Class 12 Economics Notes (English Medium)

Unit 1: Basic Concepts of Economics and Allocation of Resources

Very Short Answer Questions [For 1 mark]

1. What is scarcity and choice?
Scarcity refers to the fundamental economic problem of having seemingly unlimited human wants in a world of limited resources. Choice is the decision-making process involving the selection of one option over another because resources are scarce and have alternative uses.

2. Define an economic problem.
An economic problem is the problem of allocating scarce resources that have alternative uses to satisfy unlimited human wants. It essentially answers the questions of what, how, and for whom to produce.

3. What is capital-intensive technique of production?
A capital-intensive technique of production is a method where the ratio of capital (machinery, equipment) to labor is higher. It relies more on machines and technology than on human workers to produce goods.

4. What do you mean by allocation of resources?
Allocation of resources refers to the process of distributing available scarce resources (land, labor, capital) among various alternative uses to produce goods and services that satisfy human wants.

5. What is labour-intensive technique of production?
A labour-intensive technique of production is a method where the ratio of labor to capital is higher. It relies more on human workforce and manual effort than on machinery to produce goods.

6. Why do central problems arise?
Central problems arise due to three fundamental reasons:

• Unlimited human wants.
• Scarcity of resources.
• Alternative uses of scarce resources.

7. What do you mean by PPC (Production Possibility Curve)?
The Production Possibility Curve (PPC) is a graphical representation showing the various combinations of two goods that an economy can produce given fixed resources and constant technology.

8. What is opportunity cost?
Opportunity cost is the value of the next best alternative that is forgone or sacrificed when a choice is made.

9. What is the meaning of the problem ‘whom to produce’?
The problem of ‘whom to produce’ relates to the distribution of produced goods and services among the individuals in the economy. It decides who gets how much share of the total national produce (distribution of income).

10. What does the production point inside the PPC indicate?
A production point inside the PPC indicates the underutilization or inefficient use of resources, meaning the economy is not producing at its full potential (e.g., unemployment).

11. What do you mean by economic system?
An economic system is an organized way in which a state or nation allocates its resources and apportions goods and services in the national community. It defines the institutional framework within which economic activities take place.

12. What is a market or capitalist economy?
A market or capitalist economy is an economic system where the means of production are privately owned, and economic decisions (what, how, for whom to produce) are driven by market forces (supply and demand) and the profit motive, with minimal government intervention.

13. Define socialist or command economy.
A socialist or command economy is an economic system where the means of production are owned and controlled by the state (government). All major economic decisions are made by a central planning authority with the objective of social welfare.

14. What do you mean by mixed economy?
A mixed economy is an economic system that combines features of both capitalism and socialism. It involves the coexistence of the private sector and the public sector, where the market mechanism operates within regulations set by the government.

15. Define division of labor.
Division of labor is the process of breaking down a complex production task into smaller, specialized tasks, where each task is performed by a different worker or group of workers to increase efficiency and productivity.

Short Answer Questions [For 5 Marks]

1. Explain the concept of Production Possibility Curve.
The Production Possibility Curve (PPC), also known as the Production Possibility Frontier (PPF), is a fundamental economic model used to illustrate the concepts of scarcity, choice, and opportunity cost.
Definition: It is a curve that depicts all possible combinations of two goods that an economy can produce when its resources are fully and efficiently employed, given the state of technology remains constant.
Assumptions:

• The economy produces only two goods.
• Resources (land, labor, capital) are fixed in quantity.
• Technology is constant.
• Resources are fully and efficiently utilized.

• On the curve: Represents full and efficient employment of resources.
• Inside the curve: Represents underutilization or inefficiency (e.g., unemployment).
• Outside the curve: Represents an unattainable combination with current resources and technology.

2. Explain the problems related to allocation of resources.
Every economy faces the problem of allocating its scarce resources. These are often called the central problems of an economy:

• What to Produce: Since resources are limited, an economy cannot produce everything. It must decide which goods and services to produce (e.g., consumer goods vs. capital goods, or guns vs. butter) and in what quantities. This involves selecting the goods that yield the maximum utility for society.
• How to Produce: This problem refers to the choice of technique of production. The economy must choose the method that produces the output at the minimum cost.
  • Labor-Intensive Technique: Uses more labor than capital (suitable for labor-surplus economies).
  • Capital-Intensive Technique: Uses more machines than labor (suitable for capital-rich economies).
• For Whom to Produce: This refers to the distribution of the produced goods and services among the members of society. It essentially asks: Who will consume the goods? This depends on the distribution of income (purchasing power) among individuals. It involves ensuring a fair distribution of national income among the factors of production (rent, wages, interest, profit).

3. What is a mixed economy? Explain its features.
Definition: A mixed economy is an economic system that blends the characteristics of both capitalism (market economy) and socialism (command economy). In this system, the public sector (government) and the private sector coexist and work together.
Features of Mixed Economy:

• Coexistence of Public and Private Sectors: Both sectors operate side by side. The private sector generally operates in consumer goods industries, while the public sector manages strategic industries (defense, railways, energy).
• Role of Price Mechanism and Planning: Prices for most goods are determined by the market forces of demand and supply (price mechanism), but the government regulates prices of essential goods and services through planning and controls.
• Profit Motive and Social Welfare: The private sector is driven by the profit motive, leading to efficiency and innovation. The public sector focuses on social welfare, ensuring essential services are available to all.
• Regulation and Control: The government regulates the private sector through policies (taxation, licensing, labor laws) to prevent monopolies and protect consumer rights.
• Protection of Private Property: Individuals have the right to own property and accumulate wealth, but the government may impose limits (ceilings) on wealth to reduce inequality.

4. Explain the advantages and disadvantages of division of labour.
Division of Labor implies splitting the production process into smaller parts, with each part assigned to a specific worker.
Advantages:

• Increase in Productivity: Workers become skilled in their specific tasks, leading to higher output per worker.
• Time Saving: Workers do not need to switch between different tasks or tools, saving time and momentum.
• Invention and Innovation: Constant focus on a single task often leads workers to discover better and more efficient ways to do it, fostering innovation.
• Use of Machinery: Simplification of tasks makes it easier to use machines, further boosting production.
• Right Man for the Right Job: Workers can be assigned tasks that match their skills and aptitudes.

• Monotony and Boredom: Doing the same repetitive task every day can become mentally dull and boring for workers.
• Loss of Craftsmanship: Workers contribute only a small part to the final product and may not feel a sense of pride or accomplishment in the final creation.
• Risk of Unemployment: If a worker specializes too narrowly and that skill becomes obsolete (e.g., due to automation), they may find it hard to get another job.
• Interdependence: The production process becomes a chain. If one department or group of workers stops work (e.g., a strike), the entire production line can halt.

5. Explain capitalist economy with its five features.
Definition: A capitalist economy (or free-market economy) is a system where the means of production are owned by private individuals. Economic activities are guided by the motive of profit and controlled by the forces of demand and supply with very limited government interference.
Five Features:

• Private Property: Individuals have the right to own, control, and dispose of property (land, factories, machines). The law protects this right, encouraging investment and accumulation of wealth.
• Profit Motive: The primary driving force of all economic activities is profit. Entrepreneurs produce goods and services solely to earn the maximum possible profit.
• Freedom of Enterprise: Individuals are free to engage in any economic activity they choose. Producers can produce what they want, and consumers can buy what they want (Consumer Sovereignty).
• Price Mechanism: Economic problems (what, how, for whom to produce) are solved by the price mechanism. Prices are determined by the interaction of demand and supply in the market without government control.
• Competition: There is free competition among sellers to sell their goods and among buyers to purchase them. This competition encourages efficiency, innovation, and keeps prices reasonable.

