1. What is GDP? How GDP is measured in Nepal?
GDP is defined as the market value of final goods and services that are produced within the geographical boundary of an economy within a specified period of time.
GDP can be measured by using production, expenditure as well as income approaches. However, in underdeveloped countries such as Nepal, reliable data on expenditures as well as income is very difficult to be collected. Thus, Nepal uses Gross Value Added Approach (production approach) to measure GDP. However, after finding the value of GDP, estimates regarding expenditure as well as income components are also produced.
Nepal currently uses SNA 2008 methodology to estimate the value of GDP.
2. What is GDP deflator? How is it different from CPI?
GDP deflator a price index that measures the increases in prices level of goods and services produced within the economy. It is used to find real GDP from nominal GDP. When we divide nominal GDP by GDP deflator, we get real GDP.
The main differences between GDP deflator and CPI are :
CPI measures the prices of consumer goods and services whereas GDP deflator keeps tracks of the prices of all goods and services produced within the economy.
In CPI, the basket of goods and services whose prices are to be collected remains fixed whereas there is no basket in case of GDP deflator.
CPI included the prices of imported goods whereas GDP deflator included domestically produced goods and services only.
3. What is used to measure the size of the economy? Why real GDP is not appropriate for this purpose.
The size of the economy means the sum total of output/income generated within a specific time period. Since nominal GDP measures the size of income generated within a period, it is used as the size of the economy. The size of Nepali economy is Rs.3943 billion.
The size of the economy included total income or expenditure. Since increase in prices raises nominal income and expenditure, it is the nominal GDP that is appropriate for this purpose. Real GDP is free from the changes in prices and differ according to the choice of base year. Thus, Real GDP does not work as the correct measure for measuring the size of the economy.
4.
What is economic growth rate ? How the growth rate measured at basic
prices differs from the growth rate measured at market prices?
Economic growth rate is the rate of change in real output of the economy. Thus, it is measured by the rate of change in real GDP not the nominal GDP. It is because nominal GDP can increase due to increase in prices even if there is no change in output.
Next
if we value real GDP without including the taxes and subsidies on goods
and services, such growth rate is called growth rate at basic prices.
On the other hand, if we include taxes and subsidies, we call it growth
at market/purchaser's prices. In general, growth rate at market prices
is generally greater than the growth rate measured at basic prices.
5. What is the current structure of GDP in Nepal?
The structure of the economy can be measured by using the output, expenditure as well as income shares. Looking from the output perspective, the share of the agriculture is declining whereas the share of services sector is gradually increasing. As of 2019/20, the share of agriculture sector in GVA is 26 percent, the share of industry is 14 percent and the share of services sector is 60 percent.
From
the expenditure perspective, consumption/GDP is 91.1 percent, gross
fixed capital formation/GDP is 31.3 percent and net exports/GDP is -26.9
percent. Whereas from the income approach, the share of compensation to
employees is 39.5 percent, the share of operating surplus is 48.6
percent and the share of share of net taxes on production and imports is
11.9 percent.
6. How are GNI and GNDI calculated?
GNI or gross national income measures the total income received by the residents of an economy. It is calculated as GDP + income received by Nepali factors of production from abroad -income paid to foreign factors of production by Nepal.
On the other hand, GNDI or gross national disposable income is the sum total of income received by Nepal from all sources, it includes the income produced in the economy plus income as well as all transfers received from abroad minus income and transfers paid abroad.
GNDI=GDP+Net Factor income from abroad + Net current transfers from abroad.
Thus,
GNDI includes remittances, pensions and grants received from abroad.
As of 2020, the GDP of Nepal is Rs. 3943 billion, GNI is Rs. 3989
billion and GNDI is Rs. 4972 billion.
7. Why remittances are not included in GDP?
Since GDP includes the value of production carried out within a boundary of the economy and remittances are received from abroad, they are obviously not included in GDP. Many people say that remittances contributes directly to GDP which is misleading. Remittances may help increase production but not included in GDP directly.
8. What is gross domestic savings ?
Gross domestic savings is simply the value of GDP minus consumption expenditure. It compares the value of consumption to what we produce within our economy. The gross domestic saving as percent of GDP is around 10 percent in Nepal.
9. What is gross national savings?
Gross national savings is the difference between gross national disposable income (GNDI) and consumption expenditure. GNDI includes the sum of all incomes received by the residents of the economy. It includes the value GDP plus the sum of income, remittances and other current transfers received from abroad minus the sum of income, remittances and other current transfers received by the foreign residents from Nepal. Since Nepal receives huge amount of remittances, gross national saving is high around 40 percent even though gross domestic savings is low.
