IMPORTANCE OF PUBLIC EXPENDITURE

I n today dynamic world, the importantance of public expenditure increasing not only to maintain law and order but also for the growth, stability of the economy and weal fear of the state. The importance of the public expenditure is explained below.

1. DEFENSE
Due to the increasing cost of new weapons, sophisticated tanks and guns, modernization of defense forces a large part of the total expenditure is needed.

2. WELFARE SCHEMES
Since wage is under developed countries are low, a number of welfare schemes are under take by the government, such as free or subsidized health services, child welfare, welfare of the handicapped, subsidies on food and housing, special schemes for the unemployed, for scheduled castes and tribes as in Nepal etc.

3. POPULATION GROWTH
Population has been expanding fast in developing countries. The population theory of Malthus has been operating in such countries. A large amount has to be spent on child welfare, nutrition, social security measures, public health service, family planning programmers such as free supplies of contraceptives etc.

4. INDUSTRIAL DEVELOPMENT
A developing country need industrial development both in the private and public sectors cheeps credit to small-scale industries, supply of raw materials at concessional rates, expert subsidies, tax concessionals for industries in the backward regions, setting up of strategic industries in the public sector, etc has increased the importance of public expenditure.

5. EDUCATION
Illiteracy is rampant in developing countries so public expenditure an account of education, art, culture, scientific service and research has increased considerably.

CONCEPT OF INFLATION & DIFLATION

Inflation Purchasing power of people expands with increase in money income supply of goods and services doesnot increase to the same extend. This brings about the economic disequilibrium, which is known as inflation.There are various reason of inflation. Inflation occurs due to the following reasons:1. Demand- pull inflationIf the aggregate demand for goods and services exceed the supply of these goods and services, it is called damand-pull inflation. It occurs due to the following reasons which are given below:a) Reduction of taxation: If the government reduces the rates, it will increase purchasing power of people due to increase in disposable income of people. Consequently, the consumption expenditure and inflation occurs.b) Miscellaneous: There are other of demand-pull inflation, such as increase in private expenditure, shortage of goods and services in the market, increasing the volume of exports, repayment of debts etc. all above mentioned factors creates the problem of excess of demand over supply of goods and services and finally inflation occurs.2. Cost-push inflation: If the price of commodities rises due to the rise in cost of factors and raw materials, the inflation is called cost-push inflation. In cost push inflation, general price will be high and aggregate supply will be low as compared to aggregate demand for goods and services. Following are the causesof inflation;a) Increase in wages: Sometimes price of goods and services increase rapidly due to rise in wage rate of labor. If the trade unions are strong in the country, they demand more wages to maintain real wages which increases the cost of production and inflation occurs, which is also known as wages push inflation.b) International reasons: In the context of international trade, most of developing countries like Nepal are dependent on for raw materials, fuel energy, consumer goods etc. If the price of such goods increases in foreign country, obviously the price of such products increases in the country.DeflationPrice decline adversely affects employment condition. It creates unemployment which brings deflation. It is also known as disinflation.Following arethe causes of deflation:1. Decrease in money supply: Deflation occurs due to the low supply of money in the economy. When the central bank or other financial institutions does not issue sufficient amount of money in comparison to goods and services produced in the economy, then there will be less velocity of money or circulation of money and finally deflation occurs.2. Control of credit: One of the major functions of central bank is to control on credit creation to the commercial banks. The notice may circulate by central bank to commercial banks for increasing the ratio of cash reserved fund. It creates the deflation in the economy.3. Increase in Tax Rate: Sometimes government may impose high direct tax rate to the people due to various reasons such as control on inflation, increase in public expenditure, fulfilling war and emergency expenses etc. The high burden of tax on people lacks the circulation of money in the economy, which creates deflation and as a result deflationary situation appears in the economy.

