Money & Economy: Systems, Trade, Globalization & Financial Literacy

What is Money?

Money is anything that people use to pay for goods and services. It makes trade easier because people don’t have to barter (exchange goods directly). Money has three main functions:

1. Medium of exchange – Used to buy and sell things.
2. Store of value – Can be saved for future use.
3. Measure of worth – Helps compare the value of different items.

Types of Money

Example: If you buy a book for ₹200, you are using fiat money because the Nepali government has declared the rupee as legal tender.

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Economic Systems

An economic system is how a country organizes its money, jobs, and resources. There are three main types:

1. Capitalism (Free Market Economy)

• Definition: Businesses and individuals control production and prices.
• How it works:
  • People and companies own businesses.
  • Prices are set by supply and demand (if many people want a product, its price goes up).
  • Government has little control over businesses.
• Example: USA, UK, Nepal (partially).
• Advantages:
  • Encourages innovation and competition.
  • People can choose what to buy and sell.
• Disadvantages:
  • Wealth inequality (some people get very rich, others very poor).
  • Businesses may exploit workers for profit.

2. Socialism (Command Economy)

• Definition: The government controls major industries and wealth is shared equally.
• How it works:
  • Government owns big businesses (e.g., hospitals, schools, factories).
  • Prices and wages are set by the government.
  • Goal: Provide equal opportunities for all citizens.
• Example: Cuba, former USSR (Russia before 1991).
• Advantages:
  • Reduces poverty and inequality.
  • Government can provide free healthcare and education.
• Disadvantages:
  • Less competition → lower quality goods.
  • Government may make poor economic decisions.

3. Mixed Economy

• Definition: A mix of capitalism and socialism.
• How it works:
  • Some industries are private (e.g., restaurants, shops).
  • Some are government-controlled (e.g., electricity, railways).
  • Government regulates businesses to protect workers and consumers.
• Example: Nepal, India, most European countries.
• Advantages:
  • Balances freedom and equality.
  • Government can correct market failures (e.g., pollution, monopolies).
• Disadvantages:
  • Can be slow to adapt to changes.
  • Government may become too powerful.

Comparison Table:

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Global Trade and Economic Interdependence

Global trade is when countries buy and sell goods with each other. It helps countries get resources they don’t have.

Why Do Countries Trade?

1. Comparative Advantage – Some countries can produce goods cheaper or better than others.
   • Example: Nepal grows tea better than Saudi Arabia, so it exports tea to Saudi Arabia.
2. Access to Resources – Some countries have natural resources (e.g., oil, minerals) that others need.
   • Example: Nepal imports oil from India and the Middle East.
3. Economic Growth – Trading helps countries earn money and create jobs.

Types of Trade Barriers

Example: If Nepal puts a tariff on Chinese toys, Nepali-made toys become cheaper, so more people buy them.

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Financial Institutions

These are organizations that help manage money.

1. Banks

• Function: Safe place to keep money, give loans, and help people save.
• Types:
  • Commercial Banks (e.g., NMB, Global IME) – Give loans, accept deposits.
  • Central Bank (e.g., Nepal Rastra Bank) – Controls money supply, sets interest rates.
• How Banks Make Money:
  • Charge interest on loans.
  • Keep a small part of deposits (called reserve requirement).

Example: If you deposit ₹10,000 in a bank, the bank may lend ₹8,000 to someone else and keep ₹2,000 as reserve.

2. Stock Market

• Definition: A place where people buy and sell shares (parts of companies).
• How it works:
  • If a company does well, its share price goes up.
  • People can make money by selling shares later.
• Example: If you buy ₹1,000 worth of Ncell shares and later sell them for ₹1,500, you make a profit.

3. Insurance Companies

• Function: Protect people from financial loss (e.g., accidents, theft, natural disasters).
• Types:
  • Life Insurance – Pays money to family if you die.
  • Health Insurance – Covers medical expenses.
  • Property Insurance – Protects houses and cars.

Example: If your house burns down, property insurance will pay to rebuild it.

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Inflation and Deflation

1. Inflation

• Definition: When prices of goods and services keep rising, and money becomes less valuable.
• Causes:
  • Too much money in the economy.
  • High demand for goods.
  • Rising production costs (e.g., fuel, wages).
• Effects:
  • People need more money to buy the same things.
  • Savings lose value.
• Example:
  • In 2023, a kilo of rice cost ₹150, but in 2024, it costs ₹200 → Inflation!

