Two difficulties of the barter system:

• Double coincidence of wants: exchange is possible only if each party happens to want exactly what the other has to offer at the same time.
• Lack of a common measure of value: there is no standard unit in which to compare the values of different goods, so exchange rates are hard to fix.

Two roles of the banking system in economic development:

• Mobilisation of savings: banks collect the scattered savings of the public as deposits and turn them into investible funds, which promotes capital formation.
• Provision of credit: banks lend to farmers, industries and traders, which expands production, employment and income.

A progressive tax system is one in which the rate of tax rises as the taxpayer's income rises, so people with higher incomes pay a larger percentage of their income as tax.

It is based on the ability-to-pay principle and helps reduce inequality. Income tax in Nepal is an example.

Two advantages of protection trade policy:

• It protects domestic infant industries from foreign competition, allowing them to grow.
• It helps generate employment and reduces dependence on imports within the country.

Central Bank: Introduction and Functions in the Context of Nepal

Introduction

A central bank is the apex monetary institution of a country. It is responsible for issuing currency, controlling the supply of money and credit, and maintaining monetary stability in the economy. It does not deal directly with the general public; rather, it works as the banker, adviser, and supervisor of the government and commercial banks. In Nepal, Nepal Rastra Bank (NRB) is the central bank. It was established on 14 Baisakh 2013 BS (26 April 1956) under the Nepal Rastra Bank Act, 2012 BS, with its head office in Kathmandu. The NRB Act, 2058 BS (2002) currently governs its working. The main objective of NRB is to maintain price stability, balance of payments stability, and a sound banking and financial system in the country.

Functions of the Central Bank in the Context of Nepal

1. Issue of Currency (Note Issue)

The central bank has the sole monopoly right to issue notes and coins in the country. In Nepal, NRB issues all denominations of banknotes and coins (except one-rupee and two-rupee coins issued by the Government of Nepal) under the Minimum Reserve System. It keeps a reserve of gold, foreign currency, and government securities against the notes issued. This ensures uniformity, stability, and public confidence in the currency.

2. Banker, Adviser and Agent of the Government

NRB acts as the banker, fiscal agent and financial adviser to the Government of Nepal. It keeps the accounts of the government, receives government revenue, makes payments on behalf of the government, and provides loans and advances to the government when needed. It also advises the government on monetary, fiscal and foreign exchange policies and manages public debt.

3. Banker's Bank and Supervisor of Financial Institutions

NRB acts as the banker to commercial banks and other financial institutions. It keeps their deposits, provides them loans and rediscount facilities, and acts as the lender of last resort during emergencies. It also supervises, regulates and inspects banks and financial institutions to ensure a safe and sound banking system in Nepal.

4. Lender of Last Resort

When commercial banks face a shortage of funds or a financial crisis, NRB provides loans and rediscount facilities to protect them from failure. This maintains depositors' confidence and stability of the banking system.

5. Clearing House

NRB acts as the clearing house for commercial banks in Nepal. It settles the inter-bank transactions and claims through its clearing system, which saves time, cost and the use of cash in the economy.

6. Controller of Money Supply and Credit

NRB controls the supply of money and credit in the economy through quantitative and qualitative instruments such as the bank rate, cash reserve ratio, statutory liquidity ratio, open market operations, margin requirements, moral suasion and direct action. This helps to control inflation, deflation and credit expansion in Nepal.

7. Custodian of Foreign Exchange Reserves

NRB is the custodian of the country's foreign exchange reserves. It manages the exchange rate of the Nepalese rupee, formulates foreign exchange policy, and maintains the balance of payments position of the country.

8. Promoter of Economic Development

In a developing country like Nepal, NRB promotes economic development by directing credit to priority sectors such as agriculture, small and cottage industries, tourism and exports. It also runs programmes like the Deprived Sector Lending Programme and financial inclusion programmes to extend banking facilities to rural and backward areas.

9. Miscellaneous Functions

NRB also performs other functions such as acting as the lender to the government, managing government securities and public debt, conducting research and publishing reports on the economy, and representing Nepal in international financial institutions like the IMF and the World Bank.

Conclusion

Thus, the central bank is the heart of the monetary and financial system of a country. In Nepal, Nepal Rastra Bank performs all these traditional and developmental functions efficiently. It maintains monetary stability, supervises the banking sector, manages foreign exchange reserves and supports the economic development of the country. Therefore, NRB plays a vital role in the overall economic progress of Nepal.

Sources of Government Revenue

Government revenue refers to the total income collected by the government to meet its regular and development expenditure. The main sources of government revenue are as follows:

1. Tax Revenue Tax is a compulsory payment made by individuals and firms to the government without any direct return. It is the largest and most reliable source of government revenue. Taxes are of two types:

• Direct Tax: A tax whose burden cannot be shifted to others. The person who pays it bears the burden himself. Examples: income tax, land revenue, property tax, capital gains tax, house and land tax. Direct taxes are progressive in nature and help reduce inequality in income distribution.
• Indirect Tax: A tax whose burden can be shifted to others. The taxpayer collects it from the consumer by adding it to the price of goods and services. Examples: value added tax (VAT), excise duty, customs duty, export duty, entertainment tax. Indirect taxes are easier to collect but are regressive in nature as they fall equally on rich and poor.