Unit 2: Market and Revenue Curves

Very Short Answer Questions [For 1 mark]

1. Define Total Revenue.
Total Revenue (TR) is the total amount of money a firm receives from the sale of a given quantity of goods or services. It is calculated as Price × Quantity (TR = P × Q).

2. Define Marginal Revenue.
Marginal Revenue (MR) is the addition to Total Revenue resulting from the sale of one additional unit of output. It is calculated as MR = ΔTR / ΔQ or TR_n – TR_n-1.

3. What do you mean by Average Revenue?
Average Revenue (AR) is the revenue per unit of output sold. It is obtained by dividing Total Revenue by the quantity sold (AR = TR / Q). In most market structures, Average Revenue is equal to the Price of the commodity.

4. If total cost is Rs. 1000 and total revenue is Rs. 1200, then find the total profit by using the formula.
Formula: Profit (π) = TR – TC
Calculation: π = 1200 – 1000 = Rs. 200
Ans: Total Profit is Rs. 200.

5. If total revenue of a firm is 10,000 and total cost of a firm is 12,000, then find total profit or loss.
Formula: Profit/Loss = TR – TC
Calculation: 10,000 – 12,000 = -2,000
Ans: The firm incurs a Loss of Rs. 2,000.

Short Answer Questions [For 5 marks]

1. Show the relationship among total revenue, marginal revenue, and average revenue in perfect competition.
In a perfect competition market:

• Price is Constant: Individual firms cannot influence the price; they are price takers. Therefore, Price (P) is constant for all units of output.
• AR = MR = Price: Since price is constant, every additional unit sold adds the same amount to the total revenue. Thus, Average Revenue (AR) is equal to Marginal Revenue (MR), and both are equal to the Price (AR = MR = P).
• TR Increases Constantly: Total Revenue (TR) increases at a constant rate because MR is constant. The TR curve is a straight line passing through the origin sloping upwards.

2. Explain the nature of AR and MR under perfect competition.

• Horizontal Straight Line: Under perfect competition, the firm sells any amount of commodity at the prevailing market price.
• Perfectly Elastic: The AR curve is perfectly elastic (parallel to the X-axis).
• Identity: The AR curve and MR curve coincide with each other. They are represented by the same horizontal line (P = AR = MR).
• Diagrammatic Description: If we plot Output on the X-axis and Revenue/Price on the Y-axis, the AR/MR curve is a horizontal line at the level of the market price.

3. Explain the derivation of AR and MR from TR under monopoly market.
In a monopoly (or imperfect) market, a firm must lower its price to sell more units.

• Derivation of AR: AR = TR / Q. Since the firm must lower the price to sell more, AR (Price) falls as output increases. Thus, the AR curve slopes downwards from left to right.
• Derivation of MR: MR = TR_n – TR_n-1. Since price falls for all units to sell an additional unit, the specific revenue gained from the last unit (MR) falls faster than the average revenue.
• Relationship: TR increases initially at a diminishing rate, reaches a maximum, and then falls. Consequently, both AR and MR fall, but MR falls steeper than AR and lies below the AR curve. MR can become zero or negative, while AR remains positive.

Numerical Problem

(i) Complete the given table. (Note: Since Price is constant at 10, this is Perfect Competition)

(ii) Construct Marginal Revenue and Average Revenue curve on the basis of the completed table.
Description of the Graph:

• X-axis: Units of goods sold (1, 2, 3, 4, 5).
• Y-axis: Revenue/Price (Rs).
• Plotting: Both AR and MR are constant at Rs. 10 for all levels of output.
• Shape: The curve will be a single horizontal straight line parallel to the X-axis at the level of Rs. 10. This single line represents both AR and MR (AR = MR).

Unit 3: Cost Curves

Very Short Answer Questions [For 1 mark]

1. What is Total Fixed Cost?
Total Fixed Cost (TFC) refers to the costs incurred by a firm on fixed factors of production (like land, machinery, building) which do not change with the level of output. It remains constant even if output is zero.

2. What is Variable Cost?
Variable Cost (TVC) refers to the costs incurred on variable factors of production (like raw materials, labor, fuel) which change directly with the level of output. It is zero when output is zero.

3. Differentiate between fixed cost and variable cost.

• Fixed Cost: Remains constant regardless of output; incurred even at zero output (e.g., Rent).
• Variable Cost: Changes directly with the level of output; is zero at zero output (e.g., Wages of casual labor).

4. What do you mean by short-run cost?
Short-run costs are costs incurred in a period where some factors of production are fixed (TFC) and others are variable (TVC). In the short run, Total Cost = TFC + TVC.

5. Define Marginal Cost.
Marginal Cost (MC) is the addition to Total Cost caused by producing one additional unit of output.
Formula: MC = TC_n – TC_n-1 or MC = ΔTC / ΔQ.

6. Why does Average Fixed Cost (AFC) decrease continuously?
AFC decreases continuously as output increases because the Total Fixed Cost (TFC) is a constant numerator, while the quantity of output (denominator) keeps increasing (AFC = TFC / Q). The curve is a rectangular hyperbola.

7. Present short-run average cost in a diagram. (Description):
The Short-Run Average Cost (SAC) curve is ‘U’ shaped. It initially falls due to increasing returns to a factor (economies of scale), reaches a minimum point (optimum capacity), and then rises due to diminishing returns to a factor (diseconomies of scale).

8. Define implicit and explicit cost.

• Explicit Cost: Actual money payments made by the firm to outsiders for purchasing inputs (e.g., wages paid, payments for raw materials).
• Implicit Cost: The estimated value or imputed cost of self-owned resources used by the entrepreneur in production (e.g., rent of own land, salary of own labor).

9. What do you mean by accounting cost?
Accounting cost refers to the explicit costs recorded in the books of accounts. It includes only actual money expenditure incurred by the firm.

Short Answer Questions [For 5 marks]

1. Explain the relationship among total fixed cost, total variable cost, and total cost in the short run. OR Explain short-run total cost with a clear diagram.
In the short run, Total Cost (TC) is the sum of Total Fixed Cost (TFC) and Total Variable Cost (TVC).
Equation: TC = TFC + TVC

• TFC Curve: A horizontal straight line parallel to the X-axis (constant at all levels).
• TVC Curve: Starts from the origin (0,0), increases at a decreasing rate initially, and then increases at an increasing rate (Inverse S-shape).
• TC Curve: Starts from the TFC point on the Y-axis (not from origin). It has the same shape as the TVC curve but lies above it by the vertical distance of TFC. TC and TVC are parallel.

2. Explain the relationship between Average Cost and Marginal Cost.
There is a close relationship between Average Cost (AC) and Marginal Cost (MC):

• When AC falls: MC is less than AC (MC < AC). The MC curve lies below the AC curve.
• When AC is minimum: MC equals AC (MC = AC). The MC curve cuts the AC curve from below at its lowest point.
• When AC rises: MC is greater than AC (MC > AC). The MC curve lies above the AC curve.

3. What is the nature of the short-run average cost curve?
The Short-Run Average Cost (SAC) curve is ‘U’ shaped.
Why? This is due to the Law of Variable Proportions. In the initial stages of production, as variable factors are added to fixed factors, efficiency increases (Increasing Returns), causing average costs to fall. Eventually, the fixed factors become overcrowded, and efficiency drops (Diminishing Returns), causing average costs to rise.

