Section: A

Q.no: 6

The trade cycle refers to the ups and downs in the level of economic activity which extends over
a period of several years. If we examine the past statistical record of the business conditions, we
will find that business has never run smoothly forever. There are many fluctuations in the period.
Sometimes prosperity is followed by adversely. In Economics this tendency of the business
activities, to fluctuate from prosperity to adversely is called business cycle.
The trades cycle or business cycle are cyclical fluctuations of an economy. A full trade cycle has
got four phases: Recovery, Boom, Recession, and depression. The upward phase of a trade cycle
or prosperity is divided into two stages—recovery and boom, and the downward phase of a trade
cycle is also divided into two stages—recession and depression.

Phases of Trade Cycle:

The phases of trade cycle are explained below:
 1. Recovery:
In the early period of recovery, entrepreneurs increase the level of investment which in turn
increases employment and income. Employment increases purchasing power and this leads to an
increase in demand for consumer goods. As a result, demand for goods will press upon their
supply and it shall, thereby, lead to a rise in prices. The demand for consumer’s goods shall
encourage the demand for producer’s goods.

The rise in prices shall depend upon the gestation period of investment. The longer the period of
investment, the higher shall be the price rise. The rise of prices shall bring about a change in the
distribution of income. Rent, wages, interest do not rise in the same proportion as prices.

Consequently, the margin of profit improves. The wholesale prices rise more than retail prices.
The prices of raw materials rise more than the prices of semi-finished goods and the prices of
semi-finished goods use more than the prices of finished goods.

2. Boom:

The rate of investment increases still further. Owing to the spread of a wave of optimism in
business, the level of production increases and the boom gathers momentum. More investment is
possible only through credit creation. During a period of boom, the economy surpasses the level
of full employment and enters a stage of over full employment.

3. Recession:
The orders for raw materials are reduced on the onset of a recession. The rate of investment in
producers’ goods industries and housing construction declines. Liquidity preference rises in
society and owing to a contraction of money supply, the prices falls. A wave of pessimism
spreads in business and those markets which were sometime before sellers markets become
buyer’s markets now.

4. Depression:

The main feature of a depression is a general fall in economic activity. Production, employment
and income decline. The prices fall and the main factor responsible for it is, a fall in the
purchasing power.
Q.no: 8

The classical theory of employment is based on the assumption of flexibility of wages, interest
and prices. This means that wage rate, interest rate and price level change in their respective
markets according to the forces of demand and supply. Changes in these variables automatically
adjust the economic system in such a way as to ensure full employment.

The classical economists took full employment for granted, believed in the automatic adjustment
of the economy, and, therefore, felt no need to present a proper theory of employment.
Keynesian theory of employment was a reaction against the classical economics.

Propositions of Classical Theory of Employment:

The main propositions of the classical theory of employment are given below:

i. Full employment is a normal feature of a capitalist economy.

ii. Full employment means absence of involuntary unemployment. Even at full employment,
there may exist, voluntary unemployment, frictional unemployment, seasonal
unemployment, structural unemployment or technical unemployment.
iii. The economy attains equilibrium only at full employment.
iv. General unemployment or general overproduction is not possible.
v. Under conditions of perfect completion, flexibility of wages tends to establish full
employment. Reduction in wages can increase employment.
vi. The government should not interfere in the automatic working of the economic system
and should follow the policy of laissez faire.
vii. People spend their entire income either on consumption or on investment.
viii. Interest rate flexibility establishes equality between saving and investment.

Assumptions of the Theory:

The classical theory of employment is based on the following assumptions:

i. Individuals are rational human beings and are motivated by self-interest.

ii. Perfect competition exists both in product market and factor market.
iii. Individuals do not suffer from money illusion.
iv. Laissez-faire condition prevails, i.e., government does not interfere in the economic
activities,
v. There is closed economy which has no international trade relations,
vi. Techniques of production and business organisation do not change.
vii. Money is only a medium of exchange.
The working of self- regulating mechanism under the classical system can be understood in the
three markets of the economy.

1. Labour market,

2. Product market, and

3. Money market.

1. Labour Market:

According to the classical theory of employment, other things being constant, wage rate
flexibility assures that, in a competitive market, full employment is provided and full
employment output is produced.

