TyroCity: Economics 11 Notes

Public Revenues

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

The revenues from different sources received by the government are called public revenues. Some are regularly collected whereas some are irregularly collected. Revenues are not repayable. Some of them are obtained from the sale of public utilities whereas some are obligatory payments to the government.
Types or sources of government (public) revenue
The public revenue can be classified into tax revenue and non tax revenue:

Tax revenue:

The tax is compulsory payment to the government without quid pro quo. The government does not repay back it to the payers nor does it do anything for the personal benefit to the payers. It is very effective fiscal tool essential for the achievement of different socio-economic objectives. There are mainly two types of tax.

1. Direct tax:
The tax that is not shiftable in nature and paid by the payers who really take its burden is called direct tax. The person or organization which faces the incident taxes the burden too. The taxes imposed in income, profit, land, houses, vehicles etc are called direct taxes.

2. Indirect taxes:
It is the tax shiftable in nature. The person or organization which faces the incident of tax is different from person or organization who really takes the burden of tax. The incident is faced by the producers and traders but the burden is taken by the final consumers. The tax is imposed on production, sales, export and imports etc. The taxes like excise duty, custom duty, entertainment tax, octroi charges etc are indirect taxes. The VAT is also called indirect tax

Non tax revenue

1. Fees:
The government receives the money from the sale of different services like health, education etc. Moreover it takes fees for registration, license etc. The examples of fees are education fee, health fee, registration fee (birth, death, marriage, organization etc) license fee (driving, share broker, export, import, pistols) etc.

2. Fines and penalties:
Against the violation of rules and regulations the government charges the fines but if there is violation of law and order government charges penalties. Fines and penalties are not regular source of government revenue.

3. Royalties:
The government receives the royalties its production right, copy right, public land and building, capital equipment and plants for use to others. It obtains dividends from public enterprises, rents from public properties etc. this is also regular source of public revenue.

4. Cess:
The government collects different types of cess like road cess, pool cess etc in order to recover he construction cost and to reach the fund for maintenance of the construction.

5. Grants and donation:
The government receives the grants and donations from the people, business organization, NGOs, within the country or outside the country. It obtains grants from foreign government too.

6. Escheats:
The nationalized properties of people after the death being unclaimed are called escheats. This is irregular source of government revenue.

Meaning of Government Finance

Economics 11 Notes — Sun, 08 Apr 2012 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.

Importance of Public Finance

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

1. Steady state economic growth:
Government finance is important to achieve sustainable high economic growth rate. The government uses the fiscal tools in order to bring increase in both aggregate demand and aggregate supply. The tools are taxes, public debt, and public expenditure and so on.

2. Price stability:
The government uses the public finance in order to overcome form inflation and deflation. During inflation, it reduces the indirect taxes and genera expenditures but increases direct taxes and capital expenditure. It collects internal public debt and mobilizes for investment. In case of deflation, the policy is just reversed.

3. Economic stability:
The government uses the fiscal tools to stabilize the economy. During prosperity, the government imposes more tax and raises the internal public debt. The amount is used to repay foreign debt and invention. The internal expenditures are reduced. During recession, the case is just reversed.

4. Equitable distribution:
The government uses the revenues and expenditures of itself in order to reduce inequality. If there is high disparity it imposes more taxes on income, profit and properties of rich people and on the goods they consume. The money collected is used for the benefit of poor people through subsidies, allowance, and other types of direct and indirect benefits to them.

5. Proper allocation of resources:
The government finance is important for proper utilization of natural, man made and human resources. For it, on the production and sales of less desirable goods, the government imposes more taxes and provides subsidies or imposes taxes lightly on more desirable goods.

6. Balanced development:
The government uses the revenues and expenditures in order to erase the gap between urban and rural and agricultural and industrial sectors. For it, the government allocates the budget for infrastructural development in rural areas and direct economic benefits to the rural people.

7. Promotion of export:
The government promotes the export imposing less tax or exempting from the taxes or providing subsidies to the export oriented goods. It may supply the inputs at the subsidized prices. It imposes more taxes on imports and so on.

