INDIAN

ECONOMY FOR IAS BY Pratik Gupta (Vision IAS)

BASIC CONCEPTS: ECONOMY

G.D.P.: Gross domestic product is the market value of all officially recognized final NOTES…
goods and services produced within a country in a year, or other given period of
time.

G.N.P.: Gross national product is the market value of all the products and services
produced in one year by labor and property supplied by the citizens of a country.

Green Gross Domestic Product: The green gross domestic product (green GDP) is an
index of economic growth with the environmental consequences of that growth

factored into a country's conventional GDP. Green GDP monetizes the loss of
biodiversity, and accounts for costs caused by climate change.

Monopoly: Single Supplier

Monopsony: Single buyer.

Bilateral monopoly: One buyer one seller.
Oligopoly or multiple monopoly: A few seller in the market such as aircraft industry.

Duopoly: Two seller in the market.

Monopolistic competition: A market structure in which several or many sellers each
produce similar, but slightly differentiated products.

Collusion: Group of companies come together to bring down competition amongst
themselves, for example price fight

Administered Price: Price set by a single body usually government.

Asset Stripping: Buying undervalued company/assets with an intent to sell off at

higher price to make profit.

Black Money: Taxable money not include in tax or money earned through illegal
activities (it is not taxed)

Idle Money: It is defined as inactive money that does not contribute to productive
efforts in an economy.
It results from what Keynes called Liquidity preference i.e. the desire to hold money
rather than risk it on interest-earning assets.
Bill of Sight: Declaration made by importer to the custom. In situation when the
importer wants to inspect the good before paying duties.
Bill of Exchange: A non-interest order that one party agrees to pay to the other on a
fixed date.
Bill of Lading: It is a documentary evidence giving details of goods shipped, the ship
on which the goods are consigned and the name of the consigner and the consignee.
BOP: Tabulation of credit and debit with foreign countries and international
institutions.

Counter Trade Policy: In this trade goods are purchased from the seller only
when the seller is ready to buy something from the purchaser also.

Dumping: The sale of any commodity in a foreign market at a price below host
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country & also at times such quantity that can not be explained in a fair competition.
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Autarky: Self dependence of an economy.

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 INDIAN ECONOMY FOR IAS BY Pratik Gupta (Vision IAS)

Entrepot Trade: Import of goods with intention of exporting them without rendering NOTES…
them liable for duty.

Free on Board (FOB) & CIF: This is a term applied to the valuation of goods up to the
point of embarkation. It compares with C.I.F. (charged in full or cost-insurance
freight), which is valuation including all transport coasts and insurance up to the
Dismemberment.

Parallel Import: Importing without intellectual property consideration (Grey market)
Commodity Shunting: This term signifies the practice of buying a commodity with
one currency and selling if for another in order to circumvent exchange control
regulations, which may prevent direct foreign exchange convertibility.

Circular flow of Income: It is the process of flow of income from firms to house hold
and a flow of expenditure from house hold to firm.

Disposable income: Disposable income is personal income minus personal taxes.
Average Propensity to consume: This is the total value of expenditure on
consumptions.
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C = Amount spent

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Y = Pre tax income, T = Taxes

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Average Propensity to Save (A.P.S.): This is defined as the proportion of income,
which is not spent on consumption goods and services. (Also known as saving ratio).
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DISINVESTMENT: Disinvestment or divestment process involves selling off current

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investments in order to generate assets that can be used to better advantage in

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some other manner. Businesses sometimes use disinvestment as a means of

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changing the direction of the company in order to meet changing consumer needs

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and remain competitive.

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Money Income: Quantitative Income of person.

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Nominal Income: It is that income which is not being adjusted for the effects of

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inflation or deflation.
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Real Income: It is different from money income as it looks into the purchasing power

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of the money i.e. taking into account the effect of inflation or deflation in calculating
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the purchasing power of money income.

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Inflation: The process rising prices leading to erosion of purchasing power.
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Deflation: Contraction of supply of Money – Money supply given below the need of

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production affecting employment & out put.

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Disinflation: Process of bringing down prices moderately without adverse impact on

production and employment.

Deficit Financing: Prof. J. M. Keynes

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Deficit financing is the policy of bridging the government's expenditure and revenue

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gap.

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 INDIAN ECONOMY FOR IAS BY Pratik Gupta (Vision IAS)
This way the capacity of production for future is increased. NOTES…

Re-flation; A general increase in the level of business activity in the economy.

