ECONOMICS-II

GRADE XII

Prof. Dr. Nav Raj Kanel

Prof. Dr. Madhav Prasad Dahal
Dr. Nar Bahadur Bista
Mani Ratna Lamsal
Indra Prasad Bhusal

Approved by Curriculum Development Centre, Ministry of Education, Science and Technology,

Curriculum Development Centre, Sanothimi Bhaktapur as an Additional Material from 2078 to 2080
 ECONOMICS -II
Edition 2021

Copyright © 2021, by the Buddha Publications. All rights reserved. Printed in the Nepal. Except as
permitted under the Nepal Copyright Act of 2059, no part of this publication may be reproduced or
distributed in any form or by any means, or stored in a database or retrieval system, without the prior
written permission of the publisher.

Authors:
Prof. Dr. Nav Raj Kanel 9851146903 Prof. Dr. Madhav Prasad Dahal 9851155588
Dr. Nar Bahadur Bista 9851036585 Mani Ratna Lamsal 9841371776
Indra Prasad Bhusal 9857028780

Publishers: Buddha Publications Pvt. Ltd.

Anamnagar, Kathmandu - 29, Nepal
Tel. 00977-1- 5705165, 5705210, 5705177
e-mail: info@buddhapublicaiton.com
www.buddhapublication.com

Design by: Dipendra Shrestha

Jagadish Baskota

Price: Rs.562.00/–
ISBN: 978-9937-30-390-3
Printed in Nepal
 Preface
An applied science as it is, Economics is a popular subject with which many
activities of our daily life are related. Alongside, it has also a significant role
in national and international news. In addition, it is offered as a subject not
only in humanities and social sciences but also in management, education
and law. Therefore, the number of students interested in study of Economics
is increasing.
This edition of Economics textbook, now in your hand, is designed for the
students in Economics of higher secondary level (Class XII) with required
changes as per the current syllabus of Curriculum Development Centre (CDC)
of Nepal, with every suggestion and comment given by the students, teachers,
and general readers. We hope and are sure that the book will definitely be of
great help to the students and other readers in the subject. The basic objective
of this book has been to guide the students through the complete course of XI
level Economics, as prescribed by the NEB, in a way it is easy to understand
the otherwise complex concept. To make that happen, the book is written in
lucid language to facilitate easy and quick comprehension of the contents.
CONTENT COVERAGE The course details of XII level Economics are
composed of six units: Basic Concepts of Economics and Allocation of
Resources, Microeconomics, Macroeconomics, Development Economics,
Nepalese Economy and Quantitative Techniques in Economics.
The pedagogical aspects of this book are distinct from those of many other
similar books. It is so because the book emphasizes on the following major
pedagogical features in the teaching and learning process.
SPECIAL FEATURES The book contains some important and specific
features in it. The readers will find the book as best and really the type
they were looking for because it is written by a team of well experienced
and renowned teachers teaching either at various campuses of Tribhuvan
University or at different 10+2 colleges. Instead of beginning a chapter in an
instructional way, we have tried to motivate the students by giving local and
practical examples and problems as a lead in.
Multi-coloured design Every chapter and exercise is designed in multi-
colours.
CONCEPTUAL PICTURES Every chapter of this book begins with pictures
appropriate to the chapter. Such pictures give the summary of the chapter.
WARM UP ACTIVITIES Some warm up activities are included before starting
the chapter to motivate the students.
THINGS TO REMEMBER Major definitions and key notes are written in
TTR to make the complex concept easy for readers.
WORKED OUT PROBLEMS Worked out problems are there to lead the
students in the Statistics and Mathematics potions.
CLASS AND HOME ASSIGNMENT Class work and home work/
assignment are included at the end of every topic.
SAMPLE ANSWER A hand written sample answer of sample question
is provided.
LEARNING OBJECTIVES Every chapter of this book begins with
learning objectives, which the readers are expected to achieve after they
study the chapter.
Glossary You find the definition of key terms at the end of every single
chapters.
EXERCISES Review questions on the concerned topic are given at the
end of each chapter so as to help the students practice to answer the
questions for their examinations.
Practical and Project Work Practical and project works are given at the
end of each chapters as per the guidance of CDC.
Student friendly design Every chapter and topics of this book is designed
as per the requirement of the students.
 Acknowledgments

