Part 2 of HEHF

1. Health expenditure per capita in Nepal
Health expenditure per capita in Nepal was last measured at US $ 39.03 in 2013, according to the
World Bank. Total health expenditure is the sum of public and private health expenditures as a
ratio of total population. It covers the provision of health services (preventive and curative), family
planning activities, nutrition activities, and emergency aid designated for health but does not
include provision of water and sanitation.
Source: http://www.tradingeconomics.com/nepal/health-expenditure-per-capita-us-dollar-wb-data.html
National Income Account
The major role of Macroeconomics is to explain the determinants that determines a country’s
aggregate output of goods and services. This output at any time period is equal to what could be
produced with full utilization of economy’s resources. And it can only be measured through
Macroeconomics. Measurement of this output comes under the heading of National Income
Accounting.
There are two approaches to measure the value of economy’s output namely Expenditure
approach and the Income approach.
• Without any specific qualification this total output is referred as Gross National Product (GNP).
But there are two widely used approaches which are Net National Product and National Income.
In expenditure approach, every dollar of expenditure is almost equal to a dollar of income.
This value is changed according to time period, change in production of goods and services, prices
of goods and services.
National Income Accounting is such tool and process which summarizes a country’s economic
performances by measuring aggregate income and output of goods and services over a time period.
After Keynes’ General Theory in 1936, there was the new development in accounting national
income. According to him, instead of simply showing total output it may be broken down into
output by industry of origin (manufacturer, agriculture, transportation and so on) or by kind of
output (durable goods, nondurable goods, services, structures).
Expenditure Income
• Expenditure of consumers
• Expenditure of businessmen
• Expenditure of government
• Expenditure of rest of the world
• Payment of taxes
• Purchase of consumer goods and services
• Saving

2. Gross National Product (GNP)
Gross National Product is one of the most important statistical measures of economic
performances of an economy.
• It summarizes as an aggregate of the total value of all goods and services produced in a given
period of time.
• In short, it is the summary of economic performance of a country.
• But it does not tell the level of leisure, distribution and kinds of goods and services or the
condition of the environment.
Definition of GNP
It is the market value of all final goods and services produced during some period of time.
To understand the concept of GNP, some aspects of GNP are to be understood which are as
follows:
1. GNP is a market value concept. The value of goods and services is defined by its market price.
2. GNP measures only final goods and services acquired for final use and not for resale or further
processing.
3. GNP refers only to those goods and services produced during some interval of time.
4. GNP refers only to the goods and services produced for the market place. Non market activities
like self - employment or volunteer work are excluded.
Nominal GNP and Real GNP
Nominal GNP is a value prescribed by the prices existed in the year when the goods and services
were produced, whereas real GNP is the value as per prescribed during the index year. For
example,
The total goods and services produced during 2008 are as follows:
Item Quantity Price in
2008
Value in
2008 (US $)
Price in
2000
Price in 2000/ values
(US Dollar)
X-ray plates
Stethoscope
BP sets
2000
1000
500
100
400
1000
200000
400000
500000
80
300
800
80x2000 =160000
300x1000=300000
800x500 =400000
Total 1100000
860000
Here, the nominal GNP in 2008 is US $ 1100000 whereas real GNP of 2008 with the price index
of 2000 is US $ 860000. The rate of decreased value of money indicates the inflation rate.

3. The price increase between 2000 and 2008 =1100000/860000=1.28 indicating the price increase
by 28%. In detail, GNP is calculated as the total of Personal consumption expenditures, Gross
private domestic investment, Government purchases of goods and services and net exports.
Symbolically,
Y = C+ Ig + G + (X-M) where Y is GNP, C is personal consumption expenditures, G is
government expenditures, X is exports and M is imports.
Example,
GNP with expenditure approach in 2008
Product side
Personal consumption expenditure - $ 2000
Gross private domestic investment - $ 400
 Capital Consumption Allowance (CCA) – $ 300
 Net Investment - $ 100
Government purchases - $ 400
Net exports (X-M) 200-100 - $ 100
Here, nominal GNP - $ 2900
Real GNP at price index of 2000 - $2088
Gross National Income
Gross national income (from income side) corresponds to the value of outputs (output side).
Hence, Gross national income is the total income of an economy derived from the total output.
For example,
• The stethoscope manufacturer from table below produces the stethoscopes which worth $
40,000. And it is sold to consumers.
• To produce these stethoscopes the manufacturer used 500 kg of rubber which worth $ 5000
which was produced by another manufacturer and is considered as intermediate goods.
• Hence actual value added is $ 35000.00,
Similarly, in income side also reflected in the table.
GDP, Inflation, Nominal vs Real price
Value added (output)
Value of output - $ 40000
Less:
Intermediate goods from
Other Firms – $ 5000
Value added - $ 35000
Income generated
Indirect business- $ 6000
Employment compensation - $ 10000
Interest – $ 6000
Rent - $ 3000
Residual - $ 10000
Depreciation - $ 5000
Profit - $ 5000
Totalincome - $ 35000