2. Non-Tax Revenue This is the income earned by the government from sources other than taxes. It includes:

• Fees: Charges paid by service users to the government for specific services rendered, such as registration fees, passport fees, tuition fees of government schools and colleges, and hospital fees. Fees are voluntary in the sense that only those who use the service pay them.
• Fines and Penalties: Money collected from individuals and firms for breaking laws, such as traffic fines, court fines, and penalties for tax evasion. They discourage illegal activities and also add to revenue.
• Royalties: Payments made to the government by private companies for using natural resources owned by the state, such as royalties from mining, forestry, and hydropower projects.
• Profits from Public Enterprises: Income earned as profit or dividend from government-owned corporations such as Nepal Electricity Authority, Nepal Oil Corporation, and Nepal Telecom.
• Interest and Dividends: Interest earned on loans given by the government to domestic and foreign parties, and dividends from investments in shares and bonds.
• Sale of Government Property: Revenue from selling government land, buildings, vehicles, and other assets.
• Foreign Grants and Aid: Financial and technical assistance received from foreign governments and international organisations. This is an important source for developing countries like Nepal, though it is not a dependable long-term source.

3. Other Sources

• Internal and External Borrowing: Loans taken from domestic sources (banks, public, provident funds) and foreign sources (World Bank, Asian Development Bank, foreign governments). Borrowing is a source of revenue but creates a liability of repayment with interest.
• Miscellaneous Sources: Fines, escheats (property of persons dying without heirs), fees for licences and permits, and income from lotteries.

Conclusion Tax revenue forms the backbone of government revenue, while non-tax revenue and borrowing supplement it. A balanced mix of these sources is essential for the government to finance public services such as education, health, defence, infrastructure, and social security without excessive dependence on borrowing.

According to the classical theory, the rate of interest is determined by the intersection of the demand for capital (investment) and the supply of capital (saving).

Interest is the price of capital, so it settles where investment demand equals saving.

Barter system is the direct exchange of goods and services for other goods and services, without using money.

Medium of exchange is the primary function of money.

Money is accepted by everyone as payment for goods and services, which removes the need for a double coincidence of wants. (Measure of value is the other primary function.)

Functions of Nepal Rastra Bank in the Economic Development of Nepal

Nepal Rastra Bank (NRB) was established on 14 Baisakh 2013 BS (26 April 1956) under the Nepal Rastra Bank Act. As the central bank of Nepal, it acts as the apex monetary institution and plays a vital role in the economic development of the country. Its major functions are explained below:

1. Issue of Currency (Note Issue): NRB has the sole monopoly right to issue currency notes and coins in Nepal. It issues notes of various denominations according to the need of the economy. By controlling the volume of money in circulation, it maintains price stability and prevents inflation or deflation, which is essential for healthy economic development.

2. Formulation and Implementation of Monetary Policy: NRB formulates and implements monetary policy to achieve economic objectives such as price stability, full employment, and economic growth. It uses tools like bank rate, cash reserve ratio, open market operations, and credit control to regulate the supply of money and credit in the economy.

3. Banker to the Government: NRB acts as the banker, agent, and adviser to the Government of Nepal. It keeps the accounts of the government, receives revenue, makes payments on behalf of the government, and provides loans when needed. It also advises the government on economic and financial matters, which helps in proper planning and budgeting.

4. Banker's Bank: NRB acts as the banker to commercial banks and other financial institutions. It keeps their deposits, provides them loans during emergencies, and acts as the lender of last resort. It supervises and regulates their activities to ensure a sound and stable banking system in the country.

5. Credit Control: NRB controls the volume and direction of credit in the economy through various quantitative and qualitative methods. This helps to channel credit into productive sectors like agriculture, industry, and infrastructure, which accelerates economic development.

6. Foreign Exchange Management: NRB manages the foreign exchange reserves of the country and determines the exchange rate of the Nepalese rupee. It controls foreign exchange transactions and maintains the balance of payments position, which is crucial for international trade and economic stability.

7. Promotion of Financial Inclusion and Stability: NRB promotes financial inclusion by expanding banking services to rural and remote areas through policies like branch expansion and priority sector lending. It also maintains financial stability by supervising banks and financial institutions, protecting depositors, and preventing financial crises.

8. Development of Financial Institutions: NRB plays a leading role in establishing and developing financial institutions like the Agricultural Development Bank, Nepal Industrial Development Corporation, and Rural Development Banks. These institutions provide credit to agriculture, industry, and rural areas, supporting balanced regional development.

9. Clearing House Function: NRB operates the clearing house system, which facilitates the settlement of transactions among commercial banks. This makes payments faster, safer, and more efficient, supporting the smooth functioning of the economy.

