Economic Terms – Comprehensive Study Notes
(For Uttar Pradesh PSC – General Awareness & Current Affairs – Exam‑oriented)
Goal: Understand all key economic terms, remember the exact formulas, be aware of tricky points (common pitfalls in exam questions), and practice a hard question that tests derivations, calculations, and conceptual depth.
1. Introduction
Economic terms form the backbone of the General Awareness section in competitive exams. Candidates must:
- Define the term accurately.
- Know the formula (if any) and be able to apply it.
- Recognise subtle distinctions (e.g., nominal vs. real, CPI vs. PPI).
- Keep up with current changes (e.g., new tax reforms, RBI announcements, IMF/World Bank reports).
2. Macroeconomic Terms
| Term | Definition | Formula / Key Indicators | Tricky Points |
|---|---|---|---|
| Gross Domestic Product (GDP) | Total market value of all final goods & services produced in a country in a given period. | GDP = C + I + G + (X – M) (Consumption + Investment + Government spend + Net exports) | • Final goods only – avoid double counting. • “Investment” includes Gross Private Domestic Investment (PDI). |
| Real GDP | GDP adjusted for price changes (inflation). | Real GDP = Nominal GDP / (GDP Deflator/100) | • Real GDP growth = (Real GDPt – Real GDPt‑1) / Real GDPt‑1. |
| GDP Deflator | Price index that reflects all goods & services in GDP. | GDP Deflator = (Nominal GDP / Real GDP) × 100 | • Base year can shift value; not a price level. |
| Inflation (CPI‑based) | Rise in general price level of consumer basket. | CPI = (Cost of Basket in Current Year / Cost of Basket in Base Year) × 100 Inflation % = (CPIt – CPIt‑1)/CPIt‑1 × 100 |
• CPI uses fixed basket; changes in consumption patterns aren’t reflected. |
| Producer Price Index (PPI) | Price changes at the producer level (wholesale). | Similar formula to CPI but for producers. | • PPI often precedes CPI; used for cost‑push inflation analysis. |
| Purchasing Power Parity (PPP) | Exchange rate that equalises the purchasing power of two currencies. | PPP Exchange Rate = Price of Basket in Country A / Price of Basket in Country B | • Not the same as market exchange rate; used for cross‑country comparison. |
| Current Account Balance | Net of all international transactions (trade, services, income, transfers). | Current Account = (Exports – Imports) + Primary Income + Secondary Income | • A sub‑component of Balance of Payments. |
| Foreign Direct Investment (FDI) | Investment by a firm in one country into a firm in another country that is expected to be a long‑term investment. | No single formula but measured by gross inflows (in INR). | • Distinguish from Foreign Portfolio Investment (FPI). |
| Gross National Income (GNI) | Total income earned by a country’s residents, including net income from abroad. | GNI = GDP + Net Income from abroad | • GNI is often higher than GDP if net income from abroad is positive. |
| Human Development Index (HDI) | Composite index of life expectancy, education, and per‑capita income. | HDI = (I₁ × I₂ × I₃)^(1/3) – geometric mean of the three dimensions. | • HDI is non‑monotonic; small changes in one dimension can affect overall score. |
3. Monetary & Financial Terms
| Term | Definition | Key Indicator / Formula | Tricky Points |
|---|---|---|---|
| Monetary Base (MB) | Currency in circulation + reserves. | MB = (Cash in Circulation + Reserves) = M0 | • Doesn’t include deposit liabilities of banks. |
| M1 | Narrow money – cash + demand deposits. | M1 = Cash in Circulation + Demand Deposits | • Excludes time deposits. |
| M2 | M1 + savings & time deposits. | M2 = M1 + Savings Deposits + Time Deposits | • Used to gauge liquidity in economy. |
| Reserve Bank of India (RBI) Policy Rate | Repo Rate – rate at which RBI lends to banks. | No formula, but Repo Rate = (Interest earned on repo operation) | • Repo rate changes influence inflation and credit availability. |
| Liquidity‑Adjusted Repo (LAR) | Repo rate adjusted according to liquidity conditions. | LAR = Repo Rate ± Liquidity Adjustment | • Helps RBI manage short‑term liquidity. |