Real wage rate is determined by the forces of demand and supply in the labour market. Demand
for labour is a negative function of real wage rate; demand for labour increases with a fall in the
real wage rate and decreases with a rise in the real wage rate.

Supply of labour is a positive function of real wage rate; supply of labour increases with a rise in
the real wage rate and decreases with a fall in the real wage rate. Real wage rate is determined at
the level where demand for labour and supply of labour are equal. This level also represents full
employment equilibrium level.

If there exists some unemployment, the unemployed will compete for jobs and the real wage rate
will fall. A fall in the real wage rate will lead to an increase in the demand for labour and
decrease in the supply of labour. This will remove unemployment. Thus, flexibility of real wage
rate ensures full employment.

According to the classical theory, unemployment is the result of rigidly of wage structure and
interference in the automatic working of the labour market. When government intervenes by
recognising trade unions, passing minimum wage legislation, etc., and labour adopts
monopolistic behaviour, wages are pushed up which lead to unemployment.

Only flexibility of wages, under the conditions of perfect competition, can ensure full
employment. In the words of Pigou, “With perfectly free competition…. there will be at work a
strong tendency for wage rates to be related to the demand that everybody is employed.”
In Figure-1 (A), DL is the aggregate demand for labour curve and SL is the aggregate supply of
labour curve. Intersection of these two curves at point E determines the equilibrium real wage
rate, (W/P), at full employment level ON. If real wage rate is maintained at a higher level,
(W/P)1, supply of labour will exceed demand for labour by GH, which indicates the amount of
unemployment. Labour market being competitive, unemployment of labour will reduce wage
rate to the original equilibrium level, (W/P). This will remove unemployment and once again
establishes full employment level ON.
2. Production Function:
At the full employment level, total output of the economy depends upon the nature of the
technology, total output (Y) is a function of the number of workers employed (N). The classical
economists assume the operation of the law of diminishing returns.
In Figure-1 (B), Y = f (N) curve represents total production function. At the full employment
level, ON, the corresponding full employment output is OY.
3. Product Market:
Maintenance of full employment level, according to Say’s law, requires that the whole of the
income generated at full employment level must be spent on the purchase of the whole of the
output produced at that level. Total output comprises of consumer goods (C) and investment
goods (I).
Again, total income is partly spent on consumer goods (C) and partly saved (S). Hence, the part
of income which is not consumed (i.e. S) must be spent on investment goods. The logic of this
argument can be easily grasped with the help of the following algebric expression.

Thus, saving-investment equality (S = I) gives the market clearing condition in the product
market at full employment level. It assures that whole of full employment output in the product
market will be purchased.
Or, in other words, if saving plans by the households are equal to investment plans by
businesses, neither unemployment (overproduction) nor inflation (underproduction) will result.
According to the classical economists, equality between saving and investment is brought about
through interest rate flexibility. Saving is a positive function of rate of interest; saving will be
more at higher interest rate and less at lower interest rate.
Investment is a negative function of interest rate; investment increases at low interest rate and
decreases at higher interest rate. The equilibrium rate of interest is determined at the level where
saving and investment are equal.
At this level whole of the full employment output is purchased. If saving exceeds investment, the
rate of interest will fall. This will discourage saving and encourage investment, thus making
saving and investment once again equal.
In Figure-2, S curve is the saving curve and I is the investment curve. The two curves intersect at
point E. The equilibrium rate of interest is Oi, where saving and investment are equal (i.e., iE). If
community decides to increase saving at all levels of rate of interest, the saving curve will shift
to the right to S1 curve.