INDEX NUMBER OF MONEY

Value of money changes from time to time according to variation in prices of different commodities. All prices do not change in the same extend. Some may rise or fall of remain constant. The degree of changes in price may differ from commodity to commodity.Index number is an instrument to measure change in value of money according to change in prices. Generally index number takes the from of table.Types of Index Number:In general there are two types of index number:i) Simple Index NumberThe index number is constructed by giving equal importance or weighted to all commodities is called simple index number. In the simple index number, we assume base year equal to 100. According to this method, price index number is the outcome of the sum of prices for the current year divided by the sum of actual prices for the base year.ii) Weighted Index NumberThe index number constructing by giving weighted to various items as per their importance is called as weighted index number. Simple index number just gives equal importance to all commodities. Since, weighted index number are constructed on the basis of importance of commodities to the people, it measures accurate change in the value of money. In this method, different weights are assigned to different items according to their relative economic importance. There are different formulae to calculate index number by assigning different weights to different commodities.Importance of Index Numberi) Measurement of changes in cost of livingWhen a price of commodity goes up, cost of living rises. If prices fall cost of living also fall.ii) Study of fluctuationBy index number we can measured the rate of inflation and deflation.iii) Wage policy formulationGovernment changes wage policy on the basis of index number. If price level rises then government increases the wage level.iv) Government policy formulationGovernment has to formulate monetary and fiscal from time to time on the basis of price level.v) Business forecastBusiness is a matter of forecast. Prices may rise or fall in future. On the basis of past and present facts the future expectation can be made on the basis of index number.Difficulties in constructing Index Numberi) Selection base yearOne should be serious while selecting base year for index number. It should be normal year. It should not be fluctuated by any abnormal factors such as war, flood, earthquake etc. It is difficult task to select such.ii) Problem of weightTaking appropriate weight from the selected commodities is another difficulty of constructing index number. There should be accuracy and reliability in measuring the standard of weight commodities.iii) Collection of dataAnother difficulty of constructing index number is collection of data from the representative commodities. It is also difficult to find the reliable and authentic source of data.

ATM

ATM stands for Automated Teller Machine. It is a latest technology in world providing by the banks to their customer to withdraw cash immediately at any place. Now a day's in Nepal also it is most familiar to all the people. It is electrical use switching technology that organies digital data into 53-byte cell units and transmits them over a physical medium using digital signal technology. Individually, a cell is processed a synchronously relative to other related cells and is queued before being multiplexed over the transmission path.It is designed to be easily implemented by hardware rather than software, faster processing and switch speeds are possible. The prespecified bit rates are either 155.520Mbps or 622.080Mbps. Speeds on ATM networks can reach 10 Gbps. Along with synchronous optical networks and several other technologies; ATM is a key component of broadband ISDN.It is also known as a machine that bank customers use to make transactions without a human teller.There are a growing number of banks that are providing free ATM cards to their customer. The customer who withdraw amount from the customer who have the account in that bank ATM can't cut the amount if customer are taking from other banking at that time bank are take some amount from customer account. From this kind of facility customer feel easy and they don't have to carry many amounts if they are going from one place to another place. Customers feel easy from robbing. Such facilities are providing their customer 24hr's they can take their money. In Nepal this facility was started from 1999. In this ATM machine people can take money by inserting card and and they should follow the rules and they can enter their pin number and they can withdraw their needed money easily. In Nepal at one time only Fifty Thousand amounts can draw by one person.Historically, most banks have allowed their own customers to access their accounts with the bank for free while changing non-customers for use of their ATM. This gave banks with a large branch network a competitive advantage as banking with that bank offered the convenience of a greater number of free ATMs around the town. However branches are expensive to build and maintain and banks with few or no branches soon found that by reimbursing the fees charged to their customers when the customers use ATMs belonging to other banks, they could again the same.Competitive advantage at a much lower cost. Further, this cost could be contained by capping the amount of the fee reimbursed per transaction and or the number of transaction per month.According to the banking with USAA Federal savings Bank which from it's beginnings a few decades ago has had customers world-wide but only one office at the USAA headquarters in San Antonio, Texas. Originally, deposits were made via mail or wire transfer and cash with draw as through other bank ATMs with USAA reimbursing the ATMs. Other banks, especially internet banks, have since followed suit and many now offer reimbursement of ATM fees.

MEANING OF CAPITAL MARKET

Capital Market:-The capital market incorporates the financial instruments with more than one year. It deals with the long term financial instruments like corporate equities, government bonds, and debentures. The long and medium-term investment funds are raised through the capital market instruments for meeting the fixed and working capital requirements of the industry or government. Main difference between the money and capital market is the maturity of the credit instruments used in the market. The former relates to the market instruments with less than one year whereas the4 later deals with the instruments used for raising medium and long-term credit from the market. Capital market plays vital role for meeting external finance need of the corporations. The corporations, instead of borrowing from the banks, can directly raise the external funds from the public and, in turn, give them share certificates which they can trade in the capital market and convert into cash. The capital market serves as a bridge to establish a link between savers and investors or surplus or deficit units of the economy. Moreover, capital market provides incentives to the savers in the form of dividends or interest which induce them to save more. In the context of Nepal, the development of modern capital market is relatively a new phenomenon. It is a small and underdeveloped by any standard. The shares of few listed companies are traded in the stock exchange, Nepal Stock Exchange Limited (NEPSE) which was established in 1993.