Conclusion: In this way, NRB performs multiple functions—issuing currency, controlling credit, advising the government, managing foreign exchange, and promoting financial inclusion—which together contribute significantly to the economic development of Nepal. A strong and effective central bank is therefore indispensable for the sustained growth and stability of the Nepalese economy.

Central Budget Formulation Process in Nepal

The central budget is the annual estimate of government income (revenue) and expenditure, prepared and presented by the Ministry of Finance (MoF) on behalf of the Government of Nepal. In Nepal, the budget is called the annual budget (वार्षिक बजेट) and it is presented in the federal parliament. The process of preparing it is called budget formulation. The main steps are as follows:

1. Issuing the budget formulation circular (Pre-budget phase): The budget formulation process formally begins about 6–7 months before the start of the fiscal year. The Ministry of Finance issues a Budget Formulation Circular (बजेट तर्जुमा परिपत्र) to all ministries, departments, provincial and local governments, and other concerned agencies. This circular gives instructions on the format, ceiling of expenditure, priorities, and the deadline for submitting budget proposals. The fiscal year in Nepal runs from Shrawan 1 to Ashadh end, so the circular is usually issued around Poush–Magh.

2. Preparation of estimates by spending agencies: On the basis of the circular, each ministry and its subordinate offices prepare their expenditure estimates for the coming fiscal year. They also estimate their revenue (internal income) and submit the proposals to the National Planning Commission (NPC) and the Ministry of Finance. The NPC examines the proposals in light of the periodic plan and national priorities.

3. Setting the resource ceiling: The Ministry of Finance, in consultation with the NPC and the Revenue Advisory Committee, estimates the total resources available for the next fiscal year. These resources come from:

• Revenue (tax and non-tax)
• Foreign grants and loans
• Internal borrowing
• Principal and interest repayment

On the basis of this resource estimate, a ceiling (maximum limit) of expenditure is fixed for each ministry. This is called the budget ceiling.

4. Discussion and prioritisation: The MoF holds discussions with the NPC, line ministries, and other stakeholders. The NPC recommends the budget size and priorities. The Budget and Programme Division of the MoF coordinates the whole exercise. The proposals are then finalised in the form of a Red Book (Red Book / रातो किताब) which contains detailed estimates of income and expenditure.

5. Approval by the Council of Ministers: The draft budget is placed before the Council of Ministers (मन्त्रिपरिषद्) for approval. After approval, it becomes the government's official budget proposal.

6. Presentation in Parliament: The Finance Minister presents the budget in a joint sitting of the Federal Parliament on Jestha 15 (15th of Jestha) every year. The Finance Minister reads the budget speech, which contains the government's policies, programmes, and financial estimates for the coming year. This is called the Budget Speech (बजेट भाषण).

7. Discussion and approval in Parliament: After presentation, the budget is discussed in both houses of parliament. Members of Parliament (MPs) raise questions and give suggestions. The Finance Minister may revise the budget in response to the discussion. Then the budget is passed by a majority vote. The budget is approved in the form of the Appropriation Bill (विनियोजन विधेयक) and the Finance Bill (अर्थ विधेयक).

8. Authentication and implementation: After approval by parliament, the budget is authenticated by the President (राष्ट्रपति). Then it is implemented from Shrawan 1. The Financial Comptroller General Office (FCGO) releases funds, and the ministries and local governments spend according to the approved budget. The budget is monitored and audited by the Office of the Auditor General (OAG).

Conclusion: Thus, the central budget formulation process in Nepal is a systematic, participatory, and legal process that starts with the issuance of the budget formulation circular and ends with authentication and implementation. It involves the MoF, NPC, line ministries, parliament, and the President. The process ensures that national resources are allocated according to national priorities and the periodic plan.

The types of insurance policy are life insurance and non-life (general) insurance.

Life insurance covers the risk of death or survival of a person, while non-life insurance covers property, health, vehicles and other risks.

An overdraft is a short-term facility under which a bank allows a current account holder to withdraw more than the balance in the account, up to a sanctioned limit.

Interest is charged only on the amount actually overdrawn.

A balanced budget is a budget in which the estimated government expenditure is exactly equal to the estimated government revenue.

Balance of payment 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 year.

Central Bank

A central bank is the highest financial institution of a country, established by law to control, regulate and supervise the entire banking and monetary system. It does not deal directly with the general public for profit like commercial banks; instead it works in the public interest. In Nepal, the Nepal Rastra Bank (NRB), established in 1956 under the Nepal Rastra Bank Act, is the central bank. It has a head office in Kathmandu and branch offices in various places.

Justification as the Apex Monetary Authority

The central bank is rightly called the apex monetary authority of the country because of the following functions:

1. Issue of currency (sole note-issuing authority): Only the central bank has the legal monopoly to issue notes and coins. In Nepal, NRB issues Nepalese currency. Since it controls the volume of money in circulation, it can directly influence money supply, price level and inflation in the economy. No other bank enjoys this right.

