence. Men may come and they may go but a company remains forever. It can be wound up under the provision of the act.

Professional management:
The Company appoints experienced, competent and expert to manage the business. Their services lead to managerial and administrative efficiency and accuracy.

Economies of scale:
A company operates on a high scale and so it enjoys economies in production, distribution, management and financing.

Bargaining power:
Compared to other forms of organization, a joint stock company is a strong power in buying as well as in selling of goods because of its large scale production.

Legal status: Efficiency of labor :
Since the company is created by law, it has separate legal existence compared to its members. Therefore the members cannot be personally held responsible for the acts of company and company cannot be held liable for the acts of the members.

Large membership:
The Company is owned by a large number of members- maximum of 50 in the case of private limited company and unlimited number of member in the case of public limited company.

Transferability of shares:
Shares of Joint Stock Company, especially public companies, are freely transferable. A member who wants to sell his shares can easily do so in the stock market. This encourages the public and other to invest in shares.

Employment:
Joint Stock Company provides employment to a large number of people directly and indirectly. This leads to higher national income for the country and higher living standard of living for the people.

Government revenue:
Joint Stock Companies provide revenue to the government in the form of taxes charged directly and indirectly.

Research and development:
Joint Stock Companies undertakes R&D continuously thus bringing about new and improved products which benefits people.

Economic development:
Because of Joint Stock Companies there is all round development of trade, commerce and industry. The society in general gains the benefit of the industrial development. Large capital, government revenue, economic development etc. are the advantages of Joint Stock Companies.

Demerit of Joint Stock Company

Difficult formation:
Formation of Joint Stock Company is an expensive and time consuming process as a number of legal formalities have to be undertaken in order to register the company.

Lacks flexibility:
The working of a Joint Stock Company is less flexible s compared to other organizations. For very small thing they either have to follow a detailed procedure or obtain sanctions from various authorities. This results in lack of flexibility.

No business secrecy:
This form of organization lacks business secrecy because it is compulsory for the company to publish accounts and other records

Excessive government regulation:
The Company is a subject to excessive government control. It has to follow the numerous provision of the companies act. This makes working difficult.

Delay in decision:
The Joint Stock Company is completely not free to take all decisions and to implement the decisions. Due to excessive government control and democratic set up all decisions are taken in meetings and some decisions require shareholder’s approval. All this leads to delay in decisions.

Lack of contact with customer:
A company can’t be in a position to maintain intimate contacts with customers. It 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 due to large scale operation.

Lack of contact with employees:
The top management may not have contact with their employees. This may cause friction and disputes amongst the management and the employees with may affect the worker’s and employee’s morale.

Conflict of interest:
Many persons are the owners of Joint Stock Company. There can be misunderstanding and jealousy among them and these cause problems in operation of business and profit making.

Not suitable for all type of business:
This type of organization is not suitable for business where personalized services are required.

Exploitation of shareholders:
Sometimes the BOD may misappropriate the fund and mislead the shareholders by window dress report. The directors may even manipulate the trading on the stock exchange. Thus shareholders can be exploited by corrupt directors.