AFCAT Day 21: Economy- Definitions of imp terms

GDP: Gross Domestic Product (GDP) is the total value of goods and services produced in a country
in one year. GDP refers to the value of goods produced within the geographical territory of a
country irrespective of whether they are produced by citizens or foreigners.

GNP: Gross National Product (GNP) is the total value of the goods and services produced by a
country’s citizens or companies in one year irrespective of their geographic location.

NDP: Net Domestic Product: NDP = GDP – Depreciation

NNP: Net National Product: NNP = GNP – Depreciation

Depreciation: A decrease in the value of an asset over time due to wear and tear.

Monetary Policy: Process by which the central bank in a country controls the supply of money. In
India, the central bank is the Reserve Bank of India (RBI).

REPO rate: Re Purchase Option (REPO): Rate at which the RBI gives loans to other banks.

Reverse REPO rate: Rate at which the RBI borrows from other banks. It is lower than the REPO
rate.

CRR: Cash Reserve Ratio (CRR): The percentage of liquid cash every bank has to keep with the
RBI. It is a percentage of their deposits.

Net Demand and Time Liabilities (NDTL): It is the difference between the sum of demand and time
liabilities (deposits) of a bank (with the public or the other bank) and the deposits in the form of
assets held by the other banks.

SLR: Statutory Liquidity Ratio (SLR): The percentage of liquid cash reserves every bank has to
keep with themselves.

MSF: Marginal Standing Facility (MSF): The rate at which banks can borrow overnight funds from
RBI against the approved government securities. Here, the borrowing limit is 2% of the banks’ Net
Demand and Time Liabilities (NDTL).

Bank Rate: Higher rate (than the REPO rate) at which the RBI gives loans to other banks. A higher
bank rate would mean higher lending rates by banks. The RBI can raise the bank rate to check
liquidity. Here there is no 2% of NDTL limit.

CRAR: Capital to Risk-Weighted Assets Ratio (CRAR): The ratio of a bank’s capital to its risk.
Fiscal Policy: The policy of a government by which it adjusts the tax rates and spending levels to
influence the national economy.
Fiscal Policy: The policy of a government by which it adjusts the tax rates and spending levels to
influence the national economy.

Fiscal Deficit: It is the difference between the government’s total expenditure and its total
receipts (excluding borrowing). A fiscal deficit occurs when this expenditure exceeds the revenue
generated.

Balance of Payments (BOP): It is the difference in total value between payments into and out of a
country over a period.

Balance of Trade (BOT): It is the difference between a country’s imports and exports for a time
period. The BOT is a part of the BOP.

Capital: It is the sum of money invested in a business to generate a profit.

Carbon Tax: It is an environmental tax imposed on products that use carbon-based materials and
cause greenhouse pollution.

Angel investors are high-net-worth individuals that put their money into small and medium-sized
businesses or start-ups. Angel investors typically obtain ownership in the new company in
exchange for their support, which is common in the form of preferred stock.

Government Securities (G-Sec): It is a tradable instrument issued by the central government or state
governments.
◦ Short term G-secs (with original maturities of less than one year) are called Treasury Bills.
Long term G-secs (with original maturities of more than one year) or long term are called
Government Bonds or Dated Securities. Treasury Bills are not issued by State Governments
while Government Bonds or Dated securities are issues both by State and Central
Governments.

LTRO (Long Term REPO Operations) is a tool that lets banks borrow one to three-year funds from
the RBI at the repo rate, by providing government securities with similar or higher tenure as
collateral.

Marginal Cost of Fund based Lending Rate (MCLR): Marginal Cost of Funds based Lending Rate
(MCLR) is the minimum lending rate below which a bank is not permitted to lend.

Annual Financial Statement: It encompasses the receipt and expenditure of the Indian government.
The information on the Consolidated Fund of India, Contingency Fund of India and Public Accounts
is provided.
Annual Financial Statement: It encompasses the receipt and expenditure of the Indian government.
The information on the Consolidated Fund of India, Contingency Fund of India and Public Accounts
is provided.

• Revenue Receipt:
◦ The receipts received which cannot be recovered by the government
They do not have a direct impact on the assets and liabilities of the govt.
◦ It comprises income amassed by the Government through taxes and non-tax sources like
interest, dividends on investments.

• Revenue Expenditure:
◦ Expenditure incurred by the Union Government for purposes other than for the creation of
physical or financial assets. They also do not have an impact on the assets and liabilities of the
government.
◦ It includes those expenditures incurred for the usual functioning of the government
departments, grants given to state governments and interest payments on the debt of the Union
Government etc.

• Capital Receipt:
◦ Receipts which generate liability or decrease the financial assets of the government
◦ It includes borrowings from the Reserve Bank of India and commercial banks and other
financial institutions
◦ It also consists of loans received from foreign governments and international organization and
repayment of loans granted by the Union government

• Capital Expenditure:
◦ Spending incurred by the government which results in the formation of physical or financial
possessions of the Union government or decrease in financial liabilities of the Union Government.
◦ It contains expenditure on procuring land, equipment, infrastructure, expenditure in shares.
◦ It also includes mortgages by the Union government to Public Sector Undertakings, state and
union territories

Corporation Tax: Tax on profits of companies

Direct Tax: • Taxes which are imposed directly on individual and company
• It comprises income tax and corporation tax

Indirect Tax: • Taxes which are imposed on goods and services

• It comprises taxes like service tax, excise taxes, and customs duties
FDI: Foreign Direct Investment (FDI): It is an investment made by a company or an individual in one
country in business interests in another country.

Free Trade Agreement: It is an agreement between two or more countries that eliminates trade tariffs
between the countries and also tries to reduce non-trade barriers to trade between the countries.

Progressive Tax: A country’s tax rates are said to be progressive when the tax rates increase as the
taxable amounts increase.
Inflation: The rate at which the prices of goods and services rise in a country. Thus, it causes a fall in
the purchasing power of the currency.

Depression: It is a prolonged and severe downturn in the economic activity of a country. It is more
severe than a recession.

Open Market Operations is the simultaneous sale and purchase of government securities and treasury
bills by RBI.

Important Terms related to Inflation

1 Disinflation: Reduction in the rate of inflation

2 Deflation: Persistent decrease in the price level (negative inflation)

3 Reflation: Price level increases when the economy recovers from recession based on value of
inflation

4 Creeping inflation – If the rate of inflation is low (upto 3%)

5 Walking/Trotting inflation – Rate of inflation is moderate (3-7%)

6 Running/Galloping inflation – Rate of inflation is high (>10%)

7 Runaway/Hyper Inflation – Rate of inflation is extreme

8 Stagflation: Inflation + Recession (Unemployment)

9 Misery index: Rate of inflation + Rate of unemployment

10 Inflationary gap: Aggregate demand > Aggregate supply (at full employment level)

11 Deflationary gap: Aggregate supply > Aggregate demand (at full employment level)

12 Suppressed / Repressed inflation: Aggregate demand > Aggregate supply. Here govt will not
allow rising of prices.

13 Open inflation: A situation where price level rises without any price control measures by the
government.

14 Core inflation: Based on those items whose prices are non-volatile.

15 Headline inflation: All commodities are covered in this.

16 Structural inflation: Due to structural problems like infrastructural bottlenecks.