2. Formulation and implementation of monetary policy: The central bank decides the monetary policy of the country — how much credit to expand or contract, what interest rates and reserve requirements to apply. It uses tools such as the bank rate, open market operations, cash reserve ratio and credit ceiling to control credit and maintain price stability. This makes it the supreme authority over money and credit.

3. Banker, adviser and agent of the government: It acts as the banker to the government — it keeps government accounts, receives revenue, makes payments, grants loans and manages public debt. It also gives advice to the government on economic and monetary matters and represents the country in international financial institutions like the IMF and the World Bank. Thus it guides the fiscal and monetary affairs of the nation.

4. Banker's bank and lender of last resort: All commercial banks keep a part of their deposits with the central bank as cash reserves. The central bank supervises their activities, clears their inter-bank transactions and lends them money in times of emergency. By acting as the "banker's bank" and "lender of last resort," it controls and protects the whole banking system.

5. Custodian of foreign exchange reserves: The central bank holds and manages the country's foreign currency reserves and maintains the exchange rate of the national currency. In Nepal, NRB keeps the foreign exchange reserve and formulates the foreign exchange policy, which is vital for balance of payments stability.

6. Clearing house and supervisory role: It works as the clearing house of all banks and supervises, inspects and regulates financial institutions to ensure their soundness and to protect depositors.

Conclusion

Since the central bank alone issues currency, formulates monetary policy, acts as banker to the government and to all banks, and holds the foreign exchange reserves, it stands at the top of the country's monetary and banking structure. Therefore, it is rightly justified as the apex monetary authority of the country.

Sources of Government Revenue in Nepal

Government revenue refers to the total income collected by the government to meet its public expenditure. In Nepal, the sources of government revenue are broadly classified into two main categories: internal (domestic) sources and external (foreign) sources.

1. Internal Sources

These are the sources from which the government collects revenue within the country itself. They are further divided into two parts:

(a) Tax Revenue

Tax is a compulsory payment made by individuals and institutions to the government without any direct return. It is the major source of government revenue in Nepal.

• Direct Tax: This tax is paid directly by the person on whom it is imposed, and its burden cannot be shifted to others. Examples include income tax, land revenue, house and land registration tax, profit tax on companies, and capital gains tax. In Nepal, direct taxes are collected mainly through the Inland Revenue Department.
• Indirect Tax: This tax is imposed on goods and services, and its burden can be shifted to the final consumer. Examples include Value Added Tax (VAT), customs duty (customs), excise duty, and export duty. In Nepal, customs duty is collected at the border points, while VAT and excise duty are collected on the production and sale of goods and services.

(b) Non-Tax Revenue

This is the revenue collected by the government from sources other than taxes. It includes:

• Fees and charges: Registration fees, license fees, passport fees, vehicle registration fees, etc.
• Fines and penalties: Money collected from people who violate laws.
• Profit from public enterprises: Income earned from government-owned corporations like Nepal Electricity Authority, Nepal Oil Corporation, and Nepal Telecom.
• Royalty and rent: Income from the use of natural resources such as forests, mines, and water, as well as rent from government land and buildings.
• Interest and dividends: Interest earned on loans given by the government and dividends from shares held in public companies.
• Sale of government property: Income from selling old government vehicles, buildings, and other assets.

2. External Sources

These are the sources from which the government collects revenue from foreign countries and international organizations. They include:

• Foreign grants (aid): Financial assistance given by foreign governments and international agencies like the World Bank, Asian Development Bank, and various donor countries. Grants do not have to be repaid.
• Foreign loans: Loans taken from foreign governments and international financial institutions. These have to be repaid with interest in the future.
• Foreign direct investment (FDI): Investment made by foreign companies and individuals in Nepal, which also generates revenue for the government through taxes and fees.

Conclusion

In Nepal, tax revenue, especially indirect taxes like VAT and customs duty, contributes the largest share of government revenue. Non-tax revenue and external sources like grants and loans also play an important supporting role. The government uses this revenue to finance development activities, pay salaries, and provide public services. Therefore, a balanced and efficient system of revenue collection is essential for the economic development of Nepal.

Nepal Bank Limited was the first commercial bank of Nepal. It was established on 30 Kartik 1994 BS (1937 AD).

(a) Credit instruments such as cheques, drafts and bills of exchange help settle transactions easily without carrying or counting cash.

(b) They are a safe and convenient means of making payments and transferring money from one place to another.

Value added tax (VAT) and customs duty are indirect taxes.

They are levied on goods and services, and their burden can be shifted to the final consumer through the price of the product.

Introduction to Money

Money is anything that is generally accepted by all members of a society as a medium of exchange and as a means of settling debts. In the past, people exchanged goods for goods directly, a system called the barter system. Barter had serious difficulties: it required a double coincidence of wants (both parties had to want each other's goods at the same time), there was no common measure of value, goods could not be divided into small units, and wealth could not be stored safely. To overcome these problems, money was invented. In the beginning, commodities such as cattle, salt, shells and grains were used as money; later, metals like gold and silver were used; and today, paper notes and coins issued by the central bank, along with bank deposits and digital money, serve as money. In Nepal, the Nepal Rastra Bank issues and manages money.