8. Infrastructural development:
The government collects revenues and spends for the construction of infrastructures. It has to keep peace, justice and security too. It has to bring socio-economic reformation too. For all these things it uses the revenues and expenditures as fiscal tools.

National income

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

Basic concepts

1. Factors of production:

The factors that are used in production are called factors of production. The factors are: land, labor, capital an organization. For the contribution made by factors of production, they are paid the amounts the factors of production obtains are called factor incomes. The factor incomes are rent, wage, interest and profit. The factor incomes are also called factor costs. They are parts of national income. It we sum up the factor incomes of the country we obtain national income.

a. Factors of production : land, labor, capital , organization

b. Factor incomes: rent, wage , interest, profit

2. Transfer of payments
The payments or receipts without contribution in production are called transfer of payments. Some of the examples are pension, subsidies, indirect taxes, windfall gains, grants, allowances paid to old aged, handicapped; under privileged people etc. it is not part of national income

3. Final products
The products directly consumed by final consumers are called final products. The final products are parts of national income. Their monetary values are distributed in forms of factor incomes. The goods and services used as raw materials, fuels or energies for the production of other goods and services are called intermediary goods or products. They are not added to measure the national income.

Basic concept of national income accounting

1. Gross domestic product at market price ( GDP at MP )

GDP at MP is the sum of monetary values of all final products of a country in a year. The monetary value of each product is obtained multiplying the quantity and price of the product.

2. Net domestic product at market price (NDP at MP)

NDP at MP is the net monetary value of final products produced in a year in a country. It we subtract depreciation from GDP at MP we obtain NDP at MP.

3. Net national product at market price(NNP at MP)

If we add net factor income from abroad to NDP at MP we obtain NNP at MP. Here the factor income means rent wage, Interest and profit. For it we factor income earned from rest of the world but subtract the factor income earned by rest of the world from our country.

Mathematically,
NNP at MP = NDP at MP + net factor income from abroad

4. Net national product at factor cost (NNP at FC):

If we subtract net indirect tax from NNP at MP we obtain NNP at FC.

Mathematically,
NNP at FC = NNP at MP – net indirect tax
NNP at FC = NNP at MP – (indirect tax-subsidies)
NNP at FC is the national income…

5. Private income

Private income is the income of people and private business organization of the country. If we subtract government’s income from national income we obtain private income.

Mathematically,
Private income = NI-GOVT’S INCOME

Here,

The government’s income means rent, profit and interest earned by government. However, there is transfer of payments from government to private sector and from private sector to government. They are adjusted subtracting the transfer of payment from private sector to government and adding the transfer of payment from government to the private sector including individuals. Besides it, the corporate taxes are also subtracted from national income to obtain private income.

Mathematically,
Private income = NI- factor income of govt-corporate taxes-transfer of payments to govt+transfer of payment from government

6. Personal income

The income of individual in total is called personal income. It includes all factor incomes earned by people of the country. Moreover, it includes the transfer of payments from government and business organizations too. But, the transfers of payment from people to government are subtracted to find it.

Mathematically,
Personal income = private income-undistributed profit

7. disposable income:

The personal income left after the payment of direct taxes is called disposable income. The direct taxes are income tax, house tax, land tax etc.

Mathematically,
Disposable income= personal income-direct tax

If the people pay other social security contribution or charges they too should be subtracted to obtain disposable income

Mathematically,
Disposal income= personal income-direct tax-social security contribution

8. per capita income:

It is the ratio of national income and population size. it is known as national income per head of the country

Methods of measuring national income:

1. Income method:

In this method, we measure national income on the basis of factor incomes of people, business organization and the government of the country. The factor incomes mean rent, wage, interest and profit. These are the payments made to or received by land, labor, capital and organization respectively and is used in the country in a year. Moreover, we add net factor incomes earned from abroad. There are people self-employed too. Their income is in mixed form. That’s; why, it is added separately. Profit, interest and rent earned by government in a year is added as property and entrepreneurial income of government. The savings of non-departmental organizations too is added separately as factor income. The sum of factor incomes in the country gives NDP at FC. To NDP at FC we add net factor income from abroad and we get NNP at FC or NI as following.

