Core Economic Concepts: Finance, Markets, and Development

Government Expenditure and Financing

Recurrent expenditure refers to the government's spending on regular activities such as salaries, pensions, and interest on internal and external loans. It is also known as regular or administrative expenditure.

• Constitutional Organs: Covers expenditure on the State Council, Parliament Secretariat, Supreme Court, Election Commission, Office of the Auditor General, Law Council, and Office of the Attorney General.
• General Administration: Includes expenses for the Council of Ministers, district administration, police, jails, and other routine operations.
• Revenue Administration: Encompasses costs related to land revenue, customs, excise, and other revenue collection activities.

Capital Expenditure

Capital expenditure relates to government spending on economic development activities that expand the country's capital formation. These are long-term expenditure programs, also known as development expenditure.

• Constitutional Organs: Includes expenditure on infrastructure development for the Supreme Court, Election Commission, Office of the Auditor General, and Public Service Commission.
• General Administration: Covers spending on administrative reforms within government organizations.
• Economic Administration and Planning: Includes expenditure on national planning and statistics.

Financing

Financing involves government expenditure on repayment of government debts, loan investments to public enterprises, and the purchase of internal and external shares. The total estimated financing for the Government of Nepal for the fiscal year 2021/22 was NPR 12,817.10 crore, representing 7.80 percent of the total estimated expenditure.

Key Functions of Government

• Maintain Law and Order

  The primary function of the government is to maintain law and order within the country. This necessitates the provision of police, army, weapons, and robust administrative and judicial machinery.

• Invest in Social and Economic Overheads

  A significant challenge for developing countries is the lack of essential infrastructure. Economic overheads such as power, irrigation, transportation (roads, railways, ropeways), and communication are crucial for rapid economic development.

• Utilize Natural Resources

  A nation's natural resources, including minerals, forests, and water, form the foundation of its economic development. Significant capital investment is required for the exploration and utilization of these resources, a role often fulfilled by government expenditure.

• Develop Agriculture and Industry

  The government should invest substantial capital to provide essential facilities for agricultural development, such as irrigation, power supply, warehouses, seeds, and fertilizers. Similar support is vital for industrial growth.

• Provide Subsidies and Grants

  Governments should offer subsidies or incentives to the private sector to encourage their involvement in productive activities. Similarly, local bodies require funds for their development projects, which are typically provided by the central government as grants.

Money Market vs. Capital Market

Economic Planning Process and Stages

Planning is an essential tool for economic development, especially for developing countries like Nepal. When formulating a plan, it is crucial to clearly define priority sectors, primary objectives, targets, and policies. In Nepal, the National Planning Commission (NPC) formulates plans under the direction of the National Council.

• Study of Existing Situation

  A prerequisite for sound planning is a thorough study of the economy's existing situation. This involves evaluating current and potential resources, fiscal sectors, and human resources. The plan's shortcomings and drawbacks are also examined, providing comprehensive information about the economy's condition.

• Define Objectives

  After studying the existing situation, planners formulate broad objectives for the plan clearly and concisely. These objectives should be stated as briefly as possible. The nature of development objectives depends on national preferences and the country's stage of development, thus varying from country to country.

• Set Plan Targets

  The next step is to quantify the development objectives. When an objective is quantified, it transforms into a target. For example, a plan's objective might be to increase the country's per capita income, which then becomes a specific target. However, merely specifying the objective is not sufficient on its own.

• Mobilize Resources

  This stage involves deciding crucial investment questions for national economic development. Various internal and external resources help finance a plan. The plan should specify policies and instruments for mobilizing these resources to achieve the planned financial outlay.

• Formulate Proper Development Policy

  The state must establish a robust development policy for the success of any development plan. The sectoral policies stated in the plan should anticipate and avoid any pitfalls that might emerge during the development process.

• Implementation and Evaluation

  The implementation of a plan is as crucial as its formulation. Implementation and evaluation involve studying the plan's impact. In Nepal, the National Planning Commission is responsible for plan implementation.

Comparative Advantage Theory in International Trade

The comparative advantage theory, developed by David Ricardo in 1817, forms the fundamental basis of international trade. It is also known as the classical theory of international trade. This theory posits that not all countries possess the same resources. Due to variations in climate, natural resources, geographical situation, and labor efficiency, a country can produce certain commodities at a lower cost than others.

Consequently, each country specializes in producing the commodity where its comparative cost of production is the lowest. A country will therefore export commodities in which its comparative advantage is the greatest and import goods where its comparative disadvantage is the least.

Assumptions of the Theory

• The theory is based on a model of two countries and two commodities.
• Labor is the only factor of production, and thus production cost means labor costs.
• All units of labor are homogeneous.
• Labor is perfectly mobile within a country but perfectly immobile among countries.
• There is free trade between countries.
• There are no transportation costs.
• The Law of Constant Costs (or Returns) is applied.