Functions of Money

The functions of money are generally divided into two groups: primary functions and secondary functions. Some economists also add a third group, called contingent functions.

1. Medium of Exchange (Primary Function) Money acts as a medium of exchange for buying and selling goods and services. A person sells goods to earn money and uses that money to buy whatever he or she needs. This removes the problem of double coincidence of wants and makes trade easy, fast and convenient.

2. Measure of Value (Primary Function) Money serves as a common unit for measuring and expressing the value of all goods and services. In Nepal, the value of goods is expressed in rupees. Because there is one common measure, it becomes easy to compare the prices of different goods and to keep accounts.

3. Store of Value (Secondary Function) Money can be saved for the future because it does not lose value quickly and is not perishable like goods. People save money in cash, in banks or in other forms to meet future needs such as education, marriage, illness or old age. In this way, money helps in the formation of capital.

4. Standard of Deferred Payment (Secondary Function) Money is used to settle debts and payments made in the future. Loans, salaries, rents, taxes and insurance premiums are all expressed and paid in money. Since money has a stable value, it becomes easier to borrow and lend, and contracts can be made for future payment.

5. Transfer of Value (Secondary Function) Money makes it possible to transfer purchasing power or wealth from one person to another and from one place to another. For example, a person in Nepal can send money to a relative in another district or even in a foreign country through a bank. This would be very difficult under the barter system.

6. Basis of Credit and Distribution of National Income (Contingent Function) Money is the basis of credit, because banks lend money and charge interest in money. It also helps in the distribution of national income, since wages, rent, interest and profit are all paid in money. This makes it possible to determine the share of each factor of production in the national income.

Conclusion

Money is thus an essential part of modern economic life. As a medium of exchange, a measure of value, a store of value, a standard of deferred payment, a means of transferring value, and the basis of credit and income distribution, money has made production, exchange, saving and investment simple and efficient. Without money, the modern economy could not function smoothly.

Public expenditure refers to the expenditure incurred by the government (federal, provincial and local levels) for the welfare of the people and for the smooth running of the country. In the context of Nepal, public expenditure is classified mainly into the following types:

1. On the basis of purpose (functional classification)

(a) Recurrent (regular) expenditure: This is the expenditure made for the day-to-day operation of the government. It includes salaries and allowances of civil servants, pensions, grants to provinces and local levels, interest payment on public debt, repair and maintenance, and administrative expenses. It does not create new capital assets. In Nepal, a large share of the budget goes to recurrent expenditure.

(b) Capital expenditure: This is the expenditure made for creating permanent assets and developing infrastructure. It includes construction of roads, bridges, hydropower projects, irrigation, drinking water, schools, hospitals and purchase of machinery. It increases the productive capacity of the country and promotes long-term economic growth. In Nepal, capital expenditure is generally low compared to the allocated amount.

2. On the basis of effect on production

(a) Productive expenditure: Expenditure that directly or indirectly increases production and income, such as investment in agriculture, industry, transport and education. It is also called development expenditure.

(b) Unproductive expenditure: Expenditure that does not increase production, such as spending on defence, interest payment on loans and general administration. It is also called non-development expenditure.

3. On the basis of obligation

(a) Compulsory expenditure: Expenditure that the government must bear by law, such as salaries of government employees, repayment of loans and interest, and constitutional obligations. It cannot be avoided.

(b) Optional (discretionary) expenditure: Expenditure that the government may or may not incur according to its will and resources, such as spending on new development projects, social welfare programmes and subsidies.

4. On the basis of source of income

(a) Revenue expenditure: Expenditure met from the regular revenue income of the government (tax and non-tax revenue).

(b) Debt expenditure: Expenditure met by borrowing from internal and external sources, which creates a burden of repayment in the future.

5. On the basis of level of government

In Nepal, after federalism, public expenditure is made at three levels — federal, provincial and local. The federal government spends on national defence, foreign affairs, large infrastructure and national projects; provincial governments spend on provincial roads, health and education; and local governments spend on local roads, drinking water, sanitation and local welfare.

Conclusion: Public expenditure in Nepal is directed towards poverty reduction, infrastructure development, social welfare and balanced regional development. However, due to weak capital spending and dependence on foreign aid, its full benefit is not achieved. Therefore, priority should be given to productive and capital expenditure.

Barter system is the system of exchange in which goods and services are directly exchanged for other goods and services without using money.

One feature of the capital market: it is the market for long-term funds, where shares, debentures and bonds are issued and traded.

A tax is a compulsory payment made by citizens and institutions to the government, without any direct return for the payer.

Commercial Bank

A commercial bank is a financial institution that accepts deposits from the public, gives loans and advances, and provides other financial services with the motive of earning profit. In Nepal, commercial banks are established as public limited companies under the Companies Act and licensed and regulated by Nepal Rastra Bank (NRB) under the Bank and Financial Institutions Act, 2073 BS. Examples are Nepal Bank Limited, Rastriya Banijya Bank, Nabil Bank and Nepal Investment Mega Bank.