4. Gross Domestic Product (GDP) is the remainder of GNP after deducting the net inflow of
income earned on labor and property supplied by foreign residents.
Nepal GDP
• The Gross Domestic Product (GDP) in Nepal was worth 20.88 billion US dollars in 2015.
• The GDP value of Nepal represents 0.03 percent of the world economy.
• GDP in Nepal averaged 5.12 USD Billion from 1960 until 2015, reaching an all the time
high of 20.88 USD Billion in 2015 and a record low of 0.50 USD Billion in 1963.
Source: http://www.tradingeconomics.com/nepal/gdp
Source: http://www.tradingeconomics.com/nepal/gdp
Inflation
Inflation is the sustained and broadly based increase in the general price level.
By sustained increase, it is the rise in price fairly consistently over some significant period of
time. That is to say price increase month by month not necessarily every month or with the same
amount.
By broadly based, it is the price increase of goods and services widely. The price increase in some
specific items does not mean the broad based, however the price increase in some mostly consumed
items like foods, energy, and home ownership may dominate to be called as price increase broadly
to some extent.
Nominal price of the goods and services is the price of those goods and services which are bought
or purchased at the given time (present time say in 2009).
Real price is the price of goods and services purchased at the present time but compared with the
index price of specific previous time period. Real price is the tool to measure the rate of inflation
rate.
Demand

5. What does it mean by demand?
The demand for anything at a given price is the amount of it which will be bought per unit of time
at that price.
Demand is always concerned at a given price. Some basic features or characteristics of demand
are as follows:
• Quantity of commodity (goods and services) that a person or firm willing to buy
• Willing to buy at a given price
• Price referred as per unit of goods (piece, dozen, kg, ton, per hundred
• Willing to buy at a certain period of time
• Time also referred as per unit of time
• Willing to buy at certain place
• Willing to buy at a given income
• Willing to buy at a price of related goods.
Quantity of goods and services willing to buy may change at different price, or at different time or
at different place. Thus the comprehensive definition of demand is:
Various quantities of a given commodity or service which consumers would buy in one market in
a given period of time at various prices, or at given income, or at prices of related goods.
Types of demand:
There are three types of demand
1. Price demand
2. Income demand
3. Cross demand
1. Price demand: It tells the relationship between quantity of goods and price
Quantities of goods or services that are purchased by an individual, or industry or by a firm in a
market at various prices in the conditions that other things like income, tastes, and the price of
related goods are unchanged. For example: Number of physiotherapy demanded (purchased) at
different prices.
2. Income demand:

6. It tells the relationship between quantity of goods and the income. Quantities of goods or services
that are purchased by an individual, or industry or by a firm in a market at various incomes in the
conditions that other things like prices of the goods, tastes, and the price of related goods are
unchanged.
Example: Number of regular check up against the income
3. Cross demand:
It tells the relationship between quantity of goods and the price of related goods. Quantities of
goods or services that are purchased by an individual, or industry or by a firm in a market at various
prices of related goods in the conditions that other things like prices of the goods, income of the
individual, and tastes are unchanged.
Law of Demand
The concept of Law of Demand
The law of demand is one of the most fundamental concepts in economics. It works with the law
of supply to explain how market economies allocate resources and determine the prices of goods
and services that we observe in everyday transactions. The law of demand states that quantity
purchased varies inversely with price.
In other words, the higher the price, the lower the quantity demanded. This occurs because of
Diminishing Marginal Utility (The consumers use the first units of an economic good they
purchase to serve their most urgent needs first, and use each additional unit of the good to serve
successively lower valued ends).
The Law of demand explains the relationship between price of any goods and services with the
quantity demanded, remaining other things constant.
Definition of “The Law of Demand”
Therefore, Law of demand can be stated that other factors remaining constant, price and quantity
demand of any good and service are inversely related to each other. That means, when the price of
a product increases, the demand for the same product will fall. Similarly, when price of the product
decreases, the demand for the same product will rise remaining other things constant.
In short, remaining other things constant, quantity for goods and services are inversely
proportional to the price of the same goods and services.
• Law of demand explains consumer choice behavior when the price changes.

