Economic Terms – Study Notes for BHU Entrance (General Awareness & Current Affairs)
Why these notes matter
Economic terms form the backbone of any current‑affairs question. Knowing the definition, significance, and real‑world application of each term lets you decode news headlines, policy announcements, and exam questions with ease.
1. Simple Explanation
Economic terms are keywords that describe how money, resources, and markets work. They help us:
| Term | What it tells you | Why it matters |
|---|---|---|
| GDP | Total value of goods/services produced | Gauges a country’s economic size |
| Inflation | Rise in price level | Affects purchasing power |
| Fiscal Policy | Government’s use of spending & taxes | Drives growth or cools the economy |
| Monetary Policy | Central bank’s control of money supply | Keeps inflation in check & stabilises exchange rates |
2. Key Points – Essential Economic Terms
| Term | Definition | Key Feature / Significance |
|---|---|---|
| Gross Domestic Product (GDP) | Total value of final goods & services produced within a country in a year. | Main indicator of economic health. |
| Gross National Product (GNP) | GDP + income earned by residents abroad – income earned by foreigners in the country. | Shows national income beyond borders. |
| Net National Product (NNP) | GNP – depreciation of capital. | Real resource utilisation. |
| Gross National Income (GNI) | GNP + net income from abroad. | Broadest measure of national income. |
| Consumer Price Index (CPI) | Basket of goods/services prices faced by consumers. | Measures inflation & cost of living. |
| Producer Price Index (PPI) | Prices of goods sold by producers. | Early indicator of inflation. |
| Inflation Rate | % change in CPI year‑on‑year. | Determines monetary policy. |
| Deflation | Falling price levels (negative inflation). | Can signal recession. |
| Fiscal Policy | Government’s use of taxes & spending. | Expansionary (spend more) or contractionary (cut spend). |
| Monetary Policy | Central bank’s control over money supply & interest rates. | Target inflation, employment, growth. |
| Interest Rate | Cost of borrowing money. | Tool to influence investment & consumption. |
| Liquidity Trap | Low/zero interest rates but no stimulus to demand. | Requires non‑traditional policy (e.g., QE). |
| Exchange Rate | Value of one currency relative to another. | Affects trade, inflation, tourism. |
| Foreign Direct Investment (FDI) | Investment by foreign firm in domestic assets. | Boosts capital, technology, jobs. |
| Budget Deficit | Expenditure > Revenue in government budget. | Requires borrowing or cuts. |
| Fiscal Deficit | Budget deficit + interest payments. | Measures overall fiscal burden. |
| Current Account Deficit | Net trade deficit + net income & transfers. | Indicates external imbalances. |
| External Debt | Debt owed to foreign lenders. | Affects repayment burden & confidence. |
| Opportunity Cost | Benefit of the next best alternative foregone. | Core principle in decision‑making. |
| Comparative Advantage | Ability to produce a good at lower opportunity cost. | Basis of trade. |
| Real vs. Nominal Value | Adjusted for inflation vs. face value. | Real value shows true purchasing power. |
| Real GDP | GDP corrected for price changes (inflation). | Reflects actual growth. |
| Nominal GDP | GDP measured at current prices. | Useful for comparing current wealth. |
| Purchasing Power Parity (PPP) | Exchange rate that equalises purchasing power. | Helps compare living standards. |
| Economic Growth | Sustained increase in real GDP. | Indicator of improved living standards. |
| Business Cycle | Phases of expansion, peak, contraction, trough. | Guides policy decisions. |
| Liquidity | Ease of converting assets to cash without loss. | Important for market stability. |
| Capital Market | Markets for long‑term securities (stocks, bonds). | Source of long‑term finance. |
3. Worked Example
Calculating the Inflation Rate (CPI‑based)
| Year | CPI (Base Year = 100) |
|---|---|
| 2022 | 125 |
| 2023 | 135 |
Step‑by‑step:
-
Find the change in CPI
[ \Delta \text{CPI} = 135 - 125 = 10 ] -
Divide by the previous year’s CPI
[ \frac{10}{125} = 0.08 ] -
Convert to percentage
[ 0.08 \times 100 = 8% ]
Result: Inflation rate for 2023 = 8%
This means that the general price level rose by 8% from 2022 to 2023.
4. Quick Revision Summary
- GDP – Size of economy.
- GNP/GNI – National income beyond borders.
- CPI – Cost‑of‑living index.
- Inflation – % rise in CPI; key inflation indicator.
- Fiscal Policy – Govt spending & tax decisions.
- Monetary Policy – Central bank controls money supply & rates.
- Exchange Rate – Currency value vs others; affects trade.
- FDI – Foreign investment boosts capital & tech.
- Budget & Fiscal Deficit – Govt’s spending vs. revenue.