This book, Economics-II, is an outcome of a combined effort. It has

been prepared by professional teachers of 10+2 colleges and economics
teachers at various campuses of Tribhuvan University. We have tried to
meet the need of those students who have been looking for a concise and
comprehensive book on economics for Class XII.
We would like to express our warm appreciation to Mr. Nabaraj Bajgain,
Managing Director, Buddha Publications Pvt. Ltd., for his cooperation
in bringing out this book in this form. Had he not pushed us to complete
this book quickly, this book would have come later. Other staff members
of Buddha Publications helped us in several ways. In particular, we
would like to thank Mr. Dipendra Shrestha and Mr. Jagadish Baskota
for their painstaking job of typing the manuscript of and designing this
book.
Many people helped and encouraged us to get this book published. We
express our deep gratitude to all of them. We also offer our sincere thanks
to our colleagues at various campuses and 10+2 colleges for sharing
their experience on the teaching of XII economics and expectations of
the students.
Our special thanks also go to the family members of the authors for their
patience and cooperation during the preparation of this book. This book
would not have come out in this form without their support.
We have tried to minimize errors in this book. However, we realize
that some errors might have left undetected despite our repeated
proofreading. We would appreciate if the readers point out such errors.
Besides, comments and suggestions regarding the content, organization,
and presentation of the book are welcome.
Authors
 Syllabus
Economics
Credit hour 5 Subject Code: Eco304
Total Teaching hour = 160 hours

Credit
Chapter (Scope) (Subject Matters)
hours
1. Basic Concepts 1. Basic concepts of Economics and Allocation of Resources 8
of Economics 1.1 Concepts of Scarcity and Choice
and Allocation of 1.2 Concept of Opportunity cost
Resources
1.3 Production possibility curve (PPC): Concepts, Shape and Shift
1.4 Concepts of allocation of resources
1.5 Division of Labour and Specialization: Advantages and
disadvantages
1.6 Economic Systems ( Market, Command and Mixed) : Types
and Features
2. Microeconomics 2.1 Market and Revenue Curves 38
2.1.1 Concept of market : Perfect competition and Imperfect
competition , Types of Imperfect competition (Monopoly,
Duopoly, Oligopoly, Monopolistic Competition)
2.1.2 Concepts of Total Revenue, Marginal Revenue and Average
Revenue
2.1.3 Derivation of MR and AR curves from TR curve under Perfect
Competition and Monopoly Markets
2.1.4 Simple Numerical Illustration
2.2 Cost Curves
2.2.1 Concepts of Explicit costs, Implicit Costs, Fixed costs, Variable
costs, Total costs, Average and Marginal costs
2.2.2 Short run costs and derivation of Short-run cost curves (
Derivation of short-run Total cost curves and Average cost
curves)
2.2.3 Simple Numerical Examples
2.3 Theory of Price and Output Determination
2.3.1 Definition of Perfect competition, characteristics, Short-
run and long run equilibrium of Firm and Industry and
determination of Equilibrium price and output under perfect
competition market.
2.3.2 Meaning and Characteristics of Monopoly Market,
Determination of equilibrium price and output under
monopoly in short -run and long-run.
2.3.3 Simple Numerical Examples
2.4 Theory of Factor pricing
2.4.1 Concepts of Factor pricing
2.4.2 Rent : Concepts of Economic rent and Contract Rent,
Ricardian Theory of Rent
2.4.3 Wages : Concept of Money wage and Real Wage, Subsistence