4. If AC and AVC are Rs. 30 and Rs. 20 respectively, calculate TFC at an output of 10 units.
Given: AC = 30, AVC = 20, Output (Q) = 10.
Step 1: Find AFC. AC = AFC + AVC &implies; 30 = AFC + 20 &implies; AFC = 10.
Step 2: Calculate TFC. AFC = TFC / Q &implies; 10 = TFC / 10 &implies; TFC = 10 × 10 = 100.
Answer: TFC is Rs. 100.

Numerical Problem [For 8 marks]

(i) Complete the table by computing the total, average, and marginal costs.
Formulas:
TC = TFC + TVC
AC = TC / Output (Undefined at 0)
MC = TC_n – TC_n-1 (Undefined at 0)

(Note: Usually at Output 0, TVC is 0. If TFC is 100 and TC is 100, then TVC must be 0).

(ii) Draw the average and marginal cost curves from the table.
Description of the Graph:

• X-axis: Output (0 to 8).
• Y-axis: Cost (Rs).
• AC Curve: Plot points (1, 110), (2, 62), …, (8, 53). The curve will slope downwards steeply, reach a minimum at Output 5-6 (Rs. 40), and then start rising. It forms a ‘U’ shape.
• MC Curve: Plot points (1, 10), (2, 14), …, (8, 109). The curve starts low, rises gradually, intersects the AC curve near its minimum point (at Output 6 where AC=MC=40), and then rises steeply above the AC curve.

Economics Solutions: Unit 4 & Unit 5

Unit-4: Theory of Price and Output Determination

Very Short Answer Questions [For 1 mark]

1. What is firm equilibrium?
Firm equilibrium refers to a state where a firm has no tendency to change its level of output or price. It is the position of maximum profit (or minimum loss) where Marginal Revenue (MR) equals Marginal Cost (MC).

2. Define perfect competition.
Perfect competition is a market structure characterized by a large number of buyers and sellers, homogeneous products, free entry and exit, and perfect knowledge, where no single firm can influence the price.

3. What is monopoly?
Monopoly is a market structure where there is a single seller of a product with no close substitutes, giving the firm substantial control over the price.

4. Mention the assumptions of a perfect competition market.

• Large number of buyers and sellers.
• Homogeneous (identical) products.
• Free entry and exit of firms.
• Perfect mobility of factors of production.

5. Mention two conditions for the equilibrium of a firm.
The two necessary conditions for firm equilibrium are:

• Marginal Revenue must equal Marginal Cost (MR = MC).
• Marginal Cost curve must cut the Marginal Revenue curve from below (MC must be rising).

6. Write any four characteristics of a monopoly market.

• Single seller and large number of buyers.
• No close substitutes for the product.
• Barriers to entry for new firms.
• Price maker (the firm decides the price).

7. Write any four features of a perfectly competitive market.

• Homogeneous products.
• Perfect knowledge of market conditions.
• Absence of transport costs.
• Uniform price determined by the industry (market forces).

Long Question Answers [For 5 or 8 marks]

1. Explain how a firm determines its equilibrium level of output by using the MR-MC Approach under a perfect competition market.
Under perfect competition, a firm is a price taker. The price is determined by the industry demand and supply. Therefore, the Average Revenue (AR) and Marginal Revenue (MR) curves are a horizontal straight line equal to the price (P = AR = MR).
Equilibrium Conditions:

• MR = MC: The firm maximizes profit at the point where the cost of producing one more unit equals the revenue gained from it.
• MC cuts MR from below: The MC curve must be rising at the point of intersection.

• The firm compares its MC with the market price (MR).
• If MR > MC, the firm increases output to gain more profit.
• If MC > MR, the firm decreases output to reduce losses.
• The equilibrium is reached at the output level where the rising MC curve intersects the horizontal MR line. This point determines the optimal output level Q.

2. Describe the monopoly equilibrium according to the MR=MC Approach.
A monopolist is a price maker. The demand curve (AR) slopes downward, and the Marginal Revenue (MR) curve lies below the AR curve.
Equilibrium Conditions:

• MR = MC
• MC curve cuts MR curve from below.

• The monopolist produces up to the point where the additional revenue from selling the last unit (MR) equals the additional cost of producing it (MC).
• The intersection of MC and MR determines the equilibrium quantity (Q).
• To find the equilibrium price, the monopolist looks at the Demand Curve (AR) corresponding to quantity Q. The price (P) is set at the height of the AR curve at that output level.
• Since AR > MR in monopoly, the price charged is generally higher than the Marginal Cost.

Numerical Questions [For 5 or 8 marks]

1. Let cost function TC = 100 + 12Q² and demand function P = 200 – 8Q. Find output and price at equilibrium.
Solution: To find equilibrium, we need MR and MC.
Step 1: Find Total Revenue (TR) and Marginal Revenue (MR)
TR = P × Q = (200 – 8Q) × Q = 200Q – 8Q²
MR = d(TR)/dQ = 200 – 16Q
Step 2: Find Marginal Cost (MC)
TC = 100 + 12Q²
MC = d(TC)/dQ = 24Q
Step 3: Equate MR and MC (Equilibrium Condition)
MR = MC
200 – 16Q = 24Q
200 = 24Q + 16Q
200 = 40Q
Q = 200 / 40 = 5
Step 4: Find Price
P = 200 – 8Q
P = 200 – 8(5)
P = 200 – 40 = 160
Ans: Equilibrium Output is 5 units and Price is Rs. 160.

2. The Total Revenue Function of a monopoly firm is given by R = 30Q – Q² and Total Cost Function C = 20 + 4Q. a) Calculate the best level of output by MR-MC approach. b) Find the price (P).
Solution:
a) Calculate Best Level of Output
Find MR: R = 30Q – Q² &implies; MR = dR/dQ = 30 – 2Q
Find MC: C = 20 + 4Q &implies; MC = dC/dQ = 4
Equilibrium (MR = MC):
30 – 2Q = 4
30 – 4 = 2Q
26 = 2Q
Q = 13
Ans: The best level of output is 13 units.
b) Find the Price (P)
We know R (Total Revenue) = P × Q. Therefore, P = R / Q.
P = (30Q – Q²) / Q = 30 – Q
Substitute Q = 13:
P = 30 – 13 = 17
Ans: The price is Rs. 17.

3. A firm’s marginal cost and marginal revenue function are given as: TC = 50 + 6Q² and P = 100 – 4Q. Using the MR-MC approach (where MC = 12Q and MR = 100 – 8Q), calculate profit maximizing output, price, and the total profit.
Solution:
Step 1: Calculate Profit Maximizing Output
MR = MC
100 – 8Q = 12Q
100 = 20Q
Q = 5
Output = 5 units.
Step 2: Calculate Price
P = 100 – 4Q
P = 100 – 4(5) = 100 – 20 = 80
Price = Rs. 80.
Step 3: Calculate Total Profit
Profit (π) = TR – TC
Calculate TR: TR = P × Q = 80 × 5 = 400
Calculate TC: TC = 50 + 6Q² = 50 + 6(5)² = 50 + 6(25) = 50 + 150 = 200
Calculate Profit: π = 400 – 200 = 200
Total Profit = Rs. 200.

Unit 5: Price Determination of Factors of Production

Very Short Answer Questions [For 1 mark]

1. Define gross interest.
Gross interest is the total payment made by a borrower to a lender. It includes net interest (payment for the use of capital) plus payments for risk, inconvenience, and management of the loan.