Major Functions of a Commercial Bank

A. Primary Functions

1. Accepting deposits: The main function of a commercial bank. It collects savings from the public through:
   • Current account: money can be withdrawn any number of times; usually no interest.
   • Saving account: limited withdrawals; a small rate of interest.
   • Fixed deposit account: money kept for a fixed period at a higher rate of interest.
   • Recurring deposit account: a fixed amount is deposited every month for a fixed period.
2. Providing loans and advances: The bank lends deposited money to traders, industrialists, farmers and others as cash loans, overdrafts, cash credit and discounting of bills. The interest charged is higher than the interest paid to depositors, and this difference (spread) is the bank's main source of profit.
3. Creating credit: By granting loans and opening deposits in the borrowers' names, banks create credit and increase the money supply.

B. Secondary Functions

4. Agency functions: The bank acts as an agent of customers by collecting cheques, drafts and bills, paying premiums, rent and taxes, transferring money, and buying or selling shares and securities on their behalf.
5. Utility functions: It issues letters of credit and bank guarantees, provides locker facility, foreign exchange services, remittance and traveller's cheques.
6. Other functions: It mobilises idle capital, encourages saving, finances trade and industry, supports government plans, and provides ATM, mobile and internet banking.

Conclusion

A commercial bank is a profit-making institution that accepts deposits, provides loans and renders agency and utility services. It mobilises savings into productive investment and thereby contributes to the economic development of Nepal.

Direct Tax and Indirect Tax

Direct Tax: A direct tax is a tax whose burden and liability fall on the same person. The person who is legally bound to pay the tax cannot shift its burden to another person. It is paid directly by the taxpayer to the government. For example, income tax, land revenue, house and land tax, capital gain tax, etc. In the case of direct tax, the taxpayer feels the burden of the tax directly because it is deducted or collected from his own income or property.

Indirect Tax: An indirect tax is a tax whose burden can be shifted to another person. The person who is legally bound to pay the tax to the government is not the same person who ultimately bears its burden. It is imposed on goods and services, and its burden is passed on to the final consumer through an increase in price. For example, value added tax (VAT), excise duty, customs duty, entertainment tax, etc. In the case of indirect tax, the consumer pays the tax indirectly while buying goods and services.

Differences between Direct Tax and Indirect Tax

Conclusion: Both direct and indirect taxes are important sources of government revenue. Direct taxes help in reducing inequality of income and wealth, while indirect taxes are convenient to collect and cover a large number of people. Therefore, a balanced combination of both is necessary for the economic development of a country.

Classical Theory of Interest

The classical theory of interest was developed by classical economists like Adam Smith, Ricardo and J. S. Mill. It is also called the real theory of interest or the loanable funds theory in its simple form. According to this theory, the rate of interest is determined by the interaction of the demand for capital (investment) and the supply of capital (saving).

Assumptions

1. Full employment exists in the economy.
2. Saving and investment are the only factors determining the rate of interest.
3. The rate of interest is a real phenomenon, not a monetary one.
4. The supply of capital comes from saving and the demand for capital comes from investment.

Demand for Capital (Investment)

The demand for capital comes from investors who borrow money to invest in business. Investment is inversely related to the rate of interest. When the rate of interest is high, the cost of borrowing rises, so investment falls. When the rate of interest is low, investment rises. Hence the investment demand curve slopes downward from left to right.

Supply of Capital (Saving)

The supply of capital comes from saving by households. Saving is directly related to the rate of interest. When the rate of interest is high, people are tempted to save more, so the supply of saving rises. When the rate of interest is low, saving falls. Hence the saving supply curve slopes upward from left to right.

Determination of Rate of Interest

The rate of interest is determined at the point where the demand for capital equals the supply of capital. This is shown in the following table and diagram.

Table: Determination of Rate of Interest

Diagram

Rate of
Interest
   ^
 8 |  D\                /S
   |    \              /
 6 |     \            /
   |      \          /
 4 |-------\--------/------  E (Equilibrium)
   |        \      /
 2 |         \    /
   |          \  /
 1 |           \/
   |________________________> Capital
     100 200 300 400 500

In the diagram, DD is the demand curve for capital and SS is the supply curve of capital. They intersect at point E, where the rate of interest is 4% and the amount of capital is Rs 300. At this point, demand for capital equals supply of capital. Hence 4% is the equilibrium rate of interest.

If the rate of interest is above 4% (say 6%), supply of capital exceeds demand, so the rate of interest falls. If the rate is below 4% (say 2%), demand exceeds supply, so the rate rises. Thus the rate of interest always tends to settle at the equilibrium level where saving equals investment.

Conclusion

According to the classical theory, the rate of interest is determined by the forces of demand for and supply of capital. The demand for capital depends on investment and the supply of capital depends on saving. The equilibrium rate of interest is established where both are equal.