2. Expenditure method

In this method, national income is calculated summing up the expenditures of household sector, business sector, government sector and foreign trade sector. The expenditures of these sectors are called consumption expenditure, investment expenditure, government expenditure and net export. However, the expenditure may be on goods produced in previous years. That’s why; we adjust it subtracting opening inventory and adding closing inventory. If we sum op the expenditures we obtain GDP at MP .then from GDP at MP we subtract depreciation and net indirect tax as following to get NI

Consumption expenditure of household sector	XXXX
Government expenditure on final goods	XXXX
Investment expenditure ( private +public)	XXXX
Foreign trade sector (export-import)	XXXX
Change in inventory (closing-opening)	XXXX
Gross domestic product at market price	XXXX
Less: depreciation	XXXX
Net factor income from abroad	XXXX
Less: net indirect tax	XXXX
National income	XXXX

3. Product method:

In this method, we measure NI on the basis of monetary values of final products or value added in each stage of production and distribution. The economy (country) is divided into 3 different sectors namely: primary, secondary, tertiary.
Primary: agriculture, forestry, livestock rearing etc.
secondary: health, sanitation, transportation, education etc
tertiary: tourism, sports, music etc.

Types of method

A. Final product method

In this method, NI is measured on the basis of monetary values of final product. Firstly, we find monetary values of final product of primary, secondary and tertiary sectors. Sum of the final products gives GDP at MP. To GDP at MP we add net factor income from abroad and from it we subtract depreciation and net indirect tax to find NI.

Final product of primary sector	XXXX
Final product of secondary sector	XXXX
Final product of tertiary sector	XXXX
GDP at MP	XXXX
Depreciation	XXXX
Net indirect tax	XXXX
Net factor income from abroad	XXXX
NI	XXXX

B. value added method:

In this method, NI is measured adding the values added in each stage of production and distribution. Firstly we add values added in primary, secondary and tertiary sectors. Sum gives GDP at FC. From that we subtract depreciation and to it we add net factor income from abroad to find NI.

Value added in primary sector	XXXX
Value added in secondary sector	XXXX
Value added in primary sector	XXXX
GDP at FC	XXXX
Depreciation	XXXX
Net factor income from abroad	XXXX
NI	XXXX

Thus, these are the methods of measuring national income

Difficulties while measuring national income

1. Non-monetary transactions

There are many non monetary income and output in developing countries like owner occupied house, self consumed agriculture products etc. due to non monetary nature they aren’t included in national income

2. Problems of double counting

Only final goods and services should be included in national income. But it is arduous to distinguish between final goods and intermediate goods. Intermediate goods also can be used for final consumption. There are possibilities of double counting

3. Underground economy

Under ground economy consists of illegal transactions like drugs, gambling, smuggling etc. they are not included in national income thus income become less than actual amount

4. Petty production

There are large numbers of petty producers and it is difficult to include their production in national inco
me because they don’t maintain any account.

5. Public services

Public services like general administration, police, and army services are difficult to evaluate and they become hard to include in national income accounting

6. Illiteracy and ignorance

If majority of people are illiterate and ignorant, they can’t keep the records of production activities accurately. Hence, it is difficult to get correct information.

7. Capital gains or losses

When price of any assets alters then owner can make gains or losses. Such gains or losses are not included in national income.

8. Wages and salaries paid in kind

Payments made in kind mayn’t be included in national income. But facilities given in kind are calculates as supplements of wages and salaries on the income side

9. Conceptual problem

The major obstacles is whether to include the income generated within country or even generated abroad in national income and which method should be used in measuring national income

10. Transfer payments

Individual get pension, unemployment, allowance, windfall gains, subsidies on many measures , but they create difficulty in the measurement of national income.