Stagflation: It is an economic situation in which prices of goods and services

continually increase, many people do not have jobs, and businesses are not very
successful i.e., stagnation and inflation exists together.

Fiscal Drag: During inflation income for the government from taxes increases by
proportion higher than the inflation.

Laissez-faire: Free trade

Recession: For an economy to be in “recession” it must show two successive quarter

of negative growth or contraction in GDP.

Slowdown: An Economy is said to be in "slowdown" when the growth rate is
declining i.e. the GDP growth may still be positive but it’s not as much as previous
quarters.
Lorenz Curve: A graphical representation of wealth distribution developed by
American economist Max Lorenz in 1905. On the graph, a straight diagonal line
represents perfect equality of wealth distribution; the Lorenz curve lies beneath it,

showing the reality of wealth distribution. The difference between the straight line

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and the curved line is the amount of inequality of wealth distribution, a figure

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described by the Gini coefficient.

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Gini Coefficient: Area between the Lorentz curve and the line of perfect equality

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Giffen Good: Sir Robert Giffen (1837 - 1910)

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Tariffs: Schedule of duty imposed on commodity imports.

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Bank Rate: Bank rate is the rate at which the central bank of a country gives loan to
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the other banks of the country.

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Interbank rate: The rate of interest charged by a bank on a loan to another bank. For
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Example LIBOR (London Inter Bank Offer rate), MIBOR (Mumbai Inter Bank offer
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Rate).
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RTGs: A payment and settlement System for inter bank transactions on a gross basis

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in an online and real time mode.

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CRR: The proportion of total deposits that banks have to deposits with the Central
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Bank of a country.
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SLR: The proportion of total deposits that banks have to maintains with itself in the
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form of cash and government securities.

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Durable Goods: Good which do not vanish after single use.

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Floating Debt: Short term borrowing.

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Hard Currency: Stable or appraising currency or currency that is widely accepted

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around the world as a medium of exchange for goods and services.

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Soft Currency: A currency whose value tends to fall

Hot Currency: Currency that travel from one country to another to earn short term

benefits.

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Tobin Tax: Given by Nobel Laureate James Tobin in 1978

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• All transaction of foreign money market to be taxed.

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 INDIAN ECONOMY FOR IAS BY Pratik Gupta (Vision IAS)

Floating currency: Currency which has a floating exchange rate (exchange rate
determined by market forces of demand and supply). NOTES…
Intervention Currency: A currency that is commonly used by central
banks for exchange market intervention. For example, RBI uses US$ as intervention
currency in India.

Soft loan: A loan provided at no or at a very low rate of interest.

Special Drawing Rights (SDRs): An instrument at IMF that a country needs to buy to
become member of IMF.

Tranche: It is different policy guiding drawing right of an IMF member country.

Direct Tax: Tax on income or wealth.

Indirect Tax: where burden of taxation can be shifted.
Laffer Curve: Graphical illustration of relationship between total tax revenue and the
existing tax rate.

Canons of Taxation:

• Amount of tax proportion to income of tax payer.

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Amount collected to be rational

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Time of payment as per the convenience of tax payer

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• Cost incurred on collection should be less than amount collected through

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taxation.

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Phillips Curve: It shows an inverse relationship between the rate of inflation and the

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rate of unemployment. eo
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Price Support: Govt. purchases commodities for storage and distribution to maintain
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a minimum price at a certain level.

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Organization and Method (O&M): Examination of office work to make them more
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efficient.
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Ergonomics: Improvement of the man machine interface for higher efficiency.

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Opportunity cost: Opportunity cost of a given products is the quantity of alternative

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product which could be produced with the same quantities of factors of production.
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Liquidity: It means the ease with which an asset can be exchanged for money value.
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Capital Formation: Investment in fixed assets.

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Gresham Law: This originally came with the idea that the people would hold the
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coins with higher metal value and only keep old ones in circulation.

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Letter of Credit: A letter from a bank to another bank authorizing payment in the
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process.
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Insolvency: A situation in which a person or organization is unable to pay its debt in

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time.

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Over trading: Trading with insufficient working capital.

Euro Dollar: US dollar or right to US dollar held by the people outside USA.

Grant in aid: Payment made by the govt. to local agencies for covering the cost of
certain developmental activities.
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Zero Net Aid: When loan received by a country equals repayment for the same year.