MEANING OF MONEY MARKET

Money Market:- The financial system is the mechanism funds from surplus to deficit units through the various financial instruments include: treasury bills, corporate equities, debentures, certificate of deposits, government securities etc. The main purpose of these instruments is to collect scattered money and make funds available for investment or for payments. Some instruments are issued and traded for short-term in order to raise funds for the short period of time, usually less than one year. The market where the short term instruments such as treasury bills, certificate of deposits, money at call, inter bank transactions, commercial paper etc. are traded is known as money market. In other words money market refers to the totality of financial institutions which deal with the supply of and demand for short-term funds in the economy. The money market instruments are close substitute for money as they are highly liquid and easily marketable. The money is bought and sold in the money market. The main functions of money market are to provide short-term loans to government and the businessmen to meet their day to day requirements of the working capital, temporary funds to the speculators, and provide better opportunity for the commercial banks to utilize their funds for the short period of time. The money market provides opportunity for the banks and businessmen to utilize their extra funds which can be quickly converted into cash whenever necessary. It also enables banks to make up their unexpected needs for funds that they can obtain cheaply from the money market. London Money Market and Wall Street Money market in the USA are the two largest money markets with daily transactions of hundreds of billions of dollar every day.

IMPORTANCE OF PUBLIC FINANCE

There is great socio-economic significance of public finance, both in developed and developing countries. In developed country countries, price-stability and full employment are the main economic goals of public finance. In developing countries, rapid economic development through capital formulation and creation of infrastructure art the important goals of public finance operations. Socially equitable distributions of income, reduction of inequalities in income are some important functions of public finance operations. The importance of public finance can be clarified from the following functions.

1. TO INCREASE THE RATE OF SAVING AND INVESTMENT
Most of the people spend their income on consumption. Saving is very low so the investment is also low. The government can encourage the saving and investment.

2. TO SECURE EQUAL DISTRIBUTION OF INCOME AND WEALTH
Unequal distribution of income and wealth is the basic problem of the under developed countries. The rich are getting richer and richer while the poor are becoming poorer and poorer. So for the equal distribution of income and wealth there is need of government.

3. OPTIMUM ALLOCATION OF RESOURCES
Fiscal measures like taxation and public expenditure programmers can greatly affect the allocation of resources in various occupation and sectors.

4. CAPITAL FORMULATION AND GROWTH
Fiscal policy will be designed in a manner to perform two functions as of expanding investment in public and private enterprises and by diverting resources from socially less desirable to more desirable investment channels.

5. PROMOTING ECONOMIC DEVELOPMENT
The state can play a prominent role in promoting economic development especially through control and regulation of economic activities. It is fiscal policy which can promote economic development.

6. IMPLEMENTATION OF PLANNING
Under democratic planning fiscal policy plays crucial role as financial plan is as much important as physical plan and the implementation of the financial will obviously depend upon the uses of fiscal measures.

7. INFRASTRUCTURE BUILDING
Public finance helps to build up well-development physical and institutional infrastructure.

8. TO CONTROL INFLATION
The imbalance between demand for and supply of real resources may lead to inflations to under-development countries inflation ruins the entire economic structure of the national and the process of economic development in these countries comes to stand still. So to check inflation, budgetary policies can be used by the government.

MEANING OF PUBLIC FINANCE

Public finance is a study of income and expenditure or receipt and payment of government. It deals the income raised through revenue and expenditure spend on the activities of the community and the terms ‘finance’ is money resource i.e. coins. But public is collected name for individual within an administrative territory and finance. On the other hand, it refers to income and expenditure. Thus public finance in this manner can be said the science of the income and expenditure of the government.

Different economists have defined public finance differently. Some of the definitions are given below.

According to prof. Dalton “public finance is one of those subjects that lie on the border lie between economics and politics. It is concerned with income and expenditure of public authorities and with the mutual adjustment of one another. The principal of public finance are the general principles, which may be laid down with regard to these matters.

According to Adam Smith “public finance is an investigation into the nature and principles of the state revenue and expenditure”

To sum up, public finance is the subject, which studies the income and expenditure of the government. In simpler manner, public finance embodies the study of collection of revenue and expenditure in the public interest for the welfare of the country.