Thus, these are the difficulties in measuring national income.

Difference Between Private And Public Finance

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

Private finance (individual)	Public finance ( government)
An individual adjusts his or her expenditure according to his or her income.	The public authority adjusts its income to its expenditure.
A private individual tries to have a surplus of income over expenditure i.e. surplus budget.	A public authority will spend all that it gets
An individual can borrow money from other individual only and externally	A public authority esp a state can raised loans from both internally
Finances of individuals are limited	Finances of government are flexible
Private individuals cannot use force to get their income; they cannot compel others to get income	The government can use coercive method to realize revenues
Not a single individual can print notes	A state can print currency notes in order to meet its expenditure in difficult times

Role of Medium and Large Scale Industries

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

1. Development of medium and large scale industries help to remove the problem of unemployment by creating wide range of unemployment by creating wide range of employment opportunities to unskilled, semi-skilled and skilled human resource.

2. Proper utilization of resources

Medium and large scale industries are necessary for the scientific utilization of available natural resources such as forest resources, mineral resources, human resources and water resources.

3. Sources of Government Revenue

These industries produce huge amount of goods, generally expensive one. They are exported to foreign land and Government earns tax, VAT, Sales tax, etc. which increases Government Revenue.

4. Development of basic infrastructure

Medium and large scale industries cannot be operated without proper infrastructure. So, along with the development of industries, infrastructure of development also increases simultaneously.

5. Development in agricultural sector

Modem tools and equipment are produced by medium and large scale industries. Implementation of modern tools in agricultural sector can be done. Finally, there will be development in the sector of agriculture.

Prospects of Tourism Industry

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

1. Natural beauty

Nepal is a country full of natural beauty. Fast flowing river, evergreen hills, snow capped mountains etc makes Nepal look attractive and majestic. Yearly thousands of tourists visit Nepal to have glance over her magnificent beauty.

2. Religious places

Nepal is the destiny per Hindus. The greatest and the biggest temple of Hindu, Pashupatinath temple is situated in Kathmandu Nepal. The largest statue of Shiva in the world, 143ft is situated in Bhaktapur (Sanga), Nepal other many famous temples shrines etc are in Nepal such as Swyambhunath, Changunarayan, Budhanikantha etc.

3. Art and architecture

Nepal is renowned for its natural and cultural heritage and is generally reputed for the pagoda style of temple which is rare in the world. Many tourist visit Nepal to know the art and architecture of Nepal.

4. Climate and cultural diversity

Nepal is rich in both climate and cultural sector. Different climate can be found in each topography of Nepal. Extreme cold in Himalayan, mixed climate in Hilly and hot climate in Terai. Due to variety in climate, bio-diversity exists in Nepal.

Moreover, Nepal is rich in cultural aspect. There are more than 60 ethnic groups found in Nepal with 103 language. So, many tourists come to visit Nepal to learn or for research purposes.

5. Less expensive

Nepal is an underdeveloped country with few infrastructures. So, Nepal is less expensive country than others. Tourists can visit Nepal in reasonable price.

Human Development Indicator

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

1. Better Economic
Human development is development of overall situation of human being such as health, education, income, life expectancy etc. The variables such as human development index (HDI) per capita income (PCI), literacy rate, life expectancy at birth etc are regarded as indicators of Human Development. Some major indicators of Human Development have been discussed below.

2. Education

Educational Indicators include total literacy rate, male/female literacy rates, adult literacy rate, school enrollment rate and average years of schooling. It helps to increase the efficiency of human being.

3. Demographic

It indicates the number of year new born children would live subject to the prevailing risks of mortality. It depends upon the infant mortality rate and as of death.

4. Health

Basic needs include food, shelter, clothing, education and health service. Higher the fulfillment of basic needs, higher will be the level of human development and vice-versa.

Problems of agriculture in Nepal

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

1. Lack of irrigation

Irrigation is the basic infrastructure for agriculture development. But only 69.48% of total irrigable land has irrigation facility and only 50% of land year round facility. So, farmers entirely depend upon monsoon rain.