7. • In the market, assuming other factors affecting demand being constant, when the price of a good
rises, it leads to a fall in the demand of that good.
• This is the natural consumer choice behavior.
This happens because a consumer hesitates to spend more for the good with the fear of going out
of cash.
Demand Curve:
A demand curve is a curve which shows how the quantity of
goods and services varies with the variation in price. The x - axis
represents quantities purchased whereas y – axis represents price
of the goods. The demand curve also is called Average Revenue
(AR) because the price paid by the consumer is the revenue per
unit of the goods.
Why demand curve slopes downwards?
Willing to buy as the goods becomes cheaper. Real income increases. This is the income effect.
The goods are substituted by other related goods as the goods are cheaper. This is called
substitution effect.
Extension of demand: The combined effects of income and substitution effects leads the demand
toward the extension which means as the price of the goods and services are cheaper and when the
price of the related goods are increased then the demand curve slopes downward to the right giving
the shape of demand curve.
• Demand varies inversely with price, not necessarily proportionately. If the price falls,
demand will increase and vice versa.
Or
• A rise in the price of a commodity or service is followed by a reduction in demand, a
fall in price followed by an increase in demand, if conditions of demand remain
constant
Limitations of law of demand:

8. The law of demand does not exist if:
1. Change in taste or fashion
2. Change in other prices
3. Discovery of substitutes
4. Anticipatory changes in price
5. Mark of distinction
Derived Demand
Every one of us understood that we do not visit hospital or health clinic just to see a doctor without
any purpose. In fact, we visit health facilities because we want to receive health services. And
these health services we seek because we want to be healthy. Hence, to become healthy or the
demand of being healthy demand of health services are made. Therefore it is the health which we
really demand not the health services. Health services are the derived demand which are rendered
by the demand of health. Demand for health services and health goods are the derived demand for
its use rather than for itself. Like demand for CT scanning, MRI or Ultra sound are derived from
the demand of medical diagnosis which is demand for health care.
Hence, all the health services or the medical care like visits to the doctors, clinical diagnosis,
surgery, and medical prescriptions are the derived demand. Similarly other health determining
factors nutritional science, nutrition, good food, good environment and health behavior are the
substitutes for the health care.
Elasticityof demand:
The elasticity of demand, at any price or any output, is the proportionate change of amount
purchased in response to a small change in price, other things remaining constant. But this change
in demand is not always proportional to the change in price.
Measurement of Elasticity

9. Examples from Price Elasticityof demand
1. Perfectly elastic demand
Ed = ΔQ:OQ / ΔP/OP = ΔQ: ΔP/OQ:OP (ΔQ is change in quantity,
OQ is previous demand, ΔP is change in price and OP is previous
price.
Since in this case, change in demand (ΔQ) is horizontal and very
very large whereas change in price (ΔP) is almost zero.
Hence, ΔQ: ΔP/OQ:OP = +ve/0 = infinite
2. Perfectly inelastic demand
Ed = ΔQ:OQ / ΔP/PP1 = ΔQ: ΔP/OQ:PP1.
In this case, change in demand almost zero
Hence, ΔQ: ΔP/OQ:PP1 = 0/+ve = zero
3. Unit elastic demand
Ed =ΔQ:OQ / ΔP/PP1 = ΔQ: ΔP/OQ:PP1.
In this case, the change in quantity of goods and services is same
with the proportion of change in price.
Hence, ΔQ: ΔP/OQ:PP1 = 1
4. Relatively Inelastic demand
ΔQ:OQ / ΔP/PP1 = ΔQ: ΔP/OQ:PP1
In this case, the change in quantity demanded for goods and
services is relatively smaller than change in price.
Hence, ΔQ: ΔP/OQ:PP1 < 1