2. What is economic rent?
Economic rent is the payment made to a factor of production (usually land) which is in excess of the minimum amount necessary to keep it in its present use (transfer earnings). It arises due to the scarcity or inelastic supply of the factor.

3. Write the meaning of net profit.
Net profit is the pure reward for the entrepreneur’s risk-taking and organizational ability. It is obtained by subtracting implicit costs (rent of own land, salary of own management, etc.) from gross profit.

4. Define net interest.
Net interest is the payment made exclusively for the use of capital services only, excluding any charges for risk or inconvenience. It is the price of credit.

5. Define money and real wage.

• Money Wage: The amount of wages paid to workers in terms of cash or currency (nominal wage).
• Real Wage: The purchasing power of the money wage, expressed in terms of goods and services that the money can buy.

6. Differentiate between economic rent and contract rent.

• Economic Rent: A surplus earning over transfer earnings; arises due to inelastic supply.
• Contract Rent: The gross agreed-upon payment made by a tenant to a landlord, which may include economic rent plus interest on capital improvements (like buildings/wells) on the land.

7. Differentiate between net interest and gross interest.

• Net Interest: Pure reward for lending capital.
• Gross Interest: Net Interest + Reward for Risk + Reward for Inconvenience + Cost of Management.

Short Answer Questions [For 5 marks]

1. Explain the Subsistence Theory of wage.
Also known as the “Iron Law of Wages,” this theory (associated with David Ricardo and Lassalle) states that wages tend to settle at the minimum level necessary for the worker’s survival and subsistence.

Logic: If wages rise above subsistence, population increases, increasing labor supply, which pushes wages back down. If wages fall below subsistence, population decreases due to starvation, reducing labor supply, which pushes wages back up.
Conclusion: In the long run, wages remain fixed at the bare minimum level required to sustain life.

2. Explain the Wage Fund Theory of wage.
Propounded by J.S. Mill, this theory states that wages depend on two quantities:

• The Wage Fund: A fixed amount of capital set aside by employers for the payment of wages.
• The Population of Laborers: The number of workers seeking employment.

3. Explain the Uncertainty Bearing Theory of profit.
Proposed by Prof. Frank Knight, this theory distinguishes between “Insurable Risks” (like fire, theft) and “Non-Insurable Risks” (Uncertainties).
Concept: Profit is the reward not just for bearing risk, but specifically for bearing uncertainty.
Uncertainties: Changes in fashion, market demand, competitors’ strategies, or government policies cannot be predicted or insured against.
The entrepreneur bears this burden of the unknown, and profit is the compensation for this specific function.

4. Explain the Risk Bearing Theory of profit.
Proposed by F.B. Hawley, this theory asserts that profit is the reward for risk-taking.
Concept: Business involves various risks (financial, obsolescence, market fluctuations). No entrepreneur would engage in production unless they expect a return greater than the value of their capital to compensate for the anxiety and potential loss.
Conclusion: The higher the risk in an industry, the higher the expected profit. Profit is the price society pays to entrepreneurs for assuming the risks of production.

Long Answer Questions [For 5 or 8 marks]

1. Describe the Ricardian Theory of Rent with its criticisms.
David Ricardo defined rent as “that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.”
Key Points:

• Differential Rent: Rent arises because different plots of land have different fertility.
• Scarcity: Land is limited in supply.
• Cultivation Sequence: People cultivate the most fertile land first (A-grade). As demand grows, they move to less fertile land (B-grade, C-grade).
• Formation of Rent: The surplus produce of superior land over the marginal land (least fertile land under cultivation) is Rent. The marginal land earns no rent (No-Rent Land).

• No “Original and Indestructible” Powers: Soil fertility can be destroyed by overuse or created by fertilizers.
• Historically Wrong: People don’t always cultivate the best land first; they cultivate what is accessible.
• No-Rent Land: In reality, scarce land almost always commands some rent; absolute no-rent land rarely exists.
• Single Use Assumption: It assumes land has only one use (agriculture), ignoring alternative uses.

2. Critically explain the Classical Theory of Interest.
Also known as the Real Theory or Demand and Supply Theory of Interest. It states that the rate of interest is determined by the equilibrium of the Supply of Capital (Savings) and the Demand for Capital (Investment).
1. Demand for Capital (Investment):

• Capital is demanded by entrepreneurs for productive purposes.
• Demand depends on the productivity of capital. As more capital is used, Marginal Productivity of Capital (MPC) falls.
• There is an inverse relationship: Lower interest rates leads to higher demand for capital. (Downward sloping curve).

• Capital is supplied by savers. Saving involves “abstinence” or “waiting” (sacrificing current consumption).
• To induce people to save, interest must be paid.
• There is a direct relationship: Higher interest rates lead to higher savings. (Upward sloping curve).

• Ignores Monetary Factors: It views interest as a purely real phenomenon, ignoring the role of money, credit, and banking.
• Indeterminate: Savings depend on Income, but Income depends on Investment, which depends on Interest. The theory runs in a circle.
• Unrealistic Full Employment: It assumes full employment, which is rarely true in the real world (Keynesian criticism).

Unit 6: Banking System and Monetary Policy

Very Short Answer Questions [For 1 mark]

1. Define money market.
The money market is a financial market for short-term funds (less than one year), dealing in financial assets that are close substitutes for money, such as treasury bills, commercial papers, and certificates of deposit.

2. What is monetary policy?
Monetary policy is the policy adopted by the central bank of a country to control the money supply, interest rates, and availability of credit in the economy to achieve macroeconomic goals like stability and growth.

3. Define capital market.
The capital market is a financial market for long-term equity and debt capital (more than one year), where companies and governments raise long-term funds through shares, debentures, and bonds.

4. What is saving deposit in commercial bank?
A saving deposit is a type of bank account intended for small savers, which pays a moderate interest rate and places certain restrictions on the number of withdrawals.

5. Why is the central bank called the advisor of the government?
The central bank acts as a financial advisor to the government because it provides expert advice on economic matters such as deficit financing, devaluation, trade policy, and foreign exchange management.

6. What is current deposit in commercial bank?
A current deposit (or demand deposit) is a bank account mainly used by business firms that allows unlimited withdrawals and deposits, usually offering no interest.

7. List any two major functions of commercial bank.

• Accepting deposits from the public.
• Granting loans and advances.

Long Answer Questions [For 5 or 8 marks]

1. Explain the functions of commercial bank.
Commercial banks are financial institutions that operate for profit. Their primary functions are:

• Accepting Deposits: They mobilize savings from the public through:
  • Current Account (Demand Deposit)
  • Saving Account
  • Fixed (Time) Deposit
• Granting Loans and Advances: They lend money to individuals and businesses through overdrafts, cash credits, and short/long-term loans.
• Agency Functions:
  • Collecting cheques, dividends, and interest.
  • Making payments for insurance premiums, rent, etc., on behalf of clients.
  • Buying and selling securities.
• Credit Creation: They create secondary deposits (credit) based on primary deposits, expanding the money supply in the economy.
• Utility Functions: Providing lockers, issuing traveler’s cheques, and foreign exchange services.

2. Describe the main functions of central bank.
The Central Bank (e.g., Nepal Rastra Bank) is the apex financial institution.