10. What is resource gap?
11. Why resource gap is equal to the current account?
Resource gap and current account balance of the BoP essentially measure the same concept: how much resources does a country need to borrow? It can be shown by suing the following macroeconomic identity:12. How inflation is calculated in Nepal?
Official inflation in Nepal is calculated by using Consumer Price Index. To construct the index, 496 goods and services have been chosen by the Fifth Household Budget Survey conducted in 2104/15. Such goods and services carry almost 97 percent of the consumption expenditure done by Nepalese households. Prices are taken from 60 market centers across the country on a weekly, fortnightly, monthly and quarterly basis. And Geometric Laspeyres Index has been used to aggregate the price indices to National CPI.
13. Is inflation always bad for the economy?
No. Inflation has positive as well as negative impacts. Low and stable inflation encourages investment and promotes growth whereas high inflation reduces purchasing power and brings uncertainty. Thus, inflation up to a certain level has positive impacts and beyond that it is detrimental to growth. In case of Nepal. studies show that inflation up to 6 percent has favorable effects on growth and employment in the economy.
14. What are the main driers of inflation in Nepal?
15. What is Phillips curve?
Phillips curve shows the inverse relationship between inflation and unemployment. It argues that if central bank creates inflation by increasing money supply in the economy, unemployment rate goes down and vice versa. This implies that there is a tradeoff between the rate of inflation and unemployment in the economy.
The inverse relationship proposed by the Phillips curve has been questioned by the economists such as Friedman and Lucas. According to Friedman, the inverse relationship of the Phillips curve exists in the short run only and in the long run the Phillips becomes vertical implying that unemployment in the long run cannot be reduced by creating inflation.
16. What is real interest rate?
Real interest rate is the interest rate adjusted for inflation. It is defined to as the difference between nominal interest rate and expected inflation.18. What is money supply?
Money supply is the total stock of financial assets in an economy that can be used to carry out the function of money. It includes the currency and coins at the hands of public and deposits of the public maintained at the banking system. Deposits include the balances held at current account, at saving accounts, call accounts, fixed deposit accounts and margin accounts.19. What is narrow money supply?Narrow money supply is the sum of currency held by the public and demand deposits held at the banking system. In case of Nepal, demand deposits includes the balances kept at current accounts in the banking system.
20. What is broad money supply?
Broad money supply is the sum of currency held by the public and demand as well as time deposits held at the banking system. In case of Nepal, demand deposits includes the balances kept at current accounts in the banking system and time deposits include the balances maintained at saving, call, margin as well as fixed deposit accounts.
21. What is intermediate money supply?
Intermediate money supply is a measure between narrow money supply and broad money supply in Nepal. It includes the currency held by the public plus current account deposits plus saving and call deposits. If we add margin and fixed deposits in this measure, we get broad money supply. It is denoted by M1+.22. What is reserve money/high powered money?
Reserve money is the amount of currency outside the monetary authority that is held by the public and banking system in the economy. It can be expressed as the sum of currency with public and reserves kept by the BFIs.
Thus, Reserve Money = Currency with Public+Reserves Kept by the BFIs. Reserves include required reserves as well as excess reserves. Thus,
23. What is money multiplier ?
The value of money multiplier depends on the banking habits of the people, confidence in the banking system, the required reserve ratio determined by the central bank as well as the excess ratio to be kept by the BFIs.
In summary,
If people like to hols more cash, there will be less deposits and less credit creation in the banking system and the value of multiplier will be low.
24. What is demand for money? Why is it important for central banks?
Demand for money is the desire of the public to hold liquid assets such as currency and bank balances. If people like to hold more in the form of money, demand for money rises. In such a case, the central bank needs to increase the supply of money, otherwise interest rate will rise in the market. Thus, to stabilize the interest by keeping the monetary sector equilibrium, the central bank needs to know the demand for money.
25. What arguments are given by different theories of demand for money?
The classical theory of demand for money argues that demand for money is basically a medium of exchange and demand for money is determined by the volume of transactions in the economy. Demand for money is a constant proportion of the volume of transactions in the economy.
The neo-classical theory argue that money works as a medium of exchange as well as a store of value and demand for money is a constant fraction of nominal income in the economy.
Keynesian theory argues for three motives for holding money balances: for carrying out daily transactions (Transaction Motive), for meeting unexpected expenses such as illness (Precautionary Motive) and for getting benefit by investing in the stock market (Speculative motive). Transaction as well as precautionary demand for money positively depends on income level and speculative demand for money inversely depends on interest rate.
The Baumol and Tobin approach argues that the transaction demand for money not only depends on income level but also on the interest rate. It is affected by the cost in and return from investing in bonds.
