Economic terms: General Awareness & Current Affairs Notes for CDS

Economic Terms – Study Notes

(Designed for a General Awareness & Current Affairs exam – CDS)

1. Simple Explanation

Term	What it Means (in plain words)
GDP (Gross Domestic Product)	Total value of all goods and services produced inside a country in a year.
GNP (Gross National Product)	GDP + value of goods/services produced by a country’s residents abroad – minus what foreigners produce at home.
CPI (Consumer Price Index)	A basket‑of‑goods price average that measures how much consumers pay for everyday items.
Inflation	Rise in the CPI – general increase in price levels over time.
Deflation	Fall in the CPI – general decline in price levels.
Interest Rate	Cost of borrowing money (or return on savings), usually set by the central bank.
Monetary Policy	Actions by the central bank (e.g., changing rates, buying/selling bonds) to control money supply and inflation.
Fiscal Policy	Government’s use of spending and taxation to influence the economy.
Supply & Demand	The basic interaction: higher supply → lower price; higher demand → higher price.
Price Elasticity of Demand	How much quantity demanded changes when price changes.
Liquidity	How easily an asset can be turned into cash without affecting its price.
Fiscal Deficit	When a government’s expenditures exceed its revenues in a year.
Budget Surplus	When revenues exceed expenditures.
Tariff	Tax on imported goods – used to protect domestic industry or raise revenue.
Quota	Physical limit on how many units of a product can be imported.
Free Trade	Trade without tariffs or quotas; goods move freely across borders.
Protectionism	Policies that shield domestic industries from foreign competition (tariffs, quotas).
Exchange Rate	Value of one currency expressed in terms of another (e.g., ₹1 = $0.012).
Nominal vs Real	Nominal: current price level; Real: adjusted for inflation.
Purchasing Power Parity (PPP)	Exchange rate that equalizes the price of a basket of goods in two countries.

2. Key Points

Term	Key Take‑Aways
GDP	• Indicator of economic size and growth. • Calculated via production, income, or expenditure approach.
CPI	• Basis for consumer inflation; used for cost‑of‑living adjustments.
Inflation	• Mild inflation (2‑3 %) is normal; high inflation erodes purchasing power.
Interest Rate	• Central bank rate influences loan rates, savings yield, and investment.
Monetary Policy	• Expansionary (low rates, buying bonds) → stimulates growth. • Contractionary (high rates, selling bonds) → curbs inflation.
Fiscal Policy	• Expansionary (higher spending or lower taxes) → boosts demand. • Contractionary (lower spending or higher taxes) → slows demand.
Supply & Demand	• Equilibrium price = where quantity demanded = quantity supplied.
Elasticity	• Elastic (
Liquidity	• Cash is most liquid; bonds more liquid than real estate.
Fiscal Deficit	• Usually financed by borrowing (government bonds).
Tariff	• Can protect local jobs but raises consumer prices.
PPP	• Useful for comparing living standards across countries.

3. Worked Example

Problem:
The CPI in 2023 is 245. The CPI in 2022 was 235.
Calculate the inflation rate for 2023 and determine the real GDP if nominal GDP in 2023 was ₹50 trillion.

Solution:

Inflation Rate
[ \text{Inflation} = \frac{\text{CPI}{2023} - \text{CPI}{2022}}{\text{CPI}_{2022}} \times 100% = \frac{245 - 235}{235} \times 100% = \frac{10}{235} \times 100% \approx 4.25% ]
Real GDP
Real GDP = Nominal GDP ÷ (CPI/100)
[ \text{Real GDP} = \frac{50{,}000}{245/100} = \frac{50{,}000}{2.45} \approx ₹20{,}408 \text{ (in billions)} ] (i.e., ₹20.408 trillion)

Interpretation:
Inflation is 4.25 %. After adjusting for price changes, the economy produced ₹20.4 trillion worth of goods and services in real terms.

4. Quick Revision Summary

Concept	Quick Fact
GDP vs GNP	GDP = domestic production; GNP adds/excludes foreign income.
CPI	Measures average price changes → basis for inflation.
Inflation	2‑3 % normal; >5 % problematic.
Interest Rate	Central bank’s lever; affects borrowing, saving, investment.
Monetary Policy	Expansionary vs contractionary.
Fiscal Policy	Spending & tax decisions.
Elasticity
Liquidity	Cash > bonds >