अथवा (Or)

Ricardian Theory of Rent

The Ricardian theory of rent was propounded by the classical economist David Ricardo. It is also known as the differential rent theory. According to this theory, rent arises due to differences in the fertility of land. Rent is the payment made to the landlord for the use of land. It is the surplus earned by the more fertile land over the least fertile (marginal) land.

Assumptions

1. There is perfect competition in the market.
2. Land is limited in supply and its fertility differs from plot to plot.
3. The law of diminishing returns operates in agriculture.
4. The marginal land (least fertile land) yields no rent.
5. Cultivation is done from the most fertile land to the least fertile land.

Explanation

According to Ricardo, land differs in fertility. When the population increases, people first cultivate the most fertile land. As population grows further, less fertile land is brought under cultivation. The produce from the most fertile land is greater than the produce from the marginal land. This excess produce over the marginal land is called rent.

The marginal land is the least fertile land which yields just enough to cover the cost of cultivation. Hence it earns no rent. Rent arises only on superior lands because they yield more output than the marginal land.

Table: Ricardian Theory of Rent

In the table, land C is the marginal land where produce equals cost of production (20 quintals), so it earns no rent. Land B yields 40 quintals, so its rent is 20 quintals. Land A yields 60 quintals, so its rent is 40 quintals. Thus rent arises due to differences in fertility.

Diagram: Ricardian Theory of Rent

Produce
   ^
60 |  A  [========= Rent =========][ Cost ]
   |
40 |  B  [==== Rent ====][ Cost ]
   |
20 |  C  [ Cost ]  (No Rent)
   |
   |________________________________> Land
        A        B        C

In the diagram, the shaded portion above the cost line represents rent. Land A has the largest rent, land B has smaller rent, and land C (marginal land) has no rent. The cost of production is the same on all lands, but the produce differs due to differences in fertility. The surplus of produce over cost on superior lands is rent.

Conclusion

According to Ricardo, rent is a differential surplus. It arises because of differences in the fertility of land. The most fertile land earns the highest rent, while the marginal land earns no rent. Thus rent is not a cost of production but a surplus earned by superior lands.

Introduction to Money

Money is anything that is generally accepted by all members of a society as a medium of exchange and as a means of settling debts. In the past, people exchanged goods for goods directly, a system called the barter system. Barter had many difficulties — it required a double coincidence of wants, there was no common measure of value, goods could not be divided into small units, and wealth could not be stored safely. To remove these difficulties, money was invented. In the modern economy, money includes coins, paper notes, and bank deposits (credit money) issued and regulated by the central bank. Money is the lifeblood of the economy because it makes production, exchange, distribution, and consumption smooth and easy.

Functions of Money

The functions of money are generally divided into primary, secondary, and contingent functions. Six important functions are explained below.

1. Medium of Exchange

This is the primary and most important function of money. Money is accepted by everyone as a means of buying and selling goods and services. A person sells goods to earn money and uses that money to buy whatever he or she needs. This removes the double coincidence of wants of the barter system. For example, a farmer can sell rice for money and then buy cloth with the same money, without searching for a person who has cloth and wants rice. Thus money acts as a bridge between buyers and sellers and makes exchange easy, quick, and convenient.

2. Measure of Value

Money serves as a common unit for measuring and expressing the value of all goods and services. Just as length is measured in metres and weight in kilograms, value is measured in rupees. The price of a book, a kilogram of rice, or an hour of labour can all be expressed in the same unit. This common measure allows us to compare the values of different goods easily. For example, if a shirt costs Rs 800 and a pair of shoes costs Rs 2,000, we immediately know the shoes are more valuable. This function is also called the unit of account.

3. Store of Value

Money can be saved and kept for future use because it does not lose value quickly and is not perishable like goods. A person can store his earnings as cash at home or deposit them in a bank, and use them later when needed. This allows people to save for old age, education, marriage, or emergencies. In the barter system, storing wealth was very difficult because goods like vegetables or milk would rot. Money, being durable and portable, solves this problem and encourages the habit of saving.

4. Standard of Deferred Payment

Money is used to settle payments that are made in the future. Loans, debts, salaries, rents, taxes, and insurance premiums are all agreed upon and paid in terms of money. Since money has a stable value and is universally accepted, both the lender and the borrower can fix the amount of repayment in money terms. For example, a bank gives a loan of Rs 1,00,000 to be repaid after two years with interest, and the whole transaction is expressed in money. This function makes credit and borrowing possible in the economy.

5. Transfer of Value

Money makes it easy to transfer purchasing power or wealth from one person to another and from one place to another. Wealth can be transferred through cash, cheques, drafts, or online banking. For example, a father living in Kathmandu can send money to his son studying abroad through a bank transfer within a day. In the barter system, transferring wealth was almost impossible because goods were heavy and difficult to carry. Money, being light and acceptable everywhere, makes such transfers simple and safe.