theory of wages, Wage fund theory of Wages
2.4.4 Interest : Concepts of Gross interest and Net interest, Classical
Theory of Interest
2.4.5 Profit : Concept of Gross profit and Net Profit, Risk bearing
theory and Uncertainty bearing theory of profit.
3 Macroeconomics 3.1 Banking System and Monetary Policy 25
3.1.1 Role of Banking system in Economy
3.1.2 Classification of Banks: Central bank, Commercial bank,
Development bank, Finance company and Micro-credit
Financial institution
3.1.3 Central Bank: Meaning and Functions with reference to Nepal
3.1.4 Commercial banks ; Meaning and Functions with reference to
Nepal
3.1.5 Concepts of Money market and Capital Market
3.1.6 Monetary Policy : meaning and Types
3.1.7 Province wise Record of Number of Commercial Banks and
development banks in Nepal
3.2 Government Finance
3.2.1 Concepts and Importance of Government Finance
3.2.2 Concepts of Government Expenditure, Classification or
Headings of Government Expenditure
3.2.3 Government revenue: Sources of Government Revenue,
Concepts of Direct and Indirect Tax and their Merits and
demerits, Concepts of progressive, Proportional , and
Regressive and Degressive tax
3.2.4 Characteristics of Good Tax System
3.2.5 Government revenue: Concepts of Tax and Non-tax Revenues
in Nepal
3.2.6 Government Borrowing: Concepts of Internal and External
Borrowing
3.2.7 Government Budget: Concept and Process of Budget
formulation in the context of Nepal.
3.3 International Trade
3.3.1 Concepts and Importance of International trade
3.3.2 Concepts of Balance of Trade (BOT) and Balance of Payment
(BOP)
3.3.3 Measures to reduce trade deficit in Nepal
3.3.4 Exchange rate: Meaning and Types
3.3.5 Free trade and Protection trade: Advantages and Disadvantages
3.3.6 Comparative cost theory of international trade
4. Development 4.1 Poverty, Inequality, Unemployment and Human Resources 8
Economics 4.1.1 Concepts of Poverty, Inequality and Unemployment
4.1.2 Causes of Poverty and Inequality, Measures to minimize
poverty and inequality
4.1.3 Unemployment: Types, Causes, and Measures to provide
employment
4.1.4 Human Resources: Concepts and Roles
4.1.5 Concepts of Human Development Indicators and Human
Development Index (HDI)
4.1.6 Population of Nepal : Current status (size, Structure,
distribution and growth rate)
5 Nepalese 5.1 Foreign trade of Nepal and Foreign Employment 28
Economy 5.1.1 Concepts of Nepalese Foreign Trade
5.1.2 Foreign Trade of Nepal : Growth and trend, Direction,
Composition and Problems of Nepalese foreign trade
5.1.3 Concepts of World Trade Organization (WTO) and South Asian
Free Trade Area (SAFTA)
5.1.4 Foreign Employment and Remittance: Current situation,
Advantages and Disadvantages
5.2 Development Planning in Nepal
5.2.1 Concept of development Planning
5.2.2 General Evaluation of Immediate past plan
5.2.3 Current development Plan : Goals, Priorities and Policies
5.2.4 Process of Plan Formulation in Nepal
 5.3 Sustainable Development Goals of UN and Nepal
5.3.1 Concepts of Sustainable Development Goals of UN: 17 Goals
5.3.2 No Poverty and Nepal
5.3.3 Zero Hunger and Nepal
5.3.4 Decent work, Economic growth and Nepal
5.3.5 Quality Education and Nepal.
6 Quantitative 6. Basic Mathematics 13
Techniques for 6.1 Review of Basic Statistics : Definition, Scope, Importance and
Economics Limitations of Statistics
6.2 Collection of data : Methods of collecting primary data, sources
of secondary data.
6.3 Standard Deviation, Coefficient of Variation (CV) and Variance
6.4 Index Number : Price Index Number: Laspeyre’s and Paasche’s
Price Index Number