The Tobin's portfolio approach to demand for money argues that people want to maximize their utility considering the risk and return from bonds. There exists inverse relationship between demand for money and interest rate.
Freidman's demand for money argues that demand for money depends on:
i) return from money,
ii) return from alternative forms of wealth such as bond, equity, physical asset and
iii) human asset and tastes and preference of the money holders.
The demand for money by McKinnon and Shaw argues that in underdeveloped market, money and capital are not substitutes but complements. That is why increase in the demand for money does not reduce the demand for capital. It argues that demand for money positively demands on income level, investment rate and the return from holding money.
26. What determines the growth of money supply by central banks?
Generally, the supply of money is determined by the growth of demand for money in the economy. Demand for money, on the other hand, depends on the growth of income as well as the level of interest rate. For instance, in case of nominal GDP targeting monetary policy framework, supply of money is basically kept consistent with the increase in nominal GDP.
27. Is money supply an exogenous variable?
Though money supply is arguing to be an exogenous variable within the complete control of the central bank, it is, in reality, influenced by the behavior of public as well as the behaviors of BFIs in the economy. That is why it is said to be jointly determined by central banks, commercial banks as well as public. Thus, it is both exogenous as well as endogenous variable.
28. How money supply is managed by the central banks?
The central banks use tools such as cash reserve ratio, bank rate and open market operations to manage the level of liquidity as well as money supply in the market. The open market operations are the most frequently used instruments for such purpose. For instance, if the central bank feels that there is excess liquidity in the market, it increases cash reserve ratio and sells government bonds to the BFIs. There actions reduce the level of liquidity with the banks and controls their capacity to lend. This action ultimately reduces the supply of money in the economy.
29. How money supply statistics are compiled by the central banks?
The central banks compile the money supply statistics by consolidating the balance sheets of the central banks as well as other banks and financial institutions in the economy. There are two sides: In the sources side: the assets of the banking systems such as foreign assets and loans provided by the banking system to various sectors are added together to arrive at the money supply statistics. On the uses side the monetary liability of the central bank and the deposit liabilities of the banks and financial institutions are added together to arrive at the money supply statistics. Thus,
Money supply= Net foreign Assets (NFA)+ Net Domestic Assets (NDA)..(sources side)
Money supply = Currency with Public(CP)+ Demand Deposits (DD) + Time Deposits(TD) ……………..(Uses side)
30. What is meant by neutrality of money supply in the economy?
Neutrality of money supply means no role of money supply in determining the real sector variables such as output and employment. It is an argument that says that money supply only affects monetary variables such as nominal wage arte and price level but has no effect on output and employment.
31. What is meant by IS curve?
IS curve shows the combinations of income level and interest rate in the economy that can maintain goods market equilibrium. In other words, it is the locus of income level and interest rate that can maintain the equality of aggregate demand and aggregate supply.32. What is meant by LM curve?
LM curve shows the combinations of income level and interest rate in the economy that can maintain money market equilibrium. In other words, it is the locus of income levels and interest rates that can maintain the equality of demand for money and supply of money.33. What is meant by liquidity trap?
Liquidity trap is a situation during economic crisis when interest rate falls to the minimum and interest rate cannot be reduced further by increasing the supply of money by the central bank. In this situation, any attempt by the central bank to boost the economy by reducing interest rate through increase in money supply. That is why monetary policy is argued to be less effective during an economic crisis.34. What are the advantages and disadvantages of fixed exchange rate regime?
Advantages:
There is certainty in trade transactions.
Higher Indian capital inflows in the form of FDI.
Nepal has been benefitted from lower inflation in India.
No arbitraging.
Helps maintain price stability as RBI follows inflation targeting.
Disadvantages
Nepal has to tolerate shocks to Indian economy.
Monetary policy is dependent on India.
The exchange rate has overvalued due to positive inflation differentials leading to decline in exports.
We have to manage the supply of IC by selling USD.
35. What is real effective exchange rate?
Real effective exchange rate is the exchange rate between two currencies adjusted for inflation differentials. It can be measured as: RER=NER*Pf/Pd.
Where, NER is the nominal exchange rate, pf is the price of foreign country and pd is the price in domestic country. For example, if USD/NPR is 120 it is called nominal exchange rate. Suppose CPI indices are 120 for Nepal and 110 for US, then real effective exchange rate will be: 120*110/120=110. This implies that due to higher inflation in Nepal, the purchasing power of USD has fallen in real sense.
36. Why Nepal should continue the pegged exchange rate with India?
Because,
India is the largest trading partner of Nepal.
Long, open and porous border with India.