Now at the original interest rate Oi, saving exceeds investment by EE2 which indicates the
amount of overproduction. As a result of this excessive saving, the rate of interest will fall,
which on the one hand leads to increase in investment and on the other hand tends to reduce
saving. Eventually, the rate of interest will fall to Oi1 and once again the equality between saving
and investment is established at Point E1.
4. Money Market:
Irving Fisher’s equation of exchange, MV= PY, states that total expenditure on final goods and
services (MV) is equal to total value of output (PY). According to the classical economists, the
long- run rate of output of final goods and services (Y) remains constant at full employment
level.
They also assume that velocity of money (V) is stable because the payment habits of the people
change very slowly. Thus, Y and V being constant, the price level (P) is determined by the
supply of money (M) and there is a direct relationship between M and P; changes in the money
supply lead to proportional changes in the price level.
In Figure-3(A), MV curve is the money supply curve which also represents demand for goods. It
is a rectangular hyperbola because the equation MV = PY holds true on all the points of the
curve. At full employment level of output, OY, the corresponding price level is OP, which is
consistent with the supply of money MV.
When the supply of money (or monetary demand for goods) increases, form MV to M1 V
(indicating an increase of money supply by GH amount), total output being given, there will be a
proportional increase in the price level from OP to OP1.
Figure-3 (B) explains the determination of money wage consistent with a given real wage. (W/P)
is the real wage line. At OP price level, the money wage is OW. When the price level rises to
OP1, the money wage also rises to OW1. The price-wage combination OW1 = OP1 is consistent
with the full employment real wage level (W/P), as determined in the labour market.
Criticisms of Classical Theory of Employment:
The classical theory of employment has been severely criticized by Keynes. According to
Keynes, the classical theory was perfectly logical. But the difficulty with this theory is that it is
incapable of solving the actual economic problems. It is misleading and disastrous if we attempt
to apply it to the facts of experience
 1. Government Intervention:
Keynes analysis leads to the practical conclusions- (a) that the economy does not automatically
reach full employment equilibrium; (b) that the policy of laissez-faire is not a reliable policy; and
(c) that active government intervention is required if the objective of full employment is to be
achieved.
Keynes did not believe in the self- adjusting mechanism of the competitive system and
recommended government expenditure in public works in order to save the economy from
uncertainties of private investment. He also suggested a number of fiscal and monetary measures
to fight unemployment.

2. Saving-Investment Equality:
Keynes also criticised the classical version of saving-investment equality. According to the
classical economists, saving and investment are equal and this equality is maintained by the
interest rate adjustment mechanism. According to Keynes, income, and not rate of interest, is the
equilibrating force between saving and investment.
Whenever saving exceeds investment, aggregate demand decreases and income level declines.
As a result, saving falls and. becomes equal to investment. Similarly, if investment exceeds
saving, income level rises, saving increases and becomes equal to investment.
3. Role of Money:
For the classical economists, money is only a veil and its main function is to act as a medium of
exchange. Keynes, on the other hand, emphasised the store of value function of money.
According to Keynes, when there is unemployment of resources, an increase in the quantity of
money increases output and employment, and prices rise very little and that too only indirectly.
4. Long-Run Analysis:
The classical economists provided long-run analysis. According to them, there may be temporary
imbalances (e.g. unemployment) in the economy, but these imbalances will disappear in the long
run. According to Keynes, actual problems are short-run problems and they must be given
greater importance.
5. Static Analysis:
The classical theory gives a static picture of the economy by assuming a state of full
employment. It ignores the empirical facts of changing levels of employment in the real world.
 6. Not a General Theory:
The classical theory of employment is not a general theory. It deals with the special case of full
employment only. According to Keynes, there may be full employment, over-full employment or
under-employment.
7. Assumption of Perfect Competition:
The theory is also based on the unrealistic assumption of perfect competition. Perfect
competition does not exist in the real world.
8. Not Practical:
The classical theory has little practical significance. It does not provide any solution to the
problems of unemployment or trade cycles.
Q.no: 2
a. Price Level in the Economy
In economics, price level refers to the buying power of money or inflation. In other words,
economists describe the state of the economy by looking at how much people can buy with the
same dollar of currency. The most common price level index is the consumer price index (CPI).
The price level is analyzed through a basket of goods approach, in which a collection of
consumer-based goods and services is examined in aggregate. Changes in the aggregate price
over time push the index measuring the basket of goods higher.
Economists measure the price level with a price index. A price index is a number whose
movement reflects movement in the average level of prices. If a price index rises 10%, it means
the average level of prices has risen 10%.
There are four steps one must take in computing a price index:
1. Select the kinds and quantities of goods and services to be included in the index. A list of
these goods and services, and the quantities of each, is the “market basket” for the index.
2. Determine what it would cost to buy the goods and services in the market basket in some
period that is the base period for the index. A base period is a time period against which
costs of the market basket in other periods will be compared in computing a price index.
Most often, the base period for an index is a single year. If, for example, a price index
had a base period of 1990, costs of the basket in other periods would be compared to the
cost of the basket in 1990. We will encounter one index, however, whose base period
stretches over three years.
3. Compute the cost of the market basket in the current period.
4. Compute the price index. It equals the current cost divided by the base-period cost of the
market basket.
Price levels are one of the most watched economic indicators in the world. Economists widely
believe that prices should stay relatively stable year to year so that they don't cause undue
inflation. If price levels rise too quickly, central banks or governments look for ways to decrease
the money supply or the aggregate demand for goods and service.
B. Demand pull can be described as involving “too much money spent chasing too few goods,”
since only money that is spent on goods and services can cause inflation. This rise in price level
is not expected to happen unless the economy is already at a full-employment level. The
increased demand for workers puts upward pressure on wages, leading to wage-push inflation.
Finally, higher wages increase the disposable income of employees, leading to a rise in consumer
spending. Demand pull can cause inflation because of the following reasons;
1. Consumption
If there is a sharp increase in consumption and investment along with extremely positive
businesses atmosphere, then there will be a rise in Aggregate Demand.