2. Deflation

• Definition: When prices keep falling, and money becomes more valuable.
• Causes:
  • Too little money in the economy.
  • Low demand for goods.
• Effects:
  • People delay buying things (waiting for prices to drop more).
  • Businesses may go bankrupt.
• Example:
  • If a phone that cost ₹20,000 now costs ₹15,000, people may wait to buy it.

Comparison:

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Budgeting and Financial Literacy

Budgeting means planning how to spend and save money wisely.

Steps to Make a Budget

1. Calculate Income – How much money you earn (salary, allowance, gifts).
2. List Expenses – Write down all your spending (rent, food, transport, entertainment).
3. Categorize Expenses:
   • Fixed Expenses (same every month) – Rent, school fees.
   • Variable Expenses (change every month) – Food, shopping.
4. Set Savings Goal – Decide how much to save (e.g., 20% of income).
5. Adjust Spending – Cut unnecessary expenses to stay within budget.

Example Budget for a Student:

Tips for Smart Spending: ✅ Avoid loans for unnecessary things (e.g., latest phones, luxury items). ✅ Use cash instead of cards to control spending. ✅ Compare prices before buying. ✅ Save for emergencies (e.g., medical bills).

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NEB-Style Exercises

1. Fill in the Blanks

1. Money that has value because the government says so is called __________ money. Answer: Fiat
2. The __________ controls the money supply in Nepal. Answer: Nepal Rastra Bank
3. When prices rise over time, it is called __________. Answer: Inflation
4. A __________ is a tax on imported goods. Answer: Tariff

2. True or False

1. Socialism is an economic system where the government owns all businesses. Answer: True
2. Deflation means prices are rising. Answer: False (Deflation = falling prices)
3. A mixed economy has no government control. Answer: False (It has some government control)
4. Insurance protects people from financial loss. Answer: True

3. Short Answer Questions

1. What are the three functions of money?

   • Medium of exchange, store of value, measure of worth.

2. Give two differences between capitalism and socialism.

   • In capitalism, businesses are privately owned; in socialism, the government owns them.
   • Capitalism encourages competition; socialism focuses on equality.

3. Why do countries impose tariffs?

   • To make imported goods more expensive so people buy local products.

4. What is the difference between inflation and deflation?

   • Inflation = rising prices, money loses value.
   • Deflation = falling prices, money gains value.

4. Essay Question (NEB Style)

"Money plays a crucial role in modern society. Discuss how money affects people’s lives, giving examples from Nepal."

Answer Outline:

1. Introduction – Briefly explain what money is and its importance.
2. How money helps people:
   • Makes trade easier (no bartering).
   • Allows saving for the future (education, emergencies).
   • Helps measure value (e.g., comparing prices).
3. Problems caused by money:
   • Inflation – Prices rise, people struggle to afford basics (e.g., fuel, food in Nepal).
   • Inequality – Some get rich, others stay poor.
   • Greed – People may exploit others for profit.
4. Money in Nepal:
   • Nepali rupee is used for all transactions.
   • Remittances (money sent by Nepali workers abroad) help the economy.
   • Corruption and black money are problems.
5. Conclusion – Money is necessary but must be used responsibly.

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Exam Tip

✅ For NEB exams, focus on:

• Definitions (e.g., inflation, tariff, capitalism).
• Comparisons (e.g., capitalism vs. socialism, inflation vs. deflation).
• Real-world examples (e.g., Nepal’s economy, global trade).
• Budgeting and financial literacy – Often asked in short-answer questions.
• Essay structure – Use PEEL (Point, Example, Explanation, Link).

📌 Common Mistakes to Avoid: ❌ Mixing up inflation and deflation – Remember: Inflation = Prices UP, Deflation = Prices DOWN. ❌ Forgetting examples – Always give Nepal-related examples (e.g., NRB, remittances, tariffs on imports). ❌ Overcomplicating answers – Keep explanations simple and to the point.

💡 Pro Tip:

• Learn key terms with definitions (e.g., "Tariff = tax on imports").
• Practice budgeting questions – They often appear in short-answer sections.
• Read newspapers (e.g., The Kathmandu Post) to understand real-world economic issues.

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