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 INDIAN ECONOMY FOR IAS BY Pratik Gupta (Vision IAS)

Convertibility: Currency which can be exchanged for another currency or gold. (Ref.
Class)

Crawling Peg: System of exchange value adjustment in which international value is NOTES…
changed marginally from time to time.

Redundance: Permanent laying-off surplus workers.

Real Cost: According to the Adam Smith, It refers to pains and sacrifices of labour.

Collectivism: National Interest is superior to individual interest.

Pump Priming: The injection of small amounts of govt. spending into a depressed
economy with the aim of boosting business confidence and encouraging large scale
private sector investment.

Disguised Unemployment: hidden employment is also called as disguised

unemployment.

NPA: It means non-performing assets. Generally it is used in the context of Banking

Assets from which bank is not getting returns.

CALL MONEY: Money loan or advances payable on demand or within specified

number of days amongst Stock Brokers, Bankers etc.

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Credit Squeeze: Increasing the interest rate limiting the supply of money.

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Dis-saving: It is the excess of consumption expenditure] over disposable income.

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Islamic Banking: It is banking or banking activity that is consistent with the principles

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of sharia and its practical application through the development of Islamic economics.

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Narrow Banking: It means that weak banks should confine their business to no risk
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assignments.
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Credit Rationing: It takes place when a bank discriminates amongst the borrowers.
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Bridge Loan: Loan by bank or individual for short period for attending shortage of
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small time. It is to tide over temporary gap.

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Financial Inclusion: Financial Inclusion is the delivery of banking services at

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affordable costs to large section of disadvantaged and low income groups.

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Green Shoots: Green shoots is a term used colloquially to indicate signs of economic
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recovery during an economic downturn.

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Sleeping Partner, Dormant Partner: A person who invests but does not take part in
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running of the business.

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Venture Capital: A capital invested in an activity with high degree risk but with
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perceived long term growth potential, also known as risk capital. Though, it typically
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entails high risk for the investor but probably has the potential for above-average
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returns.
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Mutual Fund: A mutual fund is a company that brings together money from many
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people and invests it in stock market, bonds or other assets. The combined holdings
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of stocks, bonds or other assets the fund owns are known as its portfolio.
Hedge Fund: A fund which is usually managed by wealthy individuals to make
returns out of it by way of using strategies like short selling, swaps, arbitrage, etc.

They are generally exempt from various rules and regulations to manage other funds
like mutual fund.
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 INDIAN ECONOMY FOR IAS BY Pratik Gupta (Vision IAS)

Indifference Curve: It is a curve showing the locus of combinations of the amounts

of two goods, such that the individual is indifferent between any combinations of
that curve yield same level of satisfaction.
REVERSE MORTGAGE: A reverse mortgage provides income that people can tap into NOTES…
for their retirement. The advantage of a reverse mortgage is that the borrower's
credit is not relevant, and is often unchecked, because the borrower does not need
to make any payments. Because the home serves as collateral, it must be sold in
order to repay the mortgage when the borrower dies (in some cases, the heirs have
the option of repaying the mortgage without selling the home).
Capital Deepening: Capital deepening is a term used in economics to describe an
economy where capital per worker is increasing.
Capital widening: Capital widening is a term used to describe the situation where
capital stock is increasing at the same rate as the labour force, thus capital per
worker remains constant.

The economy will expand in terms of aggregate output, but productivity per worker

will remain constant.

Private Placement: Method of selling securities privately to a selective group of

investors.

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Right Issue: It is a method of raising further capital from existing share holders.

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Gilt-edged Securities: High-grade bonds that are issued by a government or firm.

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This type of security originally boasted gilded edges, thus the name. In the case of a

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firm, a gilt-edged security is a stock or bond issued by a company that has a strong

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record of consistent earnings and can be relied on to cover dividends and interest.

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Under-subscription: Taking of fewer shares by the investors then are offered for sale
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in a new issue (IPO).

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Initial Public Offering (IPO): A company’s first stock offering to the public.
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Buy-Back of shares: Companies buy back a certain % of its shares from its share
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holders.
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Subprime lending: It means making loans to people who may have difficulty

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maintaining the repayment schedule, sometimes reflecting setbacks such as

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unemployment, divorce, medical emergencies, etc.

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Crowding out: For example, the higher taxes required for government to fund social
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welfare programs leaves less discretionary income for individuals and businesses to
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make charitable donations. Further, when government funds certain activities there
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is little incentive for businesses and individuals to spend on those same things.
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Another example is increased government spending on Medicaid, which has been

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linked to decreased availability of private health insurance.

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