• Issue of Currency: It has the monopoly right to print and issue paper currency notes.
• Banker to the Government: It holds government funds, makes payments, receives revenue, and manages public debt.
• Banker’s Bank: It holds the cash reserves of commercial banks and acts as a “lender of last resort” during financial crises.
• Controller of Credit/Money Supply: It uses tools like Open Market Operations, Bank Rate, and Reserve Ratios (CRR) to control inflation or deflation.
• Custodian of Foreign Exchange: It manages the country’s gold and foreign currency reserves and maintains the external value of the domestic currency.
• Promotional Role: It promotes banking habits and expands the financial network in rural areas.

3. Discuss the role of the banking system in the economic development of Nepal.
The banking system plays a crucial role in Nepal’s development by:

• Capital Formation: Banks mobilize small scattered savings from the public and lend them to productive sectors (hydropower, tourism, agriculture).
• Monetization of Economy: Expanding banking to rural Nepal reduces the barter system and integrates rural areas into the national economy.
• Promotion of Trade and Industry: Banks provide necessary working capital, letters of credit (LC), and bank guarantees essential for domestic and international trade.
• Employment Generation: The banking sector itself creates jobs and finances industries that hire thousands of workers.
• Implementation of Monetary Policy: An effective banking network is necessary to implement NRB’s policies to control inflation and maintain stability.
• Development of Priority Sectors: Banks are directed to lend to deprived sectors, agriculture, and SMEs, fostering inclusive growth.

4. Analyze the significance of capital market to enhance the economic development of a country.
The capital market (Stock Exchange) is vital because:

• Mobilization of Long-term Savings: It channels public savings into long-term productive investments (factories, infrastructure).
• Industrial Growth: Companies can raise huge capital by issuing shares/bonds, which is difficult to get solely from banks.
• Efficient Allocation of Resources: Capital flows to the most profitable and efficient companies, ensuring optimal use of national resources.
• Liquidity: It allows investors to sell their investments (shares) easily, encouraging more people to invest.
• Attracting Foreign Investment: A well-regulated capital market attracts Foreign Institutional Investors (FIIs), bringing in foreign capital.

Unit 7: Government Finance

Very Short Answer Questions [For 1 mark]

1. Define tax.
A tax is a compulsory contribution imposed by the government on public authorities, individuals, or companies without any direct quid pro quo (exchange of specific service) in return.

2. What are the sources of government borrowing?
Government can borrow from internal sources (citizens, banks, central bank) and external sources (foreign governments, World Bank, IMF).

3. What is public borrowing?
Public borrowing (Public Debt) refers to the loans taken by the government from internal and external sources to meet its budget deficit.

4. Differentiate between direct tax and indirect tax.
In direct tax (e.g., Income Tax), the impact and incidence fall on the same person. In indirect tax (e.g., VAT), the impact falls on one person (seller) but the incidence falls on another (consumer).

5. Write any two examples of indirect tax.

• Value Added Tax (VAT)
• Customs Duty (Excise Duty)

6. What is the difference between public and private finance?
Public finance deals with the income and expenditure of the government (adjusts income to expenditure), while private finance deals with individuals (adjusts expenditure to income).

7. What are the sources of non-tax revenue?
Fees, fines, penalties, grants, gifts, income from public enterprises, and special assessments.

8. What are the internal sources of public borrowing?
Borrowing from the general public (bonds), commercial banks, non-banking financial institutions, and the central bank.

9. Define budget.
A budget is a detailed financial statement of the government’s estimated revenue and proposed expenditure for the coming fiscal year.

10. Write any two examples of direct tax.

• Income Tax
• Property Tax (Corporate Tax)

11. What is progressive tax?
A tax system where the rate of tax increases as the income of the taxpayer increases (higher burden on the rich).

12. Define internal and external borrowing.

• Internal: Loans raised within the country.
• External: Loans raised from foreign countries or international organizations.

13. Give any four canons of taxation.
Canon of Equality, Canon of Certainty, Canon of Convenience, Canon of Economy.

14. Define proportional tax.
A tax system where the rate of tax remains constant regardless of the change in income level.

15. Mention any four sources of non-tax revenue.

• Administrative fees (registration, license).
• Fines and penalties.
• Profits from public sector undertakings.
• Foreign grants and gifts.

Short Answer Questions [For 5 marks]

1. Explain the process of budget formulation in Nepal.
The budget formulation process in Nepal involves:

• Estimation of Resources: The Resource Committee (National Planning Commission) estimates available resources.
• Ceiling Fixation: Budget ceilings are sent to various ministries.
• Preparation by Ministries: Ministries prepare their programs and budget requirements.
• Discussion and Selection: Discussions are held between the Ministry of Finance and other ministries.
• Cabinet Approval: The draft budget is approved by the Council of Ministers.
• Parliamentary Presentation: The Finance Minister presents the budget in the Parliament (usually on Jestha 15).
• Discussion and Passing: Parliament discusses and votes on the budget. Once passed and signed by the President, it becomes law (Appropriation Act).

2. Explain the concept of progressive tax system.

• Definition: A system where the tax rate increases as the taxable income increases.
• Principle: It is based on the “Ability to Pay” principle. Rich people have a higher ability to pay, so they are taxed at a higher rate.
• Example: 1% tax for income up to 5 Lakhs, 10% for the next 2 Lakhs, 20% for the next amount, etc.
• Objective: To reduce income inequality and bridge the gap between the rich and the poor.

3. Describe the features of a good tax system (canons).
According to Adam Smith and others, a good tax system should have:

• Canon of Equality: Tax burden should be distributed according to the ability to pay.
• Canon of Certainty: The taxpayer should know exactly how much, when, and how to pay.
• Canon of Convenience: The timing and mode of payment should be convenient for the taxpayer.
• Canon of Economy: The cost of collecting the tax should be minimal.
• Canon of Elasticity: The system should be flexible enough to increase revenue when needed.

4. Explain the sources of public borrowing.

• Internal Sources:
  • Market Loans: Issuing treasury bills and development bonds to the public.
  • Banks: Borrowing from commercial banks and the Central Bank (Deficit Financing).
• External Sources:
  • Foreign Governments: Bilateral loans (e.g., from USA, India, China).
  • International Institutions: Multilateral loans from World Bank, IMF, ADB.
  • International Capital Markets: Selling bonds in foreign markets.

5. Explain the advantages/disadvantages of direct tax.
Advantages:

• Equity: Based on ability to pay (Progressive).
• Certainty: Govt knows how much revenue to expect.
• Civic Consciousness: Taxpayers feel involved in government affairs.

• Unpopular: People dislike paying directly from income.
• Tax Evasion: High possibility of hiding income to avoid tax.
• Disincentive: High rates may discourage hard work and investment.

6. What are the merits and demerits of indirect tax?
Merits:

• Convenient: Paid in small amounts while buying goods.
• Broad Base: Covers all consumers, even the poor (who don’t pay income tax).
• Hard to Evade: Included in the price of the product.

• Regressive: Burden falls more heavily on the poor (a rich and poor person pay the same VAT on bread).
• Inflationary: Increases the price of goods.
• Uncertainty: Revenue depends on demand, which can fluctuate.

Long Answer Questions [For 8 marks]

1. Why is public finance considered important in an economy?
Public finance (Govt revenue and expenditure) is the backbone of a modern economy.