Nepal has ever increasing trade deficit with India.
India is rapidly growing economy that provides indirect dividends to Nepal via fixed exchange rate.
Nepal's export as well as import market are inelastic.
37. What is impossible trinity?
Impossible trinity is a situation where fixed exchange rate, free capital flows and independent monetary policy cannot be chosen simultaneously. We can choose any two options from them. The three policy options are:
Fixed exchange rate and Free capital flow.
Fixed exchange rate and independent monetary policy.
Free capital flows and independent monetary policy.
38. What does the Mundell Fleming Model say for a fixed exchange rate economy like Nepal?
The Mundell Fleming model argues that if there are free capital flows a country under fixed exchange rate cannot pursue an independent monetary policy. Suppose that central bank decided to raise interest rate in domestic economy. This will invite capital flows and the market will have excess supply of USD. This will create pressure on the exchange rate and the domestic currency is likely to appreciate. But the central bank had commitments to keep the exchange rate fixed. Thus the central bank is compelled to buy USD from market that increases the supply of domestic currency in the market and reduces the interest rate.
39. What is pegged exchange rate regime?
A pegged exchange rate regime is the one in which the exchange rate is managed within a very narrow band of the preannounced exchange rate with the currency. The central bank of the country continuously works by influencing the demand and supply of the currencies to maintain the peg.
40. What is flexible exchange rate regime?
A flexible exchange rate regime is the one in which the exchange rate between the currencies is allowed to float freely in the market. In other words, in such a regime, the exchange rate is determined freely by the market forces of demand for and supply of the currencies. The float may be a managed float or an independent float.
41. How does the policy effectiveness differ according to the choice of exchange rate regime?
In a fixed exchange rate regime monetary policy is least effective whereas fiscal policy is highly effective. And in flexible exchange rate both policies are effective but the monetary policy is more effective than the fiscal policy.
42. What is balance of trade ?
Balance of trade is the difference between exports of goods and services and import of goods and services.43. What is current account balance ?
Current account balance is the summary of transactions in goods, services, factors of production and transfers of one country with the rest of the world. It includes exports and imports of goods and services, factors income received and paid, tourism income, current transfers such as remittances, grants and pensions. Thus it shows the total amount received from abroad minus total amount paid.44. What is BoP ?
Balance of Payments is the summary of the transaction done between the residents of a economy with the rest of the world. It covers the transaction in goods, transactions in services, factor income received from abroad and paid abroad, remittances received and paid, foreign grants received, pensions received and paid, capital transfers as well as investment transactions such as foreign direct investment, portfolio investment and loan transactions.45. What argument does the elasticity approach give for correcting deficit in Balance of Payments?
The elasticity approach to BoP argues that devaluation of a currency can improve the deficit in BoP provided that the import as well as export market are sensitive to the changes in exchange rate. Specifically, if the sum of export and import market elasticities is greater than one, devaluation can improve the BoP position.
46. What argument does the absorption approach give for correcting deficit in Balance of Payments?
The absorption approach argues that devaluation of a currency can discourage internal consumption of goods and can encourage exports thus leading to an improvement in BoP. Devaluation can create income effect, absorption effect, money illusion effect and redistribution effect that can work for the improvement of BoP.
47. What argument does the monetary approach give for correcting deficit in Balance of Payments?
The monetary approach argues that BoP is purely a monetary phenomenon and can be corrected only by using monetary instruments. It argues that deficit in BoP can be improved by controlling domestic credit creation. Controlling credit reduces money supply and increases interest rate which invites capital flows, On the other hand controlling credit controls imports. These work together to improve the BoP deficit.
48. What is CCD ratio?CCD stands for credit to capital and deposit ratio. Currently, CCD ratio is fixed at 85 percent in Nepal. This implies that a bank can lend 85 percent of its deposit and capital to its customers as loans.
49. What is SLR?
SLR stands for statutory liquidity ratio. It is the percent of deposit that the bank has to keep in liquid form. It consists of the cash kept as cash reserve ratio, cash kept at the vault of the banks and amount invested in government securities. Currently, SLR ratio is 10 percent for commercial banks, 8 percent for development banks and 7 percent for finance companies.
50. What is inter-bank rate?
Inter-bank rate is the interest rate that a bank charges on a loan given to another bank in the inter-bank market. Such loans are provided by the banks to other banks for a very short time period.
51. What is SLF ?
SLF stands for standing liquidity facility. It is the credit facility provided by the Nepal Rastra Bank to the banks and financial institutions. Such loans are taken by the banks if they face shortage of liquidity. In Nepal, the interest rate charged by the NRB on such loans is 5 percent.