2. Exchange Rate
A depreciation of the exchange rate increases the price of imports and reduces the price of a
country’s exports. Consumers will buy fewer imports, while exports grow. There will be an
increase in Aggregate Demand.
3. Government Spending
An enormous increase in government spending will drive up Aggregate Demand.
4. Expectations
The expectation that inflation will rise often leads to a rise in inflation. Workers and firms will
raise their prices to ‘catch up’ to inflation.
5. Monetary Growth
If there is excessive monetary growth, when they are too much money in the system chasing too
few goods. The ‘price’ of a goodwill thus increase.
C.

To reduce inflationary pressures, the government or monetary authorities will try to reduce the
growth of AD.
Fiscal policy involves changing government spending and taxation. It involves a shift in the
government’s budget position. E.g. Expansionary fiscal policy involves tax cuts, higher
government spending and a bigger budget deficit. Government spending is a component of AD.
If we use fiscal policy, it will involve higher taxes and lower spending. The advantage of using
fiscal policy is that it will help to reduce the budget deficit.
In a country some countries with a large budget deficit, it might make sense to use fiscal policy
for reducing inflationary pressures because you can reduce inflation and, at the same time,
improve the budget deficit.
Q.no: 3
A. Standard of deferred payments refer to those payments which are made in the future. Money
has made deferred payments easier. When money is borrowed, the principal and interest amounts
have to be returned to the lender. However, these transactions are not possible in terms of goods
and services. Money performs this function more effectively.
Under the barter system, it was very difficult to make future payments and contractual payments
such as salaries, loans, interest payments, etc. For example, it was difficult to decide whether
wages to a labour are to be paid in terms of food grains or any other commodity. This is because
it was difficult to value the services of labour in terms of a commodity. Similarly, if a loan is
taken in the form of a commodity, then the problem will arise in its repayment. However, as
superior to the Barter system, money made the system of deferred or contractual payments such
as. Salaries, interest payments, etc. possible. For example, a worker working on the contract
basis can be easily paid in terms of money.
B.  The agricultural workers are paid less than manufacturing workers because for the following
reasons:
The supply of agricultural workers is high. It is also because manufacturing industries require
skilled workers compared to agricultural industry and the risk involved in manufacturing
industry is also higher than the agricultural industry.

Fig: The market of manufacturing and agricultural workers

Relative Bargaining Power of Employers and Workers:

Wages are likely to be higher in occupations where workers have strong bargaining power
relative to employers. This is more likely to be the case if most of the workers are members of a
trade union or professional organization which can bargain collectively on their behalf. For
example: manufacturing workers. In contrast, most agricultural workers do not belong to a
workers’ organization.
C. Private sectors banks have more profits and public sectors because of the following reasons:
1. Tapping the best talent - Most private banks hire the best right from their tellers to the
CEO unlike the public sector banks whose appointments are dominated by political
interference.
2. Embezzlement of funds - Embezzlement of funds in most public sector institutions banks
not excluded. The corruption in such institutions makes them fail or not make high profits
unlike private sector banks whose funds are properly and prudently managed.
3. Non- profitable: The government is majorly for welfare and not for profit making. This
makes the public banks less ambitious and motivated to achieve big since they are mainly
funded by the government.
D. Bank lending is to support productive activity that generates profit to repay the loan or
provide housing to individuals that take employment to repay their mortgage.
When lending increases it is a sign that firms and people have a positive view of their economic
opportunities. The spending on their ventures or homes generates more spending and is measured
as economic activity that translates into higher GDP.
Of course if borrowers are over optimistic about their ventures or earnings power this can result
in a failure to repay these loans and reduce economic activity as banks become more
conservative when they start having to write off these loans against their capital.
The economy is a dynamic creature usually moving back and forth around trend line but at times
these movements swing widely to taking on too much or not enough risk.
Q.no: 5
In economics one who is willing to work at a prevailing wage rate but is unable to find a paying
job is considered to be unemployed. The unemployment rate is the no. of unemployed workers
divided by the total civilian labor force.
According to the ILO, a person is said to be unemployed if the person is:
i. Not working
ii. Currently available for work
iii. Seeking work
The unemployment are categorized into four different categories

 Frictional unemployment

 Seasonal unemployment

 Structural unemployment

 Cyclical unemployment

Each of these unemployment arises from causes and has different consequences.

 Frictional unemployment: This is caused because of transactions costs associated with

normal entry and exit from the labor market, voluntary job changes, or layoffs or firings.
Also called search unemployment. Mainly in industrial countries because of the frequent
change in technology or because of dynamic economy.
By definition, it is short-term, it causes little hardship to those affected by it. By spending time
searching rather than jumping at the first opening that comes their way. People find jobs for
which they are better suited and in which they will ultimately be more productive.

 Seasonal unemployment: Joblessness related to changes in weather, tourist patterns, or

other seasonal factors. A common phenomenon is developing countries and especially in
agriculture economies. Mainly occurs in agriculture, construction and tourism business-
a demand driven situation. Also in supply side, teenage unemployment rises during
vacations.
  Structural unemployment: This kind of joblessness has been arising from mismatches
between workers’ skills and employers’ requirements. Generally a stubborn, long-term
problem. Often lasting several years or more because it can take considerable time to
relocate or acquire new skills.

 Cyclical unemployment: When the economy goes into a recession and total output falls,
the unemployment rate rises. Since, it arises from conditions in the overall economy,
cyclical unemployment is a problem for macroeconomic policy. It is caused by the
business cycle hence called ‘cyclical’. Macroeconomists say we have reached full
employment when cyclical unemployment is reduced to zero. But the overall
unemployment rate at full employment is greater than zero. Because there are still
positive levels of frictional, seasonal, and structural unemployment
Frictional, structural, and seasonal unemployment arise largely from microeconomic causes,
they cannot be entirely eliminated since they are attributed to changes in specific industries and
specific labor markets. Some amount of microeconomic unemployment is a sign of a dynamic
economy.
When there is no cyclical unemployment, it is called natural rate of unemployment. Thus, the
natural rate of unemployment is defined as the rate of unemployment at which the actual rate of
inflation equals the expected rate of inflation. It is thus an equilibrium rate of unemployment
towards which the economy moves in the long run.
Q.no: 7
I would prefer mixed economy system for my business for the following things I have stated
below:
A mixed economy is an economic system in which both the state and private sector direct the
economy, reflecting characteristics of both market economies and planned economies. Most
mixed economies can be described as market economies with strong regulatory oversight, in
addition to having a variety of government-sponsored aspects.
While there is not one single definition for a mixed economy, the definitions always involve a
degree of private economic freedom mixed with a degree of government regulation of markets.
The Plan behind a Mixed Economy
The basic plan of the mixed economy is that:

 The means of production are mainly under private ownership;

 Markets remain the dominant form of economic coordination; and

 Profit-seeking enterprises and the accumulation of capital would remain the fundamental
driving force behind economic activity. However, the government would wield
considerable indirect influence over the economy through fiscal and monetary policies
designed to counteract economic downturns and capitalism’s tendency toward financial
crises and unemployment, along with playing a role in interventions that promote social
welfare. Subsequently, some mixed economies have expanded in scope to include a role
for indicative economic planning and/or large public enterprise sectors.
Governments in mixed economies often provide:

 Environmental protection,

 Maintenance of employment standards,

 A standardized welfare system,

 Maintenance of competition

A mixed economy permits private participation in production, which in return allows healthy
competition that can result in profit. It also contributes to public ownership in manufacturing,
which can address social welfare needs. The advantage of this type of market is that it allows
competition between producers with regulations in place to protect society as a whole. With the
government being present in the economy it brings a sense of security to sellers and buyers. This
security helps maintain a stable economy.
Overall, businesses, as well as consumers, in mixed economies have freedoms that are important
to both. And while government is actively involved and provides support, its control is limited,
which is good for structure.

The Advantages of a Mixed Economy

 In a mixed economy, private businesses can decide how to run their businesses (e.g. what
to produce, at what price, who to employ, etc.).

 Consumers also have a choice in what they want to buy.

 In this system, there is also less income inequality.

 Monopolies, market structures that are the only producer of a certain product, are allowed
under government watch so they do not make it impossible for entrepreneurs in the same
industry to succeed.

 To possess means of production (farms, factories, stores, etc.)

 to participate in managerial decisions (cooperative and participatory economics)

 to travel (needed to transport all the items in commerce, to make deals in person, for
workers and owners to go to where needed)

 to buy (items for personal use, for resale; buy whole enterprises to make the organization
that creates wealth a form of wealth itself)

 to sell (same as buy)

 to hire (to create organizations that create wealth)

 to fire (to maintain organizations that create wealth)

 to organize (private enterprise for profit, labor unions, workers’ and professional
associations, non-profit groups, religions, etc.)

 to communicate (free speech, newspapers, books, advertisements, make deals, create

business partners, create markets)

 to protest peacefully (marches, petitions, sue the government, make laws friendly to
profit making and workers alike, remove pointless inefficiencies to maximize wealth
creation).

 mandatory insurance (e.g. automobile)

Q.no: 4
A. An indirect tax is collected by one entity in the supply chain (usually a producer or retailer)
and paid to the government, but it is passed on to the consumer as part of the purchase price of a
good or service. The consumer is ultimately paying the tax by paying more for the product.
Indirect taxes are basically taxes that can be passed on to another entity or individual. They are
usually imposed on a manufacturer or supplier who then passes on the tax to the consumer. The
most common example of an indirect tax is the excise tax on cigarettes and alcohol. Value
Added Taxes (VAT) are also an example of an indirect tax.
The most common example of an indirect tax is import duties. The duty is paid by the importer
of a good at the time it enters the country. If the importer goes on to resell the good to a
consumer, the cost of the duty, in effect, is hidden in the price that the consumer pays. The
consumer is likely to be unaware of this, but he will nonetheless be indirectly paying the import
duty.
B. Two factors determining the increase in demand for bus services are outlined below:

1. Price: The lower the price, the more people are likely to demand the bus service offered.
Relative prices charged by different modes/operators affects the demand, the higher the
price of taxi fares, the more people will shift from taxi travel to bus travel, given the main
motive is to reach to a destination.
2. Passenger income: As income rises, so the amount of travelling for both leisure and
business trips will increase which means the bus services would be more in demand. As
the income of the passengers increases they would look for better quality of service. The
more comfortable, safe, reliable and faster the service is, the more people are encouraged
to use bus travel.
C. A reduction in government spending on education could cause unemployment.as there may
be less total (aggregate) demand which may cause a recession leading to cyclical unemployment
Lower government spending on education could reduce skills/qualifications and increase
structural unemployment. All of these may reduce public sector jobs the lower government
spending on unemployment benefits the more it may increase the incentive to work
D. In Fiscal policy, the government can increase taxes (such as income tax and VAT) and cut
spending. This improves the government’s budget situation and helps to reduce demand in the
economy.
This policy reduces inflation by reducing the growth of aggregate demand. If economic growth is
rapid, reducing the growth of AD can reduce inflationary pressures without causing a recession.
Section: B
Case study
A.
Ethiopia with a GDP of $84.4B ranked the 68th largest economy in the world,
while Nepal ranked 103rd with $29B. By GDP 5-years average growth and GDP per capita,
Ethiopia and Nepal ranked 2nd vs 37th and 181st vs 170th, respectively.