• Allocation of Resources: It reallocates resources from less productive to essential sectors (health, education, infrastructure) through taxation and spending.
• Redistribution of Income: Through progressive taxation and welfare spending, it reduces the gap between the rich and the poor.
• Economic Stability: Fiscal policy (taxes and spending) helps control inflation (by raising taxes/cutting spending) and recession (by lowering taxes/increasing spending).
• Infrastructure Development: Only public finance can fund large projects like roads, dams, and airports which have high costs and long gestation periods.
• Regional Balance: Government spends on backward regions to ensure balanced regional development.
• Employment Generation: Public works programs create jobs and reduce unemployment.

2. Explain the role of public expenditure in the context of Nepal.
Public expenditure is the spending of the government. In a developing country like Nepal, its role is vital:

• Infrastructure Development: Building roads (Strategic Road Network), hydropower projects, and airports is crucial for Nepal’s connectivity and growth.
• Poverty Alleviation: Expenditure on social safety nets, subsidies for the poor, and rural development programs helps reduce absolute poverty.
• Human Capital Formation: Investment in education and health (building schools, hospitals) improves the quality of the workforce.
• Agricultural Development: Spending on irrigation, fertilizers subsidies, and technology helps the agrarian economy of Nepal.
• Regional Balance: Allocating budgets to remote provinces (like Karnali) helps integrate them into the national mainstream.
• Maintenance of Law and Order: Expenditure on police, army, and administration ensures peace, which is a prerequisite for economic activities.
• Post-Disaster Reconstruction: Spending on rebuilding after earthquakes or floods (e.g., 2015 earthquake reconstruction) restores economic capacity.

Unit-8: International Trade

Very Short Answer Questions [For 1 mark]

1. Write the meaning of free trade.
Free trade is a trade policy where goods and services flow across international borders without any government restrictions, such as tariffs, quotas, or subsidies.

2. What is Balance of Payment?
Balance of Payment (BOP) is a systematic record of all economic transactions (visible and invisible) between the residents of a country and the rest of the world during a given period, usually one year.

3. What is protection trade?
Protection trade (Protectionism) is a government policy of restricting imports from other countries through methods like tariffs on imported goods, import quotas, and other government regulations to protect domestic industries.

4. Write any four importances of international trade.

• Promotes specialization and division of labor.
• Provides consumers with a wider variety of goods.
• Allows the transfer of technology and knowledge.
• Enables countries to sell surplus production.

5. Differentiate between national and international trade.

• National Trade: Trade within the political boundaries of a country; same currency and laws apply; factors of production are mobile.
• International Trade: Trade between two or more countries; involves different currencies and trade policies; factors of production are relatively immobile.

6. Differentiate between Balance of Payment and Balance of Trade.

• Balance of Trade (BOT): Includes only visible items (import and export of goods).
• Balance of Payment (BOP): Includes both visible items (goods) and invisible items (services, capital transfers, financial assets). BOT is just a part of BOP.

Long Answer Questions [For 5 or 8 marks]

1. State the arguments in favour of protectionism.

• Infant Industry Argument: New industries need temporary protection from established foreign competitors until they grow strong enough to compete.
• National Defense Argument: Countries should protect industries vital for national security (e.g., steel, weapons) to avoid dependence on foreigners during war.
• Employment Argument: Protectionism stimulates domestic production, thereby creating and preserving jobs at home.
• Anti-Dumping Argument: To prevent foreign firms from selling goods below cost (dumping) to destroy local industry.
• Balance of Payment Argument: Restricting imports helps in correcting a deficit in the balance of payment.

2. What are the advantages of free trade?

• Comparative Advantage: Countries specialize in producing goods where they have a lower opportunity cost, maximizing global output.
• Economies of Scale: Access to a larger global market allows firms to produce on a massive scale, reducing per-unit costs.
• Increased Competition: Domestic monopolies face competition from foreign firms, leading to efficiency, innovation, and lower prices for consumers.
• Variety of Goods: Consumers have access to goods that cannot be produced domestically (e.g., Nepal importing cars).
• Resource Utilization: Optimizes the use of world resources.

3. Explain the problems of Nepalese foreign trade.

• Landlocked Geography: High transit costs and dependence on India/China for port access (e.g., Kolkata port).
• Open Border with India: Leads to unauthorized trade and inability to protect domestic industries.
• Low Export Base: Exports are limited to a few primary goods (carpets, garments, tea), while imports include almost everything.
• High Cost of Production: Lack of technology and infrastructure makes Nepalese goods expensive globally.
• Growing Trade Deficit: Imports vastly exceed exports, leading to a severe trade imbalance.

4. Explain the Ricardian comparative cost theory of international trade. (Critically explain)
David Ricardo’s theory states that a country should specialize in the production of that good in which it has a comparative advantage (lower comparative cost) and trade for other goods.
The Model: Even if Country A is more efficient than Country B in producing both goods, trade is still beneficial if Country A specializes in the good where its efficiency advantage is greatest, and Country B specializes where its disadvantage is least.
Example: If Portugal produces wine cheaper than cloth, and England produces cloth cheaper than wine (comparatively), they should trade.
Criticisms:

• Labor Theory of Value: Assumes labor is the only cost of production, ignoring capital and land.
• Constant Costs: Assumes constant returns to scale, which is unrealistic (costs usually increase).
• Ignores Transport Costs: Treating transport costs as zero makes the theory impractical.
• Static Model: Ignores technological changes.

5. Explain the direction of Nepalese foreign trade.

• Dominance of India: India is Nepal’s largest trading partner (about 60-70% of trade) due to open borders, cultural ties, and transit access.
• China’s Growing Share: Trade with China is increasing, especially after the opening of northern border points, though it remains secondary to India.
• Overseas Countries: Trade with third countries (USA, EU for garments/carpets) exists but is often limited by logistics.
• Imbalance: The direction is heavily skewed towards imports from all directions, with very few exports going out.

Unit-9: Poverty, Inequality, Unemployment, and Human Resource

Very Short Answer Questions [For 1 mark]

1. What is unemployment?
Unemployment is a situation where able-bodied people who are willing to work at the prevailing wage rate cannot find a job.

2. Write the meaning of economic growth.
Economic growth refers to the increase in the production of goods and services (Real GDP) in an economy over a specific period.

3. Mention any two points of importance of human resources for economic development.

• Increases labor productivity and efficiency.
• Promotes innovation and technological advancement.

4. Write the meaning of human resource.
Human resource refers to the skilled, knowledgeable, and healthy population of a country that contributes to economic production.

5. Mention any two measures to reduce poverty.

• Employment generation through industrialization.
• Investment in education and skill training.

Short Answer Questions [For 5 marks]

1. Evaluate the efforts made by the government for the government of poverty in Nepal.

• Periodic Plans: Every Five-Year Plan (currently the 15th/16th plan) sets poverty reduction as a primary goal.
• Poverty Alleviation Fund (PAF): Established to provide grants for income-generating activities in rural areas.
• Youth Self-Employment Fund: Provides subsidized loans to youth to start businesses.
• Social Security: Allowances for the elderly, widows, and disabled help the most vulnerable.
• Microfinance: Promotion of micro-credit to reach the rural poor.

2. Describe the causes of poverty in Nepal.

• Low Economic Growth: GDP growth has not kept pace with population growth.
• Unemployment/Underemployment: Lack of industries forces reliance on subsistence agriculture.
• Unequal Distribution of Land: Land ownership is skewed; many farmers are landless.
• Poor Infrastructure: Lack of roads and electricity in rural areas hinders economic activity.
• Social Factors: Caste system, gender discrimination, and lack of education.

