Economic Terms – General Awareness & Current Affairs
(Microsoft Certification – General Awareness & Current Affairs)
Why it matters
In a rapidly digitising world, Microsoft’s products (Azure, Power BI, Dynamics 365, etc.) are increasingly used by businesses to model financial data, forecast demand, and manage supply chains. A solid grasp of core economic concepts enables you to:
- Interpret macro‑economic data that drives cloud‑based analytics.
- Analyse how policy changes influence your customer’s business environment.
- Communicate effectively with stakeholders who speak in economic terms.
1. Core Macro‑Economic Variables
| Variable | Symbol | Definition | Key Formula / Relationship |
|---|---|---|---|
| Gross Domestic Product | (GDP) | Total monetary value of all final goods & services produced within a country in a given period. | Expenditure Approach: (GDP = C + I + G + (X-M)) Income Approach: (GDP = \text{Compensation} + \text{Taxes} - \text{Subsidies} + \text{Net Factor Income}) |
| Gross National Product | (GNP) | Value of goods & services produced by a country’s residents, regardless of location. | (GNP = GDP + \text{Net Factor Income from Abroad}) |
| Net National Product | (NNP) | (GNP - Depreciation) (capital consumption). | |
| Personal Consumption Expenditure | (PCE) | Sum of all consumer purchases of goods & services. | |
| Inflation Rate | (\pi) | Percentage change in a price index over time. | (\pi = \frac{P_t - P_{t-1}}{P_{t-1}}\times 100) |
| CPI (Consumer Price Index) | – | Weighted average price of a basket of consumer goods. | |
| PPI (Producer Price Index) | – | Weighted average price of goods at the wholesale level. | |
| Velocity of Money | (V) | How fast money circulates. | (V = \frac{GNP\text{ (real)}}{M}) |
| Monetary Base | (M_0) | Currency in circulation + reserves at the central bank. | |
| Money Supply (M1, M2, M3) | – | Aggregates of liquid assets. | |
| Interest Rate | (i) | Cost of borrowing money. | |
| Exchange Rate | (\frac{C}{F}) | Value of domestic currency relative to foreign currency. |
2. Derivations & Key Relationships
2.1 GDP – Real vs. Nominal
- Nominal GDP: (GDP_{\text{nom}} = \sum P_{t} Q_{t}) (prices at current period).
- Real GDP: (GDP_{\text{real}} = \sum P_{0} Q_{t}) (prices at base period).
GDP Deflator (price level indicator):
[
\text{GDP Deflator} = \frac{GDP_{\text{nom}}}{GDP_{\text{real}}}\times 100
]
Tricky point: GDP Deflator is a broader measure than CPI because it captures all goods/services, while CPI only covers a fixed basket of consumer goods.
2.2 Phillips Curve – Inflation vs. Unemployment
[ \pi_t = \pi_{t-1} - \beta (u_t - u^*) + \varepsilon_t ]
- (u_t): unemployment rate.
- (u^*): natural rate of unemployment.
- (\beta>0): slope.
- (\varepsilon_t): inflation expectations shock.
Tricky point: The classical Phillips curve suggested a stable inverse relationship, but the expectations‑augmented Phillips curve shows that only in the short run. In the long run, the curve becomes vertical at (u^*).
2.3 Quantity Theory of Money (Velocity & Money Supply)
[ M \times V = P \times Y ]
- (M): Money supply.
- (V): Velocity of money.
- (P): Price level.
- (Y): Real output (real GDP).
Assuming (V) is constant, a 1% increase in (M) → 1% increase in (P) (inflation).
Tricky point: Modern macro challenges the constancy of (V) – financial innovations change money’s velocity.
2.4 IS–LM Model – Fiscal & Monetary Policy Interaction
- IS Curve (Goods market equilibrium): (Y = C(Y-T) + I(r) + G + NX(Y)).
- LM Curve (Money market equilibrium): (M/P = L(r,Y)).
Policy levers:
- Fiscal: Shift IS via (G) or (T).
- Monetary: Shift LM via (M).
Tricky point: Demand‑side stimulus is subject to crowding‑out if the LM curve is steep (high sensitivity of investment to interest rates).
3. Important Formulae (Quick Reference)
| Concept | Formula | Notes |
|---|---|---|
| Growth Rate of GDP | (\frac{GDP_t - GDP_{t-1}}{GDP_{t-1}}\times 100) | Real GDP used for true output growth. |
| Inflation Rate | (\frac{CPI_t - CPI_{t-1}}{CPI_{t-1}}\times 100) | CPI‑based inflation commonly used. |
| Real Interest Rate | (i_{\text{real}} = i_{\text{nom}} - \pi) |