TyroCity: Economics 11 Notes

Importance of agriculture in Nepal

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

1. Source of food
Agriculture is determined as main source of food in Nepal. All food and cash crops are grown from agriculture. Agriculture is the mean to survive. We get all required food from it. So, it is a main source of food.

2. Source of raw material
Agriculture is not only source of food but a dominant source of raw material. Jute, sugarcane, tobacco etc. are produced or obtained from agriculture.

3. Employment opportunities
Agriculture is the primary source of employment. According to a report of World Bank about 71.74% of total population depends upon agriculture. The number are 3,831,000 families depending on agriculture as per the 6th agricultural counting from Nepal Government. Thus, almost all farmers are completely engaged in agriculture, making agriculture dominant in agricultural employment.

4. Source of foreign trade
Most of the agro-product is export to foreign or international market. About 60% of agro-product is exported to foreign land. Tea, coffee, woolen clothes, leather jackets etc. are exported which is agricultural products.

5. Increase in Government revenue
Since, 60% of goods exported are obtained from agriculture. So, Government of Nepal includes export tax, tax, registration tax etc. which is the important source of Government revenue.

Economics XI

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

General

Human Resources

Agriculture

Poverty

General Industry

Tourism Industry

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.

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.

Nature of Economics

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

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

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

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

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

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

i. economics is science of wealth

ii. labor is the only source of income

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

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

v. this definition is influenced by physiocracy and mercantilism.

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

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

1.material welfare

2.immaterial welfare

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

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

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

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

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

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

Criticisms:

The definition is criticized in the following ways:-

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

Superiority of Robbins definition over Marshall’s definition:-

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

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

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

study of consumers behavior

           -cardinal utility theory

          – ordinal theory

          -revealed preference theory

          -cardinal behavior theory

Study of production and cost function
Mathematically.

               Q=output (quantity)

               C=cost of production

               K=capital

Q=f (K and other inputs)

C=f (Q)

      Therefore, C ∞ input

Study of price and output determination Profit=revenue-cost

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

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

Factor wages-rent, wage, interest, profit

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

a) Aggregate consumption

b) Aggregate income

c) Aggregate saving

d) Aggregate investment

e) Aggregate demand

f) Aggregate supply

g) Price level

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

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

1. Study of wage level and employment level

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

2. The study of price level and output level

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

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

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

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

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

b) Normative economics

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

Economics is a science or an art

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

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

Importance of microeconomics:

Important to the consumers

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

Important to the firms or businessmen

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

Important to the government

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

Important for the study of other economic science.

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

Importance of macroeconomics

To know the relationship between macro economics variables:

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

To know the functioning of economy

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

To correct unfavorable balance of trade and payment

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

To achieve high economic growth and employment level

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

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

Problem of cottage and small scale industry

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

1. Lack of rural infrastructure
Nepal’s rural area is sympathies and have no infrastructure life is extremely difficult and hard to earn livelihood. To run an industry, infrastructure is essential but Nepal lacks infrastructure.

2. Lack of skilled manpower

Nepal does not have sufficient manpower basically skilled one Brain drain is the main problem of Nepal. All skilled manpower move abroad which is the major problem.

3. Lack of modern technology

Farmers in our country use traditional method of farming. They do not know about modern technology. They totally depend upon tradition. They depend upon monsoon rain and use low quality seed.

4. Lack of credit facilities

Farmers are poor and there is no proper banking facility in Nepal which lends money in low interest. So, farmers depend upon money- lender, traders etc and charge very high rate interest.

5. Limited market

Due to lack of infrastructure (communication and transportation) farmers do not get opportunity to sell their product in reasonable price.

6. Intermediary Exploitation

Intermediary or middlemen are the price maker of Nepalese economy. They exploit the entire economy. They charge very amount to farmers and sell/supply to market in very huge amount. They are the profit maker and exploiter.

Introduction to Tourism Industry

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

Tourism Related Information, 2010

Tourist arrival in number	6,02,867
Foreign exchange earning	28,139 million

Number of tourist by purpose of visit

Purposes	Percentage
Trekking and Mountaineering	10.46%
Pilgrimage	11.65%
Business	3.55%
Official	4.37%
Meeting / Seminar	16.81%
Rafting	0.12%
Others	51.44%

Total Contribution in Gross Domestic Product (GDP) 24%

Direct Employment = 110000

Source: Economic Survey 2010/11

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.

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.

Causes of Poverty

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

1. Rapid Population Growth
In Nepal, the growth rate of population is very high 1.40% per annum as compared to the economic growth rate is 4.5%, according to world Economic Outlook – 2011. Due to extreme high population, the living standard of people is degraded.