3. Explain the importance of human resources in the economic development of Nepal.

• Utilization of Natural Resources: Only skilled humans can exploit water (hydro), forests, and minerals.
• Capital Formation: Skilled workers save and invest, and also use physical capital (machines) efficiently.
• Social Change: Education changes traditional superstitious attitudes to modern scientific thinking.
• Administrative Efficiency: Efficient bureaucracy and governance require trained human resources.

4. Explain the forms, nature, and remedial measures of inequality.
Forms: Income Inequality (wage gaps) and Wealth Inequality (land/asset ownership).
Nature: In Nepal, inequality is high between Urban/Rural areas and between different castes/ethnic groups.
Measures:

• Progressive Taxation: Tax the rich more.
• Land Reforms: Redistribute land to the landless.
• Subsidies: Provide free education and health to the poor.
• Inclusive Policies: Reservations (Quotas) for marginalized groups.

5. What are the causes of unemployment in Nepal? Suggest some remedial measures.
Causes:

• Lack of industrialization.
• Defective education system (produces clerks, not entrepreneurs).
• High population growth.
• Political instability discouraging investment.

• Promote Small and Medium Enterprises (SMEs).
• Vocational and technical education.
• Modernize agriculture to employ more people gainfully.
• Attract Foreign Direct Investment (FDI).

6. Distinguish between absolute poverty and relative poverty.

• Absolute Poverty: A condition where household income is below a necessary level to maintain basic living standards (food, shelter). It is measured by a poverty line (e.g., earning less than $1.90 a day).
• Relative Poverty: A condition where household income is a certain percentage below median incomes. It measures inequality compared to the rest of society (feeling poor because others are richer).

Unit-10: Foreign Trade and Foreign Employment of Nepal

Very Short Answer Questions [For 1 mark]

1. What is the World Trade Organization (WTO)?
The WTO is an international organization that regulates and facilitates international trade between nations.

2. Write any two objectives of SAFTA.

• To eliminate tariffs and trade barriers among SAARC countries.
• To promote fair competition in the trade region.

3. State the main function of the WTO.
To administer trade agreements and act as a forum for trade negotiations and dispute settlement between member countries.

4. Write any two objectives of the WTO.

• To raise standards of living and ensure full employment.
• To ensure the optimal use of the world’s resources.

5. When did Nepal become a member of the WTO?
Nepal became the 147th member of the WTO on 23rd April 2004.

6. What is meant by SAFTA?
SAFTA stands for South Asian Free Trade Area, an agreement reached in 2004 to create a free trade zone for the SAARC region.

7. Write down the names of five countries which have trade relations with Nepal.
India, China, USA, Germany, United Kingdom.

Long Answer Questions [For 8 marks]

1. Examine the growth and trend of Nepalese foreign trade.

• Increasing Volume: Both exports and imports have increased over the years, but imports have grown much faster.
• Huge Trade Deficit: Nepal consistently faces a massive trade deficit (Imports > Exports). The ratio of import to export is often alarming (e.g., 12:1).
• Shift in Composition: Historically, Nepal exported rice and timber; now it exports carpets, garments, and pashmina, while importing machinery, fuel, and electronics.
• Dependence: The trend shows continued heavy dependence on India for both imports and transit.
• Remittance financing: The huge import bill is largely financed by remittance income, not by export earnings.

2. Briefly discuss the direction of Nepalese foreign trade. (This overlaps with Unit 8 but is specific here).
Nepalese trade flows in three main directions:

• Trade with India: Accounts for the majority of total trade. Nepal imports fuel, food, and vehicles from India and exports oil cakes, juice, and cardamom.
• Trade with China: Growing rapidly. Nepal imports electronics, clothes, and machinery. Exports are minimal (handicrafts, herbs).
• Trade with Overseas Countries: Includes USA and EU. Nepal exports niche products like readymade garments, woolen carpets, and pashmina to these countries and imports luxury goods and technology.

3. Evaluate the advantages and disadvantages of foreign employment in an economy.
Advantages:

• Remittance: A major source of foreign currency and a pillar of Nepal’s GDP (~25%).
• Unemployment Solution: Absorbs the excess labor force that cannot find jobs domestically.
• Skill Acquisition: Workers return with new skills and technology.
• Poverty Reduction: Direct cash flow to rural households improves living standards.

• Brain Drain: Loss of young, energetic, and skilled workforce.
• Social Costs: Family disintegration, children growing up without parents.
• Dependency: Economy becomes dependent on external factors (migration policies of other nations).
• Shortage of Labor: Lack of workers for domestic agriculture and development projects.

4. Explain the role and importance of remittance in developing countries like Nepal.

• BOP Stability: Remittance inflows help bridge the trade deficit gap, keeping the Balance of Payments stable.
• Household Consumption: Increases the purchasing power of families, allowing them to spend on better food, education, and health.
• Debt Repayment: Helps households pay off debts and reduce poverty.
• Banking Liquidity: Remittance money deposited in banks provides liquidity for lending to other sectors.
• Shock Absorber: During crises (like the 2015 Earthquake or COVID-19), remittance often serves as a financial lifeline for families.

5. Enlist the major objectives of the WTO.

• To improve the standard of living of people in member countries.
• To ensure full employment and a large and steadily growing volume of real income.
• To expand the production of and trade in goods and services.
• To ensure the optimal use of the world’s resources in accordance with sustainable development.
• To protect the environment.

Unit-11: Development Planning in Nepal

Very Short Answer Questions [For 1 mark]

1. How is a plan formulated in Nepal? List the process.
The plan is formulated through a hierarchy of steps:

• Directive from the National Development Council (NDC).
• Estimation of resources by the National Planning Commission (NPC).
• Guidelines sent to Ministries.
• Ministries submit proposals.
• NPC prepares draft > Approval by Cabinet.

2. What do you mean by planning?
Planning is the process of setting goals, mobilizing resources, and outlining specific courses of action to achieve those goals within a defined time frame.

3. Mention any one priority of the current plan of Nepal.
(Note: As of 2025, the current plan is the 16th Periodic Plan). One priority is Strengthening the structural transformation of the economy.

4. When was planning started in Nepal?
Development planning in Nepal formally started in 2013 BS (1956 AD).

5. Which governmental body is responsible for planning?
The National Planning Commission (NPC) is the apex body responsible for formulating development plans in Nepal.

Short Answer Questions [For 5 marks]

1. Explain the process of plan formulation in Nepal.
The formulation of a periodic plan in Nepal involves a top-down and bottom-up approach:

• Directives: The National Development Council (NDC) provides the basic guidelines and directives for the plan.
• Resource Estimation: The NPC estimates the available financial resources (internal and external) and sets targets.
• Sectoral Guidelines: The NPC sends guidelines and budget ceilings to various sectoral ministries and local/provincial governments.
• Project Selection: Ministries and departments prepare detailed projects and programs based on the guidelines and submit them to the NPC.
• Draft Preparation: The NPC collates these proposals, ensures consistency with national goals, and prepares a draft plan.
• Approval: The draft is discussed in the NDC, approved by the Council of Ministers (Cabinet), and then implemented.

2. What are the main objectives and priorities of the current plan of Nepal? (Based on the 16th Plan: 2024/25 – 2028/29)
Main Objective: To achieve “Good Governance, Social Justice, and Prosperity.”
Priorities (Strategies):

• Strengthening Economic Foundation: Structural transformation through agriculture, energy, and tourism.
• Production and Productivity: Increasing domestic production and job creation.
• Human Capital: Quality education, health, and social security.
• Infrastructure: Sustainable and high-quality infrastructure development.
• Good Governance: Effective public service delivery and digitization.

