Economic Terms – Study Notes
For the Nagaland Police Sub‑Inspector (SI) Examination
General Awareness & Current Affairs – Advanced (MIT‑Level)
Objective – Equip you with a rigorous, first‑principles understanding of key economic terms, their theoretical underpinnings, mathematical formulations, and real‑world relevance.
Why it matters – As a police officer, you’ll encounter economic contexts: budgeting, trade disputes, anti‑corruption, and public‑service delivery. Mastery of these terms sharpens your analytical eye and enhances your credibility in investigative and advisory roles.
1. Macro‑Economic Terms (First Principles)
| Term | First‑Principles Definition | Key Equation | Notes |
|---|---|---|---|
| Gross Domestic Product (GDP) | Total value of final goods & services produced within a country’s borders in a given period. | GDP = C + I + G + (X – M) (C: consumption, I: investment, G: government spending, X: exports, M: imports) | Real vs Nominal: adjust for price changes. |
| Gross National Product (GNP) | GDP + income earned by residents abroad – income earned by foreigners domestically. | GNP = GDP + Net Income from Abroad | Distinguishes national economic activity. |
| Purchasing Power Parity (PPP) | Exchange rate that equalizes the price of identical baskets of goods across countries. | PPP₁₂ = Price₁ / Price₂ | Basis for World Bank and IMF comparisons. |
| Consumer Price Index (CPI) | Weighted average price level of a basket of consumer goods/services. | CPI_t = (Σᵢ wᵢ·Pᵢ_t)/(Σᵢ wᵢ·Pᵢ_base) | Base year normalization: CPI_base = 100. |
| Producer Price Index (PPI) | Weighted average of prices received by producers for output. | PPI_t = (Σᵢ wᵢ·Pᵢ_t)/(Σᵢ wᵢ·Pᵢ_base) | Often a leading indicator of CPI. |
| Inflation | Sustained rise in general price level. | π_t = (CPI_t – CPI_{t-1}) / CPI_{t-1} | Inflation rate often annualised. |
| Deflation | Sustained fall in general price level. | Same formula, π_t < 0 | Can indicate deep recession. |
| Stagflation | Simultaneous inflation + stagnation (high unemployment). | None; concept | 1970s oil shocks – a classic case. |
| Hyperinflation | Price level increases > 50% per month. | No single formula; extreme π_t | Often due to monetary over‑expansion. |
| Real Interest Rate | Nominal rate adjusted for inflation. | r_real = r_nominal – π | Fisher’s equation. |
| Nominal vs Real GDP | Nominal uses current prices; Real adjusts for price changes. | Real GDP = Nominal GDP / (CPI_t / 100) | Chain‑weighting vs Fixed‑base indices. |
| Fiscal Policy | Government budget (taxes + spending). | Tax Revenue = t·Y, Spending = G | Expansionary vs Contractionary. |
| Monetary Policy | Central bank’s control of money supply & interest rates. | M_t = 1 / (1 + π) (simplified) | Open‑market operations, reserve ratio. |
| National Savings (S) | Portion of income not consumed. | S = Y – C – G | Private + Public savings. |
| Investment (I) | Purchases of new capital goods. | I = S in a closed economy | MPC and Multiplier factor. |
| Keynesian Multiplier (k) | ΔY = k·ΔG where k = 1/(1 – MPC) | Reflects spending ripple. | |
| Solow Growth Model | Long‑run growth determined by capital accumulation, labour, tech. | Y = A·K^α·L^{1–α} | Steady‑state capital per worker. |
| Harrod–Domar Model | Growth depends on savings rate & capital‑output ratio. | g = s / v | v = capital‑output ratio. |
2. Micro‑Economic Terms (First Principles)
| Term | Definition | Key Equation | Remarks |
|---|---|---|---|
| Elasticity of Demand | % change in quantity demanded / % change in price. | **ε = (ΔQ |