52. What is bank rate?
Bank rate is the interest rate charged by the Nepal Rastra Bank on the SLF provided to the banks and financial institutions. When banks are in need of liquidity, they borrow from the NRB. NRB provides loan to then by charging bank rate.
53. What is cash reserve ratio?
Cash Reserve Ratio is the minimum amount of reserve that the banks and financial institutions should keep at their accounts maintained at Nepal Rastra Bank.
54. What are open market operations?
Open market operations refers to the sale and purchase of government securities by the central bank with the banks and financial institutions. The main objective of such transactions is to manage liquidity in the banking system. For instance, if banks have excess liquidity, the central bank sells government securities to the banks as such cash of the banks is transferred to the central banks and liquidity level of the banks comes down. On the opposite case, if there is shortage of liquidity, central bank buys government securities from the market as such liquidity is transferred from the central bank to the banks and financial institutions.
55. What are the main tools of liquidity management?
The main tools used by central banks to manage liquidity are:
56. What is repo facility?
Repo is a short term credit facility provided by the central bank to banks and financial institutions. In this facility, when banks are in need of liquidity for a short time period, they pledge the government securities with the central bank and avail credit for a short period e.g. one week. This instrument is used by the Central Bank for short term liquidity management. The opposite of the repo facility is the reverse repo facility that is used to mop up liquidity from the banks for a short time period.
57. What is LTV ratio?
LTV ratio stands for loan to value ratio. It sets the limit of the bank loan for buying a fixed asset such as land, house and vehicles or taking loans. For instance if LTV is 80 percent and you asking the bank to give loan to buy a car having price Rs. 100 million, the bank can give you a loan of Rs. 80 million only. This, reducing the LTV ratio reduces the capacity of the bank to provide loans.
58. What is monetary policy ?
Monetary policy is a policy at the hands of the central bank that aims at achieving broad macroeconomic objectives such as price and external sector stability, financial stability and economic growth. It controls money supply, credit and interest rate so as to achieve the objectives.
59. What are the major monetary policy instruments?
The main instruments of monetary policy are :
60. What is fiscal policy?
Fiscal policy is a policy at the hands of the government that is used to achieve broad macroeconomic objectives such as economic growth, employment creation and maintaining stability. It manages government revenue and government expenditure so as to achieve those objectives.
61. What are the main instruments of fiscal policy?
Money laundering is a process of converting illegal money from various sources appear to have originated from legal sources. Illegal money mainly comes from tax evasion, smuggling, corruption and others.
63. What is Core Banking Solution(CBS)?
Core Banking Solution (CBS) is the networking of bank branches, which enables customers to operate their accounts, and get banking services from any branch of the bank on the banking system network. In this case, the customer can maintain account in any branch but get same services from any of the bank branches as his details are maintained in the centralized system rather than a specific branch.
64. What is Bancassurance?
Bancassurance is the concept of selling insurance products of insurance companies by banks. In this case, banks act like agents of insurance companies and sell their insurance policies. It is practiced in Nepal also.
65. What is Nostro Account?
A Nostro Account is an account maintained by a Nepali Bank in a bank abroad. The meaning of 'Nostro' means ours. So, Nostro account refers to our money deposited in your bank from the perspective of Nepali Bank. Such accounts are generally maintained in foreign currencies to settle trade and financial transactions. For example, Nabil Bank may open an Nostro account in Bank of America in New York.
66. What is Vostro Account?
A vostro account is an account opened in Nepali banks by foreign banks. The meaning of Vostro is 'Yours'. Thus, a Vostro Account simple means 'Your money deposited in my our bank'. Such accounts are generally opened in Nepal by foreign banks but in Nepali currencies. For instance the Standard Chartered London may open a Vostro account in Nabil Bank Nepal.
67. What is off-balance sheet exposure of the banks?
Off-balance sheet exposure items of the banks are the liabilities and assets that are not included in the balance sheet. Such liabilities are contingent liabilities such as letter of credit, unused commitments and derivatives.
68. What is performing loan?
The loan whose repayments are due by three months are called performing loans in Nepal. It consists of pass loans that with no due payments and payments due by maximum one month and watch list loans with payments due from one to three months.
69. What is non-performing loan?
The loans whose repayments are due by more than three months are called non-performing loans in Nepal. It consists of :
70. What is Multiplier?
Multiplier shows the increase in income from one unit increase in investment. For instance if the value of the multiplier is 5, it shows that if we invest Rs. 100 in the economy, income level would increase by Rs. 500.The value of the multiplier depends on the propensity to consume ratio. Higher the propensity to consume, higher the multiplier.71. What is accelerator?
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1 comment:
what is twins deficit?
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