Economic terms: General Awareness & Current Affairs Notes for Kerala Police Constable

Economic Terms – Study Notes

Program: Kerala Police Constable
Subject: General Awareness & Current Affairs
Topic: Economic Terms

These notes are designed for quick reading, easy recall, and exam‑ready revision.

1. Simple Explanation

Economics is the study of how societies use limited resources to produce goods and services and distribute them among people.
Key economic terms help us understand the state of the economy, government actions, and market behaviour.

2. Key Economic Terms & Definitions

Term	Simple Explanation	Key Points (What You Need to Remember)
Gross Domestic Product (GDP)	Total value of goods & services produced within a country in a year.	• Measures economic size. • Growth rate = percentage change year‑on‑year. • Used to gauge health of economy.
Gross National Product (GNP)	GDP + income earned by residents abroad – income earned by foreigners domestically.	• Includes national income from overseas. • Less used in India.
Inflation	Sustained rise in general price level.	• Measured by CPI. • Causes purchasing‑power loss.
Deflation	Sustained fall in general price level.	• May signal recession. • Can increase real debt burden.
Consumer Price Index (CPI)	Weighted average of prices paid by consumers for a basket of goods.	• Key inflation gauge. • CPI ↑ → inflation.
Producer Price Index (PPI)	Weighted average of prices received by producers for goods.	• Pre‑consumer indicator. • PPI ↑ can lead to CPI rise.
Fiscal Policy	Government decisions on spending & taxation.	• Expansionary (spend↑, tax↓) → stimulate economy. • Contractionary (spend↓, tax↑) → curb inflation.
Monetary Policy	Central bank actions on money supply & interest rates.	• RBI sets repo, reverse repo rates. • Tightening → higher rates, lower inflation.
Interest Rate	Cost of borrowing money.	• Nominal vs. real rates. • Influences investment & consumption.
Budget Deficit / Surplus	Difference between government revenue and expenditure.	• Deficit = spend > revenue. • Surplus = revenue > spend.
Public Debt	Total amount owed by the government.	• Expressed as % of GDP. • Affects credit rating.
Tax	Mandatory levy on income, consumption, property.	• Types: income tax, GST, excise, etc.
Subsidy	Financial assistance to lower the cost of goods/services.	• E.g., fuel subsidy, food grain subsidy.
Gross National Income (GNI)	Total income earned by residents of a country.	• GNI = GNP + net income from abroad.
Exchange Rate	Value of one currency against another.	• Fixed vs. floating. • Affects trade balance.
Trade Balance	Difference between exports and imports.	• Surplus > 0 → exports > imports. • Deficit < 0 → imports > exports.
Balance of Payments (BOP)	Records all transactions between residents & rest of world.	• Current account + capital account + financial account.
Liquidity	Ease with which an asset can be converted to cash.	• High liquidity = low risk.
Inflation Targeting	RBI’s strategy to keep inflation within a band (e.g., 4 ± 2 %).	• Uses repo rate, open‑market operations.
Goods & Services Tax (GST)	Unified indirect tax on production & consumption.	• Replaces multiple state & central taxes. • 3‑tier structure (CGST, SGST, IGST).
Capital Formation	Net increase in productive capital (machinery, infrastructure).	• Indicator of potential growth.
Employment Rate	% of labour force that is employed.	• Unemployment rate = 100 – employment rate.
Real GDP	GDP adjusted for inflation.	• Shows true growth.
Nominal GDP	GDP measured at current prices.	• Inflated by price changes.
Leading Indicators	Economic variables that predict future activity.	• Stock market indices, new orders, etc.
Lagging Indicators	Variables that confirm trends after they occur.	• Unemployment, inflation, GDP.

3. Worked Example

Problem

The CPI for January 2025 is 300. In January 2026 it rises to 315.
Calculate the Annual Inflation Rate.

Solution

Formula
[ \text{Inflation Rate} = \frac{\text{CPI}{\text{current}} - \text{CPI}{\text{previous}}} {\text{CPI}_{\text{previous}}} \times 100% ]
Plug in
[ \text{Inflation Rate} = \frac{315 - 300}{300} \times 100% = \frac{15}{300} \times 100% = 5% ]
Interpretation
A 5 % inflation rate indicates that, on average, prices increased by 5 % over the year.

4. Quick Revision Summary

Term	Symbol / Key Value	Typical Use in Exam
GDP	–	Growth rate, real vs nominal
CPI	–	Inflation %
PPI