Gross Domestic Product & Income

Topics Ethiopia Nepal

GDP $84.4B $29B

GDP growth, 1 year 7.7% 6.3%

GDP growth, 5-years average 9.3% 4.8%

Population 105M 29.4M

GDP per capita $772 $1k

GDP per capita growth 4.05% 4.91%

Purchasing Power Parity conversion factor 9.97 34.93

Price level ratio of PPP conversion factor GDP to 0.38 0.33

market exchange rate

GDP per capita, PPP adjusted $2.3k $2.9k

GNI, Atlas method $86.7B $27.2B

GNI per capita $790 $970

GNI, PPP adjusted $219.4B $87.4B

GNI per capita, PPP adjusted $2k $3.1k

C.
Nepal is a small landlocked country having area 147181 square km with length about 500 miles
and wide 100 miles, and population about 30 million with the annual population growth rate of
2.37 percent. She has neighbors China in the north and India in the south, east and west. Nepal is
a developing country in the world with small size of the economy having Rs 550 billion GDP
and $ 561 per capita income in FY 2009/10.  The gross domestic savings and investment are
about 7 percent and 5 percent respectively, which are very low compared to other nations. Nearly
one third of the people live below absolute poverty line in Nepal.
There are many factors that had hindered the economic growth of Nepal. I would like to
summarize it as follows:
1. Skilled Manpower: We have less skilled manpower and most of them are going abroad.
This is causing virtually no skilled manpower left in the country who can contribute to
the country’s economic development.
2. Political Instability: Every one of us knows how unstable Nepalese politics is and I need
not explain.
3. Energy Crisis: It most is the biggest of all as Nepal can’t provide energy which is a
fundamental requirement for every economic activity. Unless the stabilized energy
supply can be maintained, economic development is so hard to achieve.
4. Trade Deficit: In 2014, Nepal exported $1.06B and imported $7.75B, resulting in a
negative trade balance of $6.69B. Economic development is possible when we reduce the
trade deficit.
5. Corruption: A large share of the budget goes to corruption than the actual development
work.
6. Natural Resources Utilization: We are rich with natural resources but we don’t have the
plan to utilize them. The first step for the country towards development is to be self-
sufficient with proper utilization of the resources, increase the export, and decrease the
trade deficit.
7. Mass Poverty and Inequality: Reducing the percentage of people below absolute
poverty line, narrowing the ever widening poverty gap between rich and poor with
implementation of the poverty reduction measures, at present, is one of the major
development issues in Nepal. Data reveals that 25.4 percent Nepalese people live below
absolute poverty line. Low growth rate about only 2 percent in the last 50 years period
reveals the presence of the structural bottlenecks in the economy. Against this backdrop,
one of the major development challenges to Nepal at present is to break the vicious circle
 of poverty and underdevelopment through rapid economic growth along with equitable
distribution of the income.
In addition to the above mentioned issues and challenges, there are so many development
challenges we are facing continuously in the path of building a well-advanced, egalitarian
and discrimination-free society. In the financial sector, we are facing a problem of weak
institutional governance of the financial institutions. Therefore, one of the challenges is to
build financial sector strong and stable alongside making institutional governance and self-
regulatory system of the banks and financial institutions effective. Addressing the issue of
financial inclusiveness is also prominent one because of the difficulty in increasing access to
banking and financial services of the ultra-poor, remote and rural areas. One additional
challenge is of simultaneously sustaining both monetary and demand management for
avoiding the undesired pressure on the price level. As a least developing country, Nepal has
several development changes in its way of economic development, which needs immediate
policy consideration and implementation from all Nepalese.
D. The WTO provisions on Most Favored Nation (MFN) treatment status allow for countries
to take advantage of bilateral and multilateral trade agreements outside of the WTO system,
as long as they do not discriminate among member states. The principle of Most Favored
Nation treatment is set out under Article 1 of the GATT. It provides that the benefits of
concessions among member states must be “immediately and unconditionally to the like
product originating in or destined for the territories of all other contracting parties.” The
principle has been incorporated into many of the bilateral and multilateral trading agreements
to which Nepal is a party. Prior its accession to the WTO, Nepal had signed bilateral trade
treaties with 17 trading partners. Since, its Accession to the WTO, Nepal has been actively
pursuing a further trade diversification and membership in other regional trade regimes in
Asia, such as BIMSTEC and SAFTA. A review of some of Nepal’s important bilateral and
