Economic Terms – Study Notes
(For Arunachal Pradesh Forest Guard General Awareness & Current Affairs)
1. Simple Explanation
Economic terms are the building blocks that help us understand how a country’s economy behaves, grows, and is managed. They are used by governments, businesses, and analysts to describe production, consumption, prices, and the flow of money.
Think of the economy as a big machine: these terms are the labels on its parts so everyone knows what’s happening inside.
2. Key Economic Terms (with short definitions)
| Term | Simple Definition | Typical Use |
|---|---|---|
| Gross Domestic Product (GDP) | Total value of all goods & services produced inside a country in a year. | Measures overall economic size & growth. |
| Gross National Product (GNP) | GDP + income earned by nationals abroad – income earned by foreigners domestically. | Shows national income irrespective of location. |
| Gross National Income (GNI) | GNP + net primary income from abroad (e.g., remittances). | Alternative measure of national income. |
| Consumer Price Index (CPI) | Weighted average of prices of a basket of goods & services purchased by households. | Measures consumer inflation. |
| Producer Price Index (PPI) | Prices received by producers for their output. | Measures producer inflation. |
| Inflation | General rise in price levels over time. | Indicates decrease in purchasing power. |
| Deflation | General decline in price levels. | Indicates falling demand or excess supply. |
| Fiscal Deficit | Government expenditure – government revenue (taxes + non‑tax). | Indicates how much the government borrows. |
| Budget Deficit | Same as fiscal deficit; often used interchangeably. | Shows fiscal health. |
| Trade Deficit | Value of imports > value of exports. | Indicates more money leaving the country. |
| Current Account Deficit | Trade deficit + net income + current transfers. | Overall balance of payments indicator. |
| Monetary Policy | Central bank actions (interest rates, reserve ratios) controlling money supply. | Aims to control inflation & stabilize economy. |
| Fiscal Policy | Government decision on taxation & spending. | Aims to influence growth, employment, inflation. |
| Gross Fixed Capital Formation (GFCF) | Investment in physical assets (machinery, buildings). | Measures future productive capacity. |
| Human Development Index (HDI) | Composite of life expectancy, education, and per‑capita income. | Measures overall well‑being. |
| Exchange Rate | Value of one currency in terms of another. | Affects trade competitiveness. |
| Interest Rate | Cost of borrowing money; set by central bank/market. | Influences investment & consumption. |
| Unemployment Rate | % of labor‑force that is jobless & looking for work. | Indicator of economic health. |
| Productivity | Output per worker (or per hour). | Gauge of efficiency. |
| Taxation | Government’s method of collecting revenue. | Major source of fiscal revenue. |
| Subsidy | Government payment to reduce costs of a good/service. | Used to support strategic sectors. |
| Public Debt | Total amount of money the government owes. | Reflects borrowing history. |
| Economic Growth | Increase in GDP over a period. | Indicates improving standard of living. |
| Real GDP | GDP adjusted for price changes (inflation). | Shows true growth. |
| Nominal GDP | GDP measured at current prices. | Raw output figure. |
| Purchasing Power Parity (PPP) | Exchange rate that equalises the price of a basket of goods across countries. | For international comparisons. |
| Balance of Payments | Record of all transactions between residents and non‑residents. | Includes current & capital accounts. |
| Capital Account | Transactions involving ownership of assets. | Includes foreign investment flows. |
3. Worked Example
Example 1: Calculating the Inflation Rate using CPI
Given
- CPI (Jan‑2023) = 300
- CPI (Jan‑2024) = 315
Formula
[
\text{Inflation Rate} = \frac{\text{CPI}{2024} - \text{CPI}{2023}}{\text{CPI}_{2023}} \times 100%
]
Calculation
[
\frac{315 - 300}{300} \times 100 = \frac{15}{300} \times 100 = 5%
]
Result
Inflation between Jan‑2023 and Jan‑2024 = 5 %.
Example 2: Calculating GDP Growth Rate
Given
- GDP 2022 = ₹25,000 crore
- GDP 2023 = ₹26,250 crore
Formula
[
\text{Growth Rate} = \frac{\text{GDP}{2023} - \text{GDP}{2022}}{\text{GDP}_{2022}} \times 100%
]
Calculation
[
\frac{26,250 - 25,000}{25,000} \times 100 = \frac{1,250}{25,000} \times 100 = 5%
]
Result
GDP grew by 5 % from 2022 to 2023.
4. Quick Revision Summary
| Term | What it tells you |
|---|---|
| GDP | Size & growth of economy |
| GNP/GNI | National income including abroad |
| CPI | Consumer price changes (inflation) |
| PPI | Producer price changes |
| Inflation/Deflation | Price level trend |
| Fiscal/Deficit | Govt borrowing level |
| Trade/Current Account Deficit | Balance of payments |
| Monetary Policy | Central bank’s role |
| Fiscal Policy | Govt spending & taxes |
| Unemployment | Labor market health |
| Productivity | Efficiency of output |
| Exchange Rate | Currency strength vs others |
| Real vs Nominal GDP | Growth vs price effect |
Tips for Exam Day
- Memorize the Definitions –