Specification Table
Very short Short Long Toal
Units Total Marks
Questions Questions Questions Questions

Basic Concept of Economics and

1 1 - 2 1+5=6
Allocation of Resources

Microeconomics 1 3 1 5 1+15+8=24

Macroeconomics 2 1 1 4 2+5+8=15

Development Economics 1 1 - 2 1+5=6

Nepalese Economy 3 1 1 5 3+5+8=16

Quantitative Techniques in
3 1 - 4 3+5=8
Economics
Total 11 8 3 22 75

Note: Numbering of the questions should be arranged from Very Short Questions (Q.N. 1 to 11), Short
Questions (Q.N. 12 to 19) and Long Questions (Q.N. 20 to 22).
 Contents
Chapter 1 Basic Concepts of Economics and Allocation of Resources
Ten Principles of Economics 2
Concept of Scarcity and Choice 10
Opportunity Cost 13
Production Possibility Curve (PPC) 13
Concepts of Allocation of Resources 19
Basic Problems related to Allocation of Resources 20
Division of Labour and Specialization 21
Types of Economy 26
Glossary 35
Very short Questions with Answer 36
Questions for Practice 37
Chapter 2 Microeconomics
Unit 2.1 Market and Revenue Curves 40
Concept of Market 41
Classification of Market 42
Concepts of Total, Average and Marginal Revenue 45
Revenue Curves under Perfect Competition Market 46
Revenues under Monopoly Market 50
Glossary 53
Questions for Practice 54
Unit 2.2 Cost Curves 57
Basic Concept of Cost 58
The Concepts of Total Cost, Marginal Cost and Average Cost 60
Relation between MC, AVC, and AC 69
The Long–Run Cost Curve 71
Numerical Illustration 73
Glossary 76
Questions for Practice 77
Unit 2.3 Theory of Price and Output Determination 81
Concept of Equilibrium 82
Equilibrium of Firm: TR-TC and MR=MC Approaches 82
Price and Output Determination under Perfect Competition 87
Analysis of Equilibrium of a Firm 89
Long–Run Equilibrium of the Industry and Firm 93
Monopoly Market 95
Marginal Revenue=Marginal Cost (MR=MC) Approach 96
Long Run Equilibrium of Firm under Monopoly 98
 Numerical Illustrations 100
Very short Questions with Answer 106
Main Points 107
Glossary 108
Questions for Practice 109
Numerical Exercises 109
Unit 2.4 Theory of Factor Pricing 112
Basic Concept of Factors of Production 113
Rent 114
Ricardian Theory of Rent 116
Wage 119
Interest 125
Classical Theory of Interest 127
Profit 130
Risk Bearing Theory of Profits 132
Uncertainty Bearing Theory of Profits 133
Very short Questions with Answer 134
Main Points 135
Glossary 137
Questions for Practice 137
Chapter 3 Macroeconomics
Unit 3.1 Banking System and Monetary Policy 140
Concept 141
Meaning of Bank 141
Role/Importance of Banking System in the Economy 142
Classification of Bank 143
Central Bank 144
Commercial Bank 147
Concepts of Money Market and Capital Market 150
Monetary Policy: Meaning and Types 152
Total Number of Commercial Banks and Development Banks in Nepal 157
(Province wise)
Very Short Questions with Answer 158
Main Points 159
Glossary 160
Questions for Practice 161
Unit 3.2 Government Finance 162
Meaning 163
Difference between Public and Private Finance 164
Importance or Role of Government Finance 164
Government Expenditure 166
Government Revenue 170
Taxes 172
Types of Taxes 173
Progressive, Proportional, and Regressive Taxes 178
Characteristics of a Good Tax System (Canons of Taxation) 182
 Government Borrowing 184
Government Budget 186
Very Short Questions with Answer 189
Main Points 190
Glossary 192
Questions for Practice 193
Unit 3.3 International Trade 195
Introduction 196
Role or Importance of International/Foreign Trade 197
Concept of Balance of Trade (BOT) 198
Concept of Balance of Payment (BOP) 199
Measures to Reduce Trade Deficit in Nepal: Increasing Competitiveness 201
Exchange Rate: Concept and Types 202
Free Trade and Protectionism 206
Comparative Cost Theory of International Trade 211
Very Short Questions with Answer 213
Main Points 215
Glossary 215
Questions for Practice 217
Chapter 4 Development Economics 219
Concept of Poverty 220
Characteristics of the Poor 222
Causes of Poverty 224
Remedial Measures of Poverty Reduction 226
Concept of Inequality 228
Unemployment 230
Remedies on Minimize Unemployment 233
Human Resources 234
Meaning 234
Role or Importance of Human Resource 235
Human Development Index (HDI) 237
Current Population Status of Nepal 239
Indicators of Human Development 243
Very Short Questions with Answer 244
Glossary 245
Questions for Practice 247
Chapter 5 Nepalese Economy
Unit 5.1 Foreign Trade and Foreign Employment of Nepal 250
Introduction 251
Nepal's Foreign Trade 252
General Introduction to WTO and SAFTA 257
Foreign Employment and Remittance in Nepal 259
Very Short Questions with Answer 263
Main Points 265
Glossary 265
Questions for Practice 267
 Unit 5.2 Development Planning in Nepal 268
Concept of Development Planning 269
General Evaluation of the Immediate Past Plan 271
The Fifteenth Plan (Mid July 2019 – Mid July 2024) 272
Very Short Questions with Answer 276
Main Points 277
Questions for Practice 277
Unit 5.3 Sustainable Development Goals of United Nations and Nepal 278
Sustainable Development Goals of United Nations 279
Questions for Practice 280
Chaper 6 Quantitative Techniques in Economics
Unit 6.1 Definition of Statistics 282
Definition of Statistics 282
Origin and Development of Statistics 282
Definition of Statistics 282
Importance and Scope of Statistics 285
Functions of Statistics 286
Limitations or Weaknesses of Statistics 287
Main Points 288
Questions for Practice 289
Unit 6.2 Collection of Data 290
Concept 290
Pre-Requisites of Data Collection 290
Types of Data 291
Methods of Collecting Primary Data 292
Sources of Secondary Data 295
Precautions in the use of Secondary Data 296
Techniques of Data Collection 297
Methods of Sampling 299
Use of Statistics in Economics 302
Main Points 303
Questions for Practice 305
Unit 6.3 Measures of Dispersion 306
Concept 306
Essential Requisites for a Measure of Desperation 307
Types of Measures of Dispersion 307
Measures of Dispersion 308
Exercises 1 320
Unit 6.4 Index Number 325
Meaning 325
Types of Index Number 325
Price Index Number 326
List of Formula 332
Exercises 2 332
Practical and Project Work 337
Sample Question 339
Sample Answer 341
References 369