multilateral agreements and their implications under the WTO Most Favored Nation
treatment principle
Nepal has been pursuing an open trading regime since the 1950’s. However, over the thirty
year period of single-party rule that lasted until the mid1980s, there was a very high level of
state intervention in all spheres of the Nepalese economy. During this time, economic
distortions and inefficiencies fueled high fiscal and external sector deficits and inflation.
Structural adjustment programs were introduced to target these problems and to open up the
Nepalese economy to market driven reforms. When the multi-party majority was restored in
1991, Nepal embarked on a more comprehensive policy of trade liberalization.
The reforms were designed to accelerate the process of economic and social development by
promoting a more efficient system of national production and improved access to foreign
markets. Many of the market-based initiatives in Nepal since 1991 have focused on the areas
of trade 1992 was implemented under the Industrial Policy and amended in 1997 to balance
the regional development of the country by encouraging labor intensive industries in areas of
low agricultural output.
The Act has provisions to allow for subsides to certain priority industries. These include tax
reductions and excise duty rebates of up to 35% for industries established in report,
undeveloped and underdeveloped areas, as well as for export oriented products.23 Although
the industrial sector was an area of considerable growth for Nepal in the 1990s, reduced
foreign demand, increased competition among trading countries and an adverse shift in the
policies in the countries that import Nepalese goods, have been some of the factors limiting
its export performance in recent years.24 In addition, the implementation of the Industrial
Policy has been hampered by weak institutions, trading infrastructure and supply-side
constraints arising from the Maoist insurgency. Reforms in the agricultural sector have been
primarily implemented under the 1995 Agriculture Perspective Plan (APP). This plan was
developed in conjunction with the Asian Development Bank to provide framework to
encourage agricultural growth, stimulate the economy and reduce poverty over a 20 year
period. The primary objective is to improve the diversity of agricultural products and to
 develop commercial agriculture by enhancing cereal production in the plains (the Terai
region) and the production of fruits as well as high value crops and livestock in the hills and
mountain regions. It also sought to increase investments in irrigation, rural roads, fertilizer
and technology. However, due to lack of resources, central coordination and monitoring,
implementation of the APP has progressed on a piecemeal basis.
In 2002, the Government of Nepal introduced the Tenth Plan of its Poverty Reduction
Strategy Paper, to be implemented over a 5 year period. The original goal was to reduce
poverty from 38% in 2001 to 30% in 2007 on the basis of a four pillared development
approach. The strategy was designed to encourage broad-based and sustained economic
growth, to improve infrastructure, social and economic services in rural areas, to reduce
social and economic exclusion from disadvantaged groups and to improve governance
strategies for transparency, efficiency and accountability. Under the Tenth plan, agricultural
reform strategies included mobilizing the private sector and NGO service providers,
promoting cooperative/contractual farming, adopting commodity policies to create favorable
investment climates for private entrepreneurs, devolving local agricultural programs to local
bodies and strengthening agricultural farms/stations as resource centers to ensure the supply
of quality seeds and planting/breeding materials for multiplication.26 It also included land
reform packages and the development of sustainable irrigation facilities as envisaged under
the Agricultural Perspective Plan. Nonetheless, a result of conflicts in many of the rural
areas, the budget for the 10th Plan was substantially reduced, and Nepal continues to struggle
with implementation measure.

B. Some of the policy recommendation are as follows:

Private investment:
It is very essential to fuel the economy with private investment because the need for profit will
result in efficient production and operation. This will result in lower cost of product making it
competitive internationally too. It will be very relevant in Nepal too.
Increase in bank lending:
The increase in bank lending or decrease in interest rate will make more money available for
general public which means increase consumption providing finance for business to even grow
more. However, inflation goes up side by side. So, it is very essential to evaluate pros and cons.
In a country like Nepal, this might not be very feasible because there are so less investment areas
available.
Search for finance:
The alternative source of finance could be tax revenue and foreign direct investment which could
be the breakthrough for a country like Nepal. Inflow of money as investment will create
employment and increase GDP of the economy.