Economic Terms – Study Notes for Ladakh Police SI Exam
(General Awareness & Current Affairs)
1. Simple Explanation
| Term | What it Means (in 1–2 sentences) |
|---|---|
| Gross Domestic Product (GDP) | The total monetary value of all final goods and services produced within India in a given period (usually a year). |
| Gross National Product (GNP) | The total value of goods and services produced by Indian citizens (domestic and abroad) in a year. |
| Inflation | The rate at which the general level of prices for goods and services rises, eroding purchasing power. |
| Consumer Price Index (CPI) | A statistical measure that tracks changes in the price level of a basket of consumer goods & services. |
| Producer Price Index (PPI) | Measures the average change in selling prices received by domestic producers for their output. |
| Unemployment Rate | Percentage of the labor force that is job‑seeking but cannot find employment. |
| Fiscal Policy | Government decisions on taxation and spending to influence the economy. |
| Monetary Policy | Central bank actions (e.g., interest rates, reserve requirements) to control money supply & inflation. |
| Reserve Bank of India (RBI) | India’s central bank; regulates monetary policy, issues currency, and supervises banks. |
| Repo Rate | The interest rate at which banks borrow money from RBI for a short period. |
| Reverse Repo Rate | The rate at which RBI borrows money from banks, thereby injecting liquidity. |
| Liquidity‑Adjusted Rate of Return (LARR) | A measurement used by RBI to gauge the cost of funds for banks. |
| Goods & Services Tax (GST) | A unified indirect tax levied on the supply of goods and services, replacing multiple state & center taxes. |
| Subsidy | Financial assistance (cash or in kind) given by the government to reduce the cost of essential goods/services. |
| Export‑Import Policy | Government measures (tariffs, quotas, incentives) that affect the trade balance. |
| Foreign Direct Investment (FDI) | Investment by a foreign entity in a domestic business that gives it control or significant influence. |
| Inflation Targeting | The RBI’s policy of keeping inflation within a specified range (currently 4 % ±2 %) to maintain price stability. |
| Composite Index of Economic Activity (CIEA) | A composite of various economic indicators (price index, output, employment, etc.) to gauge overall economic health. |
2. Key Points – Quick Reference
| Term | Key Points |
|---|---|
| GDP | • Measured quarterly & annually. • Includes consumption, investment, government spending, and net exports. • Real GDP = Adjusted for inflation. |
| GNP | • Adds net income from abroad to GDP. • Useful for assessing national income. |
| Inflation | • Core inflation excludes volatile food & fuel. • CPI/ PPI used to calculate inflation rate. |
| CPI | • Weighted basket of goods (food, housing, transport, education, etc.). • Seasonal variations considered. |
| PPI | • Indicator of upstream price changes. • Often precedes CPI changes. |
| Unemployment Rate | • Labour Force = Employed + Unemployed. • “Under‑employment” and “discouraged workers” not captured. |
| Fiscal Policy | • Expansionary (tax cuts, increased spending). • Contractionary (tax hikes, spending cuts). |
| Monetary Policy | • Tools: Repo Rate, Reverse Repo Rate, Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR). • Aimed at controlling inflation & ensuring liquidity. |
| RBI | • Authority for monetary policy. • Supervises banks, manages foreign exchange, issues currency. |
| GST | • 4 main tax rates: 5 %, 12 %, 18 %, 28 %. • Input tax credit (ITC) mechanism. |
| Subsidy | • Targeted (e.g., food grains for Below Poverty Line families). • Prohibited for “non‑priority” items (like sugary drinks). |
| FDI | • 100 % FDI allowed in most sectors (except defense, railways). • 2‑step approval: RBI → Ministry of Commerce. |
3. Worked Example – Calculating Inflation (CPI Based)
Question:
The CPI for the base year 2019 is 100. In 2020 it is 104 and in 2021 it is 110. What is the headline inflation rate for 2020 and 2021?
Solution Steps
-
Formula for inflation rate
[ \text{Inflation (%)} = \frac{\text{CPI}{\text{current}} - \text{CPI}{\text{previous}}}{\text{CPI}_{\text{previous}}} \times 100 ] -
Inflation 2020
[ \frac{104 - 100}{100} \times 100 = 4% ] -
Inflation 2021
[ \frac{110 - 104}{104} \times 100 \approx 5.77% ] -
Interpretation
- 2020: 4 % inflation – within RBI’s target band (4 % ± 2 %).
- 2021: 5.77 % – slightly above the upper bound, signalling a rise in price pressures.
**Key Takeaway