2. Lack of technology

Nepal herself is poor. Moreover, her people are also poor. About 205% of total populations live under poverty line. So, neither they can afford for new technology, nor they have proper knowledge about it. So, our agricultural sector is lacking behind.

Scarcity and choice

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

Chapter 3

Scarcity and choice

Basic economic issues:

The major causes of economic problems are basic economic issues.

1. Scarcity of resources
The common meaning of scarcity refers to unavailability in the market of a certain commodity. A commodity is scarce, in economic view, not due to its rarity in market but due to its means is limited. Scarcity explains this relationship between limited resources and unlimited wants and the problem therein. Scarcity raises national economic problems. There is poverty and human misery due to scarcity. Scarcity tells us about importance of commodity. The resources are not only scarce, but they also have alternative uses.
The resources mean all the national resources, artificial resource and human resource itself. However, the main economic problems are abused by scarcity of natural resource. The resources differ from place to place in their types, quantities and the qualities. They are usable for the production of varieties of goods and services to satisfy different human wants. But they are very in sufficient to satisfy all of human wants. Their supply is very limited and changeable with the flight of time. Their quantities and qualities may decrease if we don’t utilize them properly.

2. Choice of the best alternatives:-

Choice is involved in economic activities at both consumption and production levels. The problem of choice begins with an individual’s liking of how much time he would allot for work and how much for leisure. On the income earned, the choice is between how much to consume now and how much to save for the future. The chain of choice goes on deeper and deeper referring to the profitable use of resources at the hand of economic actors.

The choice of the best alternative is the selection of the best combination of goods producible with the use of all the resources available that gives maximum social benefits to the nation. The problem of choice is accused by limited resources and unlimited human wants. Since, each resource can be put for the production of varieties of goods; there is the possibility of large number of combination of goods producible in the country. However, they give more or less social benefit or utility to the nation. As per the requirements, importance or preference of human needs/ human requirements or importance of the goods the choice of the best alternative is met.

3. Allocation of resources:-
The allocation of resources means use of the resources dividing them for the production of the combination of goods that gives the maximum social benefit or utility to the nation. It is called appropriation of the resources to satisfy most important wants out of their unlimited types. The allocation of the resources is necessary because of insufficiency of limited resources for the fulfillment of unlimited human wants. Allocation is usually made to the basis of market demand or people’s preference on the goods. For it the concepts of demand and supply or the concepts of production possibility curve and preference curve of people are used.

The resources have alternative uses. One use can be chosen and all others have to be satisfied. Allocation is related to the choice of how much of resource to be allocated in what sector. The whole body of planning, programming and even budgeting is nothing, but the statement of allocation of resources. Resource allocation occupies central position in economics. Economics is the principle governing the allocation of scarce means among competing ends.

Production possibility curve (PPC):-

A production possibilities curve is the graphical illustration of all the combinations of goods and services that can be produced in a given economy at a given time, if all the available resources in the economy in the economy are fully and efficiently employed. All points on PPC are points of maximum production efficiency or minimum production inefficiency; resources are allotted in such a way that it is impossible to increase the output of one commodity without reducing the output of other.

The PPC has following assumptions and features:-

a. It is based upon two commodities or two goods model

b. There is no change in technology and production technique

c. All the resources are utilized

d. PPC is downward sloped concave curve.

e. PPC shifts upward if the new resources are explored or technology is advanced

To explain the concept of production possibility curve lat assume the country can produce one of the following combinations of goods utilizing all the resources available as shown in the table below.

Table:

combinations	butter	guns
A	15	0
B	14	4
C	12	7
D	9	9
E	5	11
F	0	12

In the above table there are six different possible combinations of butter and guns. If we represent them we obtain the PPC as shown in the graph.

In the above figure, if production of butter is decreased from 15 units to 14 units, then the production of guns increase from 0 units to 4 units which signifies 1 pound of butter production decrement causes to increase guns production to 4. If production of butter is decreased from 14 units to 12 units, then the production of guns increase from 4 units to 7 units, which signifies 2 pound of butter production decrement causes to increase guns production to 3 and so on.