10. 5. Relatively elastic demand
ΔQ:OQ / ΔP/PP1 = ΔQ: ΔP/OQ:PP1
In this case, change in quantity demanded for goods and services
is relatively higher than change in price.
Hence, ΔQ: ΔP/OQ:PP1 > 1
Income Elasticityof Demand
It is the ratio of proportionate change (ratio of change in quantity with previous demand) in
quantity demanded for health services with respect to proportionate change (ratio of change in the
amount spent on the health services to the income) in income, remaining price of the health
services constant.
Income elasticity (Ei)
= Proportionate change in the quantity of health services purchased
Proportionate change in the income
(Price remaining constant)
 It is unity when proportion of income spent remains the same even when the income
increases
 It is greater than one when proportion of income spent is increased as the income increases
 It is less than one when the proportion of income reduces as the income increases
 It is zero when change in income does not make any difference in quantity purchase
 It is negative when increase in income with less purchase (inferior goods)
Cross Elasticityof demand
It is the ratio of proportionate change in purchase of a commodity to the proportionate change in
the price of related commodity. This type of condition arises in the case of inter related goods and
services like tea and coffee, similar antibiotics with different brand names, similar health services.
Cross elasticity of demand for goods X to Y =
Proportionate change in purchase of goods X
Proportionate change in the price of goods Y
Remaining price of goods X, income constant
Factors determining price elasticity of demand

11.  Necessary and conventional necessary goods
 Luxury goods elastic
 Proportion of total expenditure
 Substitutes
 Goods with alternative uses
 Joint demand
Cases of Price Elasticity of Demand
The cases of emergency health care like the severe abdominal pain, emergency surgery, accidental
care and other emergency health care may be categorized in the case of perfectly en-elastic demand
where as general medical checkup, radiologic diagnosis can be categorized into perfectly elastic
demand upon the knowledge on the importance of health care. Routine health services, minor
treatment, minor surgery and general OPD services may fall under the category of relatively en-
elastic demand whereas specific health services CT scanning, MRI and special and super special
health services may fall under relatively elastic demand.
Examples 1:
The price of scaling of the teeth in a dental hospital is reduced by 80% which has led to the increase
of 20% of patients coming for scaling. Analyze this situation as a public health manager.
Let, a be the original number of patients coming for scaling.
The increase in cases 20% = 20 x a/100
Similarly let us assume the original price for scaling is b
Decrease in price is by 80% = 80 x b/100
The elasticity of demand = 20 x a/100

12. a = 1/5 = 0.25 = <1
80xb/100 4/5
b
The elasticity is less than 1 which means this is the case of relatively en-elastic. This does not
indicate that reducing only the price really influences the increase in demand at the same
proportion. As a public health manager, some other factors also are to be studied like the
accessibility of the dental hospital, behavior of clinicians, health personnel, quality of health
services, environment, advocacy on the importance of dental care and others.
Exercises on Elasticity of Demand
Case 1:
A hospital in Kathmandu changed its price for the surgery of gall stone from NRs. 4000 to 4500
effective from 1 Jan.. 2010. The number of monthly surgery made in the hospital for last 6 months
till the end of January 2010 are 20, 22, 24, 23, 25, and 8. As a health economist what will be your
pricing strategy to increase the flow of patients for surgery of gall stone? Enunciate with evidence.
Case 2:
The Government of Nepal, Ministry of Health and Population has established its policy on
providing transportation allowances for maternity cases. This has shown impact that an estimated
40% of price of delivery is reduced. The number of deliveries has increased by 10%. How do you
conclude this situation? Discuss with suggestions.

13. Supply
Supply is the amount of goods and services offered for sale at a given price.
Definition:
It is the schedule of goods and services that would be offered for sale at all possible prices at
specified time or period, remaining other conditions of supply constant.
Difference between stock and supply:
Supply is the total quantity of goods or commodity which could be brought in the market within
short period for a sale (Total quantity of goods being hold in the economy) whereas Supply is the
actual quantity of goods brought in the market for a given price.
Law of Supply:
Supply is the function of price. It can be stated as:
Other things remaining same, as the price of a commodity rises its supply is extended, and as the
price falls its supply is contracted. In another words, supply is directly varies with price
Supply schedule:
Price (Rs) quantity supplied
10 50
8 45
6 40
4 30
2 20
1 5
Supply curve
5 20 30 40 45 50
Quantity of goods for sale
Price
1246810
Reserve price:
When the price of the goods falls extensively, then there will be
no supply at all. The supplier does not supply the goods below
some price, this is called Reserve Price. In this case supplier
will start purchasing from the own stock.