KINDS OF MONEY

Kinds of money are also known as forms of money. Money can be classified into various parts. On the basis of its evolution, there are following kinds of money.


COMMODITY MONEY

In the days of human civilization, human society had used each and every commodity like, cattle and their bones and leathers, food grains etc as money. The commodity which used as money is called commodity money. The commodity money lakes the basic feature of good money such as uniformity, stability durability, and transportability.


2. METALIC MONEY

Money made from metal like gold, silver, copper, brass is called metallic money. This money possesses quality of good money. The metallic money is of following types.


a. STANDARD OF FULL-BODIES COINS

The money made up of superior metals gold, silver etc with definite weight, value and purity is called standard or full body’s coins. The face value of such money is supposed to be equal to its intrinsic value. Its value does not fall when it is sold after melting.


b. TOKEN OR SUBSIDITY COIN

The money made of inferior metals like iron, copper, brass etc is called token or subsidiary money. The face value of token money is higher then the intrinsic value. Its real value disappears if it is melted. It holds nature of limited legal tender.

3. PEPER MONEY

The money issued by the central bank or monetary authority of the country in the form of paper notes is called paper money. The paper money was first invented in china in 18th century. Such money possesses higher face value than its intrinsic value. The paper money is widely used through the world.


a. REPRESENTATIVE OR CONVERTIBLE PAPER MONEY

Paper money that represents precious metals is known as representative paper money. They serve as a substitute of gold and silver to user. They hold cent percent reserve in the central bank or monetary authority of the country. It is difficult to issue money because all money should keep gold and silver reserve. It is also known as convertible paper money because; they can be converted into gold and silver easily in cash of need.


b. FIAT OR INCONVERTIABLE MONEY

The money issue by the central bank without cent percent gold and silver reserve is called flat money. Its face value is many time higher than the intrinsic value. It is issued by the state, so it has unlimited legal tender, but there is no legal provision to convert fiat money into gold and silver. Hence it is called non convertible paper money.


4. BANK OR CREDIT MONEY

The credit institution issued by the banks and finance companies, whose acceptance not obligatory, are known as credit or bank money. Credit instrument such as cheque, credit cards, debit cards, promissory notes, bills of exchange, draft, latter of credit etc are the example of credit money. It is also known as optional or non legal tender money.

VALUE OF MONEY

The value of money indicates purchasing power of money. It refers to the quality of goods and services that a unit of money can purchase unit of time. The purchasing power of money depends on the level of price of goods and services. Thus, it refers the buying and purchasing power of money. There is inverse relationship between the value of money and the price level. If price is high purchasing power of money is low. Similarly if price is low the purchasing power is high. There is positive relationship between value of money and its purchasing power. Higher the value of money, lower will be the purchasing power. Similarly, lower the value of money, lower will be the purchasing power. The relationship between the value of money and its purchasing power is exactly proportional. Thus, in consumption, the value of money refers to the money to command or buy the goods and services.


According to Benham, “The value of money means the purchasing power of a unit of currency in general.”


In the word of Crowther, “The value of money is that what it mill buy”

Fisher define the value of money a “The purchasing power of money is the reciprocal of the level of prices”

DEFECT/EVILS OF MONEY

Modern world is moving with the wheel of money. Money is not only important in every aspect of human life; it is also evil. Money is a good servant but bad master. Hence it is referred as necessary evil. The main defects are as follows.


1. ECONOMICS INSTABILITY

The value or purchasing power of money doesn’t remain same. This fluctuation in value of money causes economic instability. Increasing in quantity of money reduce value of money and invite inflation which makes the reach richer and the poor poorer. On the other hands decrease in the quantity of money increase value of money and causes deflection which increase unemployment and hardship.


2. TRADE CYCLE

Money can cause Boom and Slump. During boom employment expand beyond full employment level and price goes very high. During slump unemployment increase and productivity capacity and investment deceases. This trade cycle is monetary phenomena i.e. causes by money.


3. INEQUALITY OF INCOME AND WEALTH

Money cause inequality in the distribution of income and wealth which divide the society into richer and poor and causes class conflict. It disturbed the social harmony.



4. DISCOURAGE CAPITAL FORMULATION

Money discourages the capital formulation because if there is inflection, money gives rich to speculative activity and attracts resources away from productivity channels. On the other hand, if there is deflection, the whole economy machine goes out of gear and spreads missing all rounds.