Shifting of the curve:-The rightward shift in PPC indicates increase in production capacity of economy due to improvement in technology or new resources or both.

Limitations:-

PPC says nothing about which goods people want and which to provide the most satisfaction but only indicates about available options.
PPC are not related to preferences of consumer or producers so there is no economic efficiency.
It does not show if there is efficient use of resources.

Conclusion:-

Opportunity cost is shown by negative slope of PPC.
Full employment is shown by maximum production obtained with existing technology, given that all available resources are engaged in production
There is indication of unemployment, economic growth and investment.

Role of cottage and small scale industries

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

1. Employment opportunities

Cottage and small industries provide employment to every sort to skilled people (skilled, semi-skilled and unskilled). It provides alternative job opportunities.

2. Utilization of local resources

Cottage and small scale industries are established in rural area by some local people. So, this type of industry uses the local resource available in that area.

3. Source of foreign currency

Cottage and small scale industry produce handicrafts, painting etc which attracts tourist. About 37% of total export is enveloped by the product of these industries. So, it is the source of foreign currency.

4. Government revenue

Since, 37% of total export is enveloped by cottage and small scale industries, government can even revenue through scales tax, income tax, export tax, vat etc. So, there is the ultimate increase in Government revenue.

5. Living standard

Cottage and small scale industries are simple and are operated with limited capital but also increases/upgrades living standard people can earn sufficient amount to sustain their life and fulfillment of their needs.

Addition as suggested by Abishek

Small Scale Industry:
In the small scale industry the male members of the family along with hired labour work together. In small industries, electric power and improved machines are mostly used in subcontinental the firm employing less than 10 persons are classified as small. In subcontinental Carpet industry, poultry farming, beekeeping, tailoring and furniture making is included in the cottage and small industry.

Importance: There is a shortage of capital and technical skill in subcontinental. It is not possible to establish the heavy industries. While it is very easy to increase the number of small scale industries. The examples of Japan, Hong Kong and Taiwan are before us.

Following are the main advantages of small scale industry in subcontinental :

1. Increase in Industrial Product :-
There is a shortage of manufactured goods in our area. We spend a lot of foreign exchange on the import of these goods every year. So we should increase the small scale and cottage industry to remove the shortage of these goods.

2. Increase in Employment :-
The rate of unemployment is increasing day by day. To control unemployment it is necessary that we should increase the small scale industries because these are labour-intensive. Our farmer can also easily work in small scale industry. It is not possible to provide Govt. jobs to all the unemployed people. It may also increase the self employment.

3. Increase in Foreign Exchange Earnings :-
The various kinds of goods like carpets and sports sold in the international market. We earn a lot of foreign exchange by exporting these goods.

4. Use of Industrial waste :-
The waste of large scale industries like cotton and steel can be used by the small scale industry. In this way we can save a lot of capital.

5. Provides Employment to Women :-
Our women are engaged in the cottage and small scale industry and increasing the production. Because in our society women can not work with other men in the factories. We should increase the number of cottage industries to make the female sector a real asset of the nation.

6. Increase in The Income :-
Increase in the production of goods on small scale increase the income of the people. The rise in income improves the standard of living. In rural areas there is great need of small scale industry.

7. Cheaper Production :-
The small scale industry is labor-intensive while labor is cheap in subcontinental, so the production of small scale industry is cheaper. Due to low prices people purchase more goods and market expands.

8. Proper Distribution of Wealth :-
The small scale industry increases the income of the people and reduces the gap between rich and poor. We can reduce the poverty by expanding the small scale industry.

9. establishment With Small Capital :-
We can establish these industries with small capital. In subcontinental most of the people are poor, so they can start the production with small capital.

10. Development of Backward Areas
We can develop backward areas by establishing the small scale industry in these areas. It will remove poverty from backward areas.

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.