2. Gender inequality

The unequal distribution of income and wealth is another cause of poverty in Nepal. The gap between rich and poor is very high and the distribution of national income is not in favors of poor people. So, poor get poorer and poorer and rich get richer and richer.

3. Illiteracy

Illiteracy is also one of the causes of poverty. Illiterate people are unaware about family planning measures and birth spacing and are not familiar with the problem created by large population. So, the more population, the more requirement of job causes unemployment and ultimately arises poverty.

4. Lack of employment

Nepal, a country with poor, weak and fragile economy has very limited industries (large). The population is growth rate is high but industries are limited. So, rate of unemployment is growing rapidly leading to poverty.

5. Low saving

About 70 or more percent of total salary or income is spent in food which is very high and rest 30% is spent in other sectors such as education, health etc. The percent shared by saving is null or very less.

6. Old technology

Farmers of Nepal are traditional and are poor. They use old technology for farming and their production include max food crop (49.1%). Similarly, the production is low, which causes poverty even though they labour hard enough.

Direct Tax

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

Meaning of direct tax

The taxes imposed in income, profit and properties are called direct taxes. The person or organization which faces the incident taxes the burden of the tax. The tax is not shift able in nature and is paid by the payers who really take its burden. The payers know how much they are paying at what rate and on what basis. Therefore, this tax is inconvenient and hence unpopular type of tax. But it is a very effective tool applied for price stability, redistribution of income and wealth, economic stability, reallocation of resources etc.

Advantages of direct tax

1. Certainty:
There is certainty in collection of tax from direct tax. The government can easily estimate the amount of tax that it can collect in the coming fiscal year.

2. Based on ability to pay:
The direct taxes are imposed on the basis of “ability to pay” of the people and organization. The people and business organizations earning more profit, income pay more taxes than the counterparts.

3. Uniform:
The people and business organization belonging to a certain group are imposed equally. Rate of tax is uniform in all places and to everyone.

4. Economic:
Bearing little cost of collection, huge amount can be collected. Less time and manpower is required for tax collection.

5. Educative:
The payers of direct tax know how much they are paying, why should they pay and whether the government is utilizing the money or not.

6. Re distributive:
Direct tax is very useful to redistribute income and wealth if there is high inequality. For it, the rich people are imposed taxes in income, profit and properties heavily and the amount collected is used for the benefit of the poor people.

7. Anti-inflationary:
If there is inflation, the government absorbs the money with people increasing direct tax rate. It helps to control the increase in aggregate demand and rise in price level.

8. Reallocate:
The direct tax is helpful to reallocate the resources from non or less desirable sector to more desirable sector. For it, the government imposes more profit tax in the profit earned from the production of such non or less desirable product like tobacco, alcohol etc.

Disadvantages of direct tax

1. Inconvenient:
The payers of direct tax know how much they are paying on what basis or on what rate per unit of time they are paying. The direct taxes are paid in large amounts. Therefore, the payers feel inconvenience or burden.

2. Less flexible:
Only if the direct tax is decreased, it is welcomed and accepted by large number of people. When it is increased the government may encounter serious political pressure.

3. Unpopular:
The direct tax is unpopular tax. It is inconvenient and less flexible. It is not diversified like indirect tax. Due to direct tax, the government may encounter serious political pressure too.

4. Corruption:
In order to evade the payment of large amount of direct tax, the officials and political leaders are offered bribes.

5. Anti-productive:
The direct tax may be anti-productive. It is because its imposition makes people not to work hard. There may be decrease in production, investment and income generation.

Characteristics of Poor

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

1. Low income
Nepal is poor country and is enlisted in under developed country. In Nepal, more than 60% are illiterate among poor. Adult illiteracy rate is 57.2%, according to human development report 2010.

2. Education

Education is the process of getting knowledge poor people are not aware about education knowledge. So, they think providing education facilities to daughter is useless and son and does not send their daughter to educational institute which causes high illiteracy rate.

3. Housing condition

Housing condition of poor is extremely poor. Moreover, the condition of urban poor is worse than rural poor. Urban poor do not have their own house. They sustain their life on the basis of daily wage. Similarly, the life of rural poor is difficult. They live on small house.

4. Expenditure

The less income, the more expenditure. The expenditure exceeds income in poor. They spend more than 70% income merely in food and rest in other sector.

5. Large family size

Due to lack of education, poor people are not aware of family planning measures (birth control measures). So, they think begetting children is boon of god.

6. Property

The word poor automatically refer to those who do not have property or who have less property. They do not have sufficient land to earn their livelihood. So, they work on other’s land and earn their livelihood.