5. SOCIAL DISADVANTAGE


Money brings about social disadvantage. It has been responsible for decline of spiritualism, increasing greed, encouraging theft, robbery, prostitution etc. it also increases exploitation and large scale corruption in the modern society.

ROLE/ IMPORTANT OF MONEY

Money is the lubricant of an economy. Without money economic activities such as production, consumption, capita formation etc can not be performed. This shows that money is the life blood of an economy. Due to its quality of portability, divisibility, stability, acceptability and durability, it is regarded as the wheel of the economics’ system. Following are the role of money:


1. ON CONSUMPTION

The satisfactions can be obtained by consumption of various goods and services, which is measured by the help of money. Due to its purchasing power, people can satisfy their wants by purchasing different commodities with money.


2. ON DISTRIBUTION

Money is used in factors pricing. It is the phenomena of determining the price of factors of production, such as wage, salary, for labor, interest for capital, profit for origination and rent for land. Any producer can maximize the profit by using money.


3. ON PRODUCTION

In production entrepreneur has to compensate all factors of production for their contribution. Rent to land, wage to laborers, interest to capital, profit to enterprises has to pay and without money we can’t assess the exact compensation of factors of production.


4. CREDIT FACILITY

Money facilitates the environment of credit business in modern economy. It has made easier both lending and borrowing. Money is also used in standard of different payment.


5. MEASURING NATIONAL INCOME

National income of the country is calculated in terms of money which shows the standard of living of people. Without money measurement of national income can not be done because national income is money value of total outlay of a country within a year.


6. MONEY IN CAPITAL FORMULATION

Capital is scare and important factors of production. Money provides mobility to capital. Capital formulation is possible when there is an exact unit to measure the amount of the capita in the country. The process of the capital formulation in the modern economy is almost impossible without money.


7. SOCIAL ECONOMIC DEVELOPMENT

Money plays a signification role in social economic development. It is an effective means of mobilizing factors of production. Money facilities the development of social and physical infrastructure such as road, electricity, communication, school, hospital etc.

FUNCTIONS OF MONEY

* PRIMARY FUNCTIONS

Primary functions are the major function of the money which can be explained the following headings.


1. MEDIUM OF EXCHANGE

The primary and unique function of the money is to serves as the medium of exchange. It provides the economic freedom to the people. With the money people can sell or bye the product in the market. It also insures the purchasing power of the consumers.


2. MEASURE OF THE VALUE

Money serves as a common measure of value and standard unit of account. After the invention of the money, value of goods and services can be expressed in terms of currency of money. It has made the transaction easy and simplified the problem of measuring and compeering the price of the goods and services in the market. It also helps to calculate the macroeconomic indicators like NI, per capita income, GDP, GNP and Human Development indicators.


* SECONDARY FUNCTIONS

Secondary functions of money is less important then that of primary functions. This function are originated and derived from primary functions of money. Following are the secondary functions of the money.


1. STORE OF VALUE

Money serves as store of value of any goods and services in both short run and long run. In modern world people want to have some currency or coins in their pocket, home ,bank account etc to use anytime for the purchase of anything. The value of goods and services can be store in terms of money for many y due to quality of stability and durability. Money as the liquid store of value facilitates its owners to purchase any other assets in any times.


2. STANDERD OF DIFFERENT PAYEMENT


Lending and borrowing was the very difficult before the invention of the money, so that it was difficult to settle of lone. But due to different payment credit system become easy. With the help of money people can buy or sell goods and services only on commitment and payment can be made in the future in the form of installment. Money is regarded as the best transaction due to its quality of stability, accepting and durability. The future payment also possible through the help of money.


3. TRANSFER OF VALUE

Money also serves as the common tool to transfer the value of assets and income. Sale, purchase, mobilization and transfer if movable and immoveable property can also made with the help of the money. One can sell at one place and can buy them elsewhere. Value shift from one place to another because it transferred in terms of money.

DEFINITION OF MONEY

Money is anything, which is generally accepted as a means of payment and it possess liquidity. It is the king of means, which is printed and acceptable to all for buying and selling goods and services. In other words, it refers to that commodity which performs as the medium of exchange goods and services, measuring the value of factors of productions, goods / services, common and useful means of credit transaction in business society and having quality of store of value of goods / services in the form of cash.

In other words, it is anything which possesses hand to hand easily as mediums of exchange among people. Money has become so much a part of our day to day activities that we have started to talk it for garneted. The complex economy system stands on the base of money because money is something which generally acceptable as a medium of exchange.