14. Elasticityof supply
Like in elasticity of demand, elasticity of supply is also the degree of extension or reduction of
quantity of goods supplied at the given change in price.
Cases ofelasticityof supply:
 Perfectly in-elastic supply
 Perfectly elastic supply
 Unit elastic supply
 Relatively in-elastic supply
 Relatively elastic supply
Price
Quantity supplied
Perfectly en-elastic supply Perfectly elastic supply Unit elastic supply
Quantity supplied
Price
Relatively en-elastic supply Relatively elastic supply
Causes ofchanges in supply:
 Change in cost of various factors of production
 Improvement in the factors of production in agricultural sector (rainfall, irrigation, bigger
doze of fertilizers, improved seeds, technology)
 Change in technology
 Change in taxation
 Change in communication and transportation
 Political situation
 International agreement (oil, international currency)
 Price of other commodity
 Number of sellers and Seller’s price expectation

15. Pricing, policy and Health Marketing
Pricing, Policy change and externalities in demand and supply
Demand and supply are the both forces which determine the price of a commodity in the market.
It can be compared as which blade is more important to cut the clothes. It is fact both blades are
necessary to be active or be moved to cut the clothes. Hence, conclusion: Demand of all consumers
and the supply of all firms together determine the prices which are then taken as given by each of
them.
Equilibrium Price:
It is discussed that quantity demanded and quantity supplied may vary with price. The price at
which the quantity demanded and quantity supplied is equal in the market is called the Equilibrium
Price. And the quantity demanded and quantity supplied is called the Equilibrium amount.
If demand or supply tends to change on the basis of willing of buyers or suppliers, there may be fluctuation
in price and will tend to equilibrium price. But the fact is that demand and supply can affect only at
superficial level, there are really other factors which in realsense can affect the price of the commodity in
the market – By Samuelson. Factors influencing the price of the goods and servicesare shown in the
following figure:
Thus it can be concluded that the change in income, factors of production, size of population, time
period (short run or long run) and other factors can influence the price.
Health Care Demand
Health care demand is the quantity of health care or health goods or health services purchased at
existing or given prices remaining other thigs constant
Health demand as is said influenced by prices, however in addition some other events or factors
also influence health demand as follows:
• Consumers as a health producer
• Health as a consumption good as well as investment good
• Role of education, income and other factors in health care demand

16. Consumers as a health producer
Firstly
• It is not medical care as such that consumers want, but rather health.
• People want health; they demand medical care inputs to produce it.
• Consumers do not merely purchase health passively from the market.
• Instead, they compel to produce health, combining Time devoted to health- improving
efforts with purchased medical inputs.
Secondly
• Health lasts for more than one period and does not depreciate instantly, and it can be
analyzed like a capital good.
• Most importantly, health can be treated both as a consumption good and an investment
good.
• As a consumption good, health is desired because it makes people feel better.
• As an investment good, health is desired because it increases the number of healthy days
available to work and to earn income.
A Model for Time Spent Producing Health
• Investment (I) in health is the function of market health inputs (M) and time devoted to
produce health (T)
Thus, I = M + T
• Similarly, some other goods (B) also require to produce health which again needs market
purchased goods and time to produce the goods
Thus, Other goods production (B) also is the function of market purchased goods (X) and time
(T1) taken to improve and time (T2) devoted to produce other goods, time lost to illness (T3)
time for working (T4). i.e. B = X+T1 +T2 +T3 +T4
From above all, it can be concluded that Consumers can be considered as a health producer
Health care -- a consumption good and an investment good
• Health care is purchased to enhance health which makes health care a consumption good.
• Health enhances our enjoyment of life and also enhances our labor productivity which make
health care an investment.
Hence, it can be concluded that Health Care is a consumption as well as investment good.