6. Measure and Distribution of National Income

Money helps in measuring the national income of a country and in distributing it among the factors of production. Since all goods and services are valued in money, the total value of a nation's output can be calculated as national income. Similarly, rent is paid to landowners, wages to labourers, interest to capital owners, and profit to entrepreneurs — all in money. This makes it possible to compare incomes, calculate the standard of living, and plan taxation and public expenditure properly.

Conclusion

Money is thus an essential invention of modern civilisation. By serving as a medium of exchange, measure of value, store of value, standard of deferred payment, means of transferring value, and a measure of national income, money has removed the defects of barter and made economic activities smooth and efficient. Without money, the modern economy cannot function properly.

A promissory note is a written, signed promise by a person (the debtor) to pay a fixed sum of money to another person (the creditor) on demand or on a stated date. It is a form of credit money.

It is a necessary condition of the barter system. Barter takes place only when two persons each have what the other wants, in the quantity and at the time needed. Because it is hard to find such a match, barter is difficult and money was introduced.

Government expenditure is the money spent by the government on its administration, defence, social services, development projects and the payment of debts, to fulfil its duties and promote the welfare of the people. It is divided into recurrent and capital expenditure.

Introduction

Government expenditure is the money the government spends on administration, defence, social services, economic development and other public purposes. In a developing country such as Nepal, where private investment is weak, it is a key tool for economic development. It is useful for the following reasons.

1. Infrastructure building: Spending on roads, bridges, electricity, irrigation and airports lowers business costs and opens the way for production, trade and investment.
2. Education and health: Spending on schools, scholarships, hospitals and training improves the skills and health of people, which raises productivity and human capital.
3. Employment generation: Public works and government projects create jobs, raise incomes and reduce unemployment and poverty.
4. Capital formation: Public investment in hydropower, industries and agriculture adds to the capital stock, increases production and national income.
5. Support to agriculture and industry: Subsidies on fertiliser and seeds, loans, research and extension services raise output in the productive sectors.
6. Reducing inequality: Social security allowances, support for the poor and backward regions, and spending on rural areas spread the benefits of growth more evenly.
7. Stability and economic security: Spending on defence, law and order, and justice provides the peaceful environment needed for investment and growth.
8. Economic stability: In a recession, extra spending raises demand and employment; in times of price rise, controlled spending helps check inflation.
9. Multiplier effect: Money spent by the government becomes income for others, who spend it again, so national income rises by more than the original spending.

Conclusion: Government expenditure builds the foundation of development by providing infrastructure, human capital, jobs and stability. Its benefits are greatest when it is spent honestly and efficiently on productive sectors.

Budget deficit = Total expenditure − Total revenue
= Rs 1.8 trillion − Rs 1.4 trillion
= Rs 0.4 trillion (Rs 400 billion)

Sources of Revenue of the Federal Government of Nepal

The federal government of Nepal collects revenue mainly from two sources: tax revenue and non-tax revenue. Tax revenue is compulsory payment made by people to the government without any direct return, while non-tax revenue is the income earned by the government from its own property, services and other sources.

Four sources of tax revenue:

1. Income tax: It is the tax imposed on the income of individuals and companies. Employees pay tax on their salaries, and business firms pay tax on their profits. It is a major source of federal revenue.

2. Value Added Tax (VAT): It is an indirect tax imposed on the value added to goods and services at each stage of production and distribution. It is collected from consumers at the time of purchase and is the largest source of indirect tax revenue in Nepal.

3. Customs duty: It is the tax imposed on goods imported from foreign countries. It is collected at the customs points of Nepal and also protects domestic industries from foreign competition.

4. Excise duty: It is the tax imposed on the production and import of certain goods like alcohol, tobacco, cigarettes and petroleum products. It is collected from producers and importers of such goods.

Four sources of non-tax revenue:

1. Fees and charges: The government earns revenue by providing various services to the public, such as passport fees, citizenship fees, vehicle registration fees, licence fees and court fees.

2. Income from government property and enterprises: The government earns rent from its land, buildings and other property, and also receives profits and dividends from government-owned corporations like Nepal Telecom and Nepal Oil Corporation.

3. Royalty and levies: The government receives royalty from the use of natural resources such as minerals, forests, water and mines. For example, royalty is received from hydropower projects and mining industries.

4. Fines, penalties and grants: The government earns income from fines and penalties imposed on those who break the law. Besides, foreign grants received from donor countries and international organisations are also counted as non-tax revenue.

Conclusion: Tax revenue is the main source of federal income, while non-tax revenue gives additional support. Both are necessary for running the government and carrying out development works in Nepal.

Real wages fall.

When the price level rises while money wages stay the same, workers can buy fewer goods and services with the same income, so the purchasing power of wages decreases.

Inconvertible paper money is called fiat money.

It cannot be converted into gold or silver on demand; it is legal tender by government order and is backed only by the government's authority.

Two examples of direct tax: income tax and property (house and land) tax.

The person who pays a direct tax bears its burden and cannot shift it to someone else.