3. Review the achievements of the 14th and 15th plans of Nepal.

• 14th Plan (2016-2019):
  • Achieved an average economic growth rate of nearly 7% (highest in decades).
  • Significant reduction in load-shedding (energy crisis solved).
  • Transitioned the country into the federal structure.
• 15th Plan (2019-2024):
  • Context: Heavily impacted by the COVID-19 pandemic and global economic slowdown.
  • Infrastructure: Completion of major projects like Gautam Buddha International Airport and Pokhara Regional International Airport.
  • Social: Improvement in Human Development Index (HDI) and reduction in absolute poverty (dropped to approx. 15%).
  • Challenges: Failed to meet the targeted GDP growth rate (average growth was low due to pandemic) and trade deficit widened.

Unit-12: Sustainable Development Goals and Nepal

Very Short Answer Questions [For 1 Mark]

1. Which goal of sustainable development is related to zero hunger?
Goal 2 (Zero Hunger).

2. Which one of the 17 goals of sustainable development is not directly relevant to Nepal?
Goal 14 (Life Below Water), as Nepal is a landlocked country with no oceans.

3. Which goal of sustainable development is related to quality education?
Goal 4 (Quality Education).

4. Which goal of sustainable development is related to Gender equality?
Goal 5 (Gender Equality).

Unit-13: Review of Basic Subject Matter of Statistics

Very Short Answer Questions [For 1 mark]

1. Write any two uses of statistics in economics.

• To analyze economic problems like inflation and unemployment using data.
• To formulate economic policies and evaluate their impact.

2. What is statistics?
Statistics is the science of collecting, organizing, analyzing, interpreting, and presenting numerical data.

3. Mention the importance and limitations of Statistics.
Importance: Helps in forecasting, policy making, and condensing large data into simple figures (averages).
Limitation: It deals only with quantitative data (ignores qualitative aspects like honesty) and results are true only on average.

4. Explain in one sentence the singular and plural definitions of Statistics.
Plural Sense: Statistics refers to the numerical data or facts collected systematically (e.g., population statistics).
Singular Sense: Statistics refers to the methods or science dealing with the collection, analysis, and interpretation of data.

Unit 14: Data Collection

Very Short Answer Questions (1 Mark)

1. Primary data is more reliable than secondary data. Why?
Answer: Primary data is considered more reliable because it is collected originally by the investigator specifically for the purpose of the current inquiry. Since the investigator knows the collection method and there is no risk of data being manipulated by previous users, the degree of accuracy is higher.

2. Why is the census method of collecting data more expensive than the sampling method?
Answer: The census method involves collecting data from every single unit of the population, whereas sampling involves studying only a representative fraction. The census method requires significantly more time, manpower, and financial resources to cover the entire population, making it more expensive.

3. What are the various methods of collecting primary data?
Answer: The main methods include:

• Direct Personal Interview
• Indirect Oral Investigation
• Information from Local Correspondents
• Mailed Questionnaire Method
• Schedules sent through Enumerators

4. Differentiate between primary and secondary data.
Answer:

• Primary Data: Original data collected for the first time by the investigator (first-hand). It is costlier and more time-consuming but more reliable.
• Secondary Data: Data that has already been collected by others (second-hand). It is cheaper and quicker to obtain but may be less reliable or not fit for the specific purpose.

5. What are the sources of secondary data?
Answer: Sources are broadly classified into:

• Published Sources: Government reports, journals, newspapers, international publications (e.g., WHO, IMF).
• Unpublished Sources: Records maintained by private firms, research scholars, or office files not open to the public.

Unit 15: Measures of Dispersion

Very Short Question (1 Mark)

Q: Find the value of x if the mean of the given data is 8.
Data: 4, 6, 8, x, 12
Solution: We know that Mean ($\bar{X}$) = $\frac{\sum X}{N}$
Given: $\bar{X} = 8$, $N = 5$, $\sum X = 4 + 6 + 8 + x + 12 = 30 + x$
Calculation:
$$8 = \frac{30 + x}{5}$$ $$8 \times 5 = 30 + x$$ $$40 = 30 + x$$ $$x = 40 – 30$$ $x = 10$

Short Numerical Problems (5 Marks)

Question 1: Discrete Series Standard Deviation
Find the Standard Deviation from the following data and interpret the result.
Note: The frequency for Income 28 was missing in the provided text. Based on standard problems of this type where $N$ usually equals 20, we have assumed the frequency for 28 is 4.

Solution Table:

1. Calculate Mean ($\bar{X}$):
$$\bar{X} = \frac{\sum fX}{N} = \frac{388}{20} = 19.4$$

2. Calculate Standard Deviation ($\sigma$):
$$\sigma = \sqrt{\frac{\sum fd^2}{N}}$$ $$\sigma = \sqrt{\frac{484.8}{20}}$$ $$\sigma = \sqrt{24.24}$$ $\sigma \approx 4.92$
(Note: The provided answer 4.0899 suggests the missing frequency might be different or the dataset slightly varies, but the procedure above is the correct method for Discrete Series).

Interpretation: The standard deviation of 4.92 indicates the average deviation of individual incomes from the mean income of Rs. 19.4. A higher SD implies higher inequality in income distribution.

Question 2: Continuous Series Standard Deviation
Find the standard deviation from the following table. Ans: 11.59

Solution Table (Using Step Deviation Method):

Assumed Mean ($A$) = 25
Class Interval ($h$) = 10

Formula:
$$\sigma = \sqrt{\frac{\sum fd’^2}{N} – \left(\frac{\sum fd’}{N}\right)^2} \times h$$

Calculation:
$$\sigma = \sqrt{\frac{55}{40} – \left(\frac{7}{40}\right)^2} \times 10$$ $$\sigma = \sqrt{1.375 – (0.175)^2} \times 10$$ $$\sigma = \sqrt{1.375 – 0.030625} \times 10$$ $$\sigma = \sqrt{1.344375} \times 10$$ $$\sigma = 1.15947 \times 10$$ $\sigma = 11.59$

Unit 16: Index Number

Numerical Problems (5 Marks)

Question 1: Laspeyre’s Price Index
Find Laspeyre’s Price Index from the given data and interpret the result.
Base Year (0) = 2067 BS
Current Year (1) = 2077 BS

Solution Table:

Formula:
$$P_{01}^L = \frac{\sum p_1 q_0}{\sum p_0 q_0} \times 100$$

Calculation:
$$P_{01}^L = \frac{900}{843} \times 100$$ $$P_{01}^L = 1.0676 \times 100$$ $P_{01}^L = 106.76$

Interpretation: The Laspeyre’s Price Index is 106.76. This indicates that the price level in 2077 BS has increased by 6.76% compared to the base year 2067 BS, based on the base year quantities.

Question 2: Paasche’s Price Index
Construct Paasche’s price index number from the table and interpret the result.
Base Year (0) = 2014
Current Year (1) = 2015

Solution Table:

Formula:
$$P_{01}^P = \frac{\sum p_1 q_1}{\sum p_0 q_1} \times 100$$

Calculation:
$$P_{01}^P = \frac{383}{277} \times 100$$ $$P_{01}^P = 1.3826 \times 100$$ $P_{01}^P = 138.26$

Interpretation: The Paasche’s Price Index is 138.26. This indicates that the general price level in 2015 has increased by 38.26% compared to the year 2014, based on current year quantities.