1.

GDP
Ans: Gross Domestic Product (GDP) is a key indicator used to measure the economic performance of
a country. It represents the total value of all goods and services produced over a specific time period
within a country's borders. GDP is often used as a broad measure of a nation's economic health and
is a crucial tool for policymakers, economists, and investors to assess and compare the economic
performance of different countries.
There are three primary approaches to calculating GDP, and they should, in theory, provide the same
result. These approaches are:
1. Production (or Output) Approach: This calculates GDP by adding up the value of all goods and
services produced in the country during a specified period. It focuses on the value-added at each
stage of production.
2. Income Approach: This approach measures GDP by summing up all incomes earned by individuals
and businesses within a country. Incomes include wages, profits, rents, and taxes minus subsidies.
3. Expenditure Approach: GDP can also be calculated by summing up all expenditures made in the
economy. This includes consumption (C), investment (I), government spending (G), and net exports
(exports minus imports, denoted as NX).
The formula for GDP using the expenditure approach is:

GDP = C + I + G + (X - M)
where:
- (C) is consumption expenditure
- (I) is investment expenditure
- (G) is government spending
- (X) is exports of goods and services
- (M) is imports of goods and services

GDP can be expressed in three forms:

1. Nominal GDP: This measures the value of all goods and services produced in current prices
without adjusting for inflation.
2. Real GDP: Real GDP adjusts nominal GDP for changes in prices, providing a more accurate
representation of an economy's actual production by removing the impact of inflation or deflation.
3. Per Capita GDP: This is obtained by dividing the GDP of a country by its population. It gives an
average representation of economic output per person.
GDP is a useful tool, but it has its limitations. It doesn't account for factors like income distribution,
quality of life, or environmental sustainability. Additionally, it may not fully capture the informal
economy or the value of non-market activities. As a result, GDP is often used in conjunction with
other indicators to provide a more comprehensive understanding of an economy's health and well-
being.
 2. National Income:
Ans: National income is a measure of the total income earned by the residents of a country, including
both individuals and businesses, within a specific time period. It is a broader concept than Gross
Domestic Product (GDP) and includes income earned both domestically and abroad by a country's
residents. National income is an important economic indicator that helps assess the overall economic
health and well-being of a nation.
There are different measures of national income, and they are often used interchangeably. Some of
the key measures include:
1. Gross National Income (GNI): GNI is the total income earned by a country's residents, including
domestic production and any income earned from abroad. It is calculated by adding the country's
GDP to the net income earned from abroad (net income from abroad equals the income earned by
residents abroad minus the income earned by foreigners in the country).
[ GNI = GDP + Net Income from Abroad]
2. Net National Income (NNI): NNI is the total income earned by a country's residents after
deducting depreciation (the wear and tear on capital goods). It provides a measure of the net value
of the country's economic output.
[ NNI = GNI - Depreciation]
3. National Income at Factor Cost: This measure represents the total income earned by individuals
and businesses before deducting indirect taxes and adding subsidies. It focuses on the factor
incomes, including wages, profits, and rents.
National income is crucial for understanding the economic well-being of a country. It helps
policymakers, economists, and analysts assess the standard of living, income distribution, and
economic growth. Additionally, changes in national income over time can indicate the direction of an
economy and the effectiveness of economic policies.
It's worth noting that while national income is a valuable metric, it has limitations. Like GDP, it
doesn't capture factors such as income inequality, non-market activities, and environmental
sustainability. Therefore, it is often analyzed in conjunction with other indicators to provide a more
comprehensive view of a nation's economic performance.
 3. Annual Demand
Annual demand refers to the total quantity of a good or service that consumers are expected
to purchase within a specific time frame of one year. It is a key concept in economics and
business, influenced by factors such as price, consumer preferences, income levels,
availability of substitutes, and external economic conditions. Understanding annual demand
is crucial for businesses and policymakers to make informed decisions about production,
pricing, and resource allocation.

The demand curve is a graphical representation of the relationship between the price of a
good or service and the quantity demanded for a given period of time. In a typical
representation, the price appears on the left vertical axis while the quantity demanded is
on the horizontal axis.

A demand curve doesn't look the same for every product or service. When the price rises,
demand generally falls for almost any good, but the drop is much greater for some goods
than for others. This is a reflection of the price elasticity of demand , a measurement of the
change in consumption of a product in relation to a change in its price. The elasticity of
demand for products varies between and within product categories, depending on the
product’s substitutability.

Example, if the price of corn rises, consumers will have an incentive to buy
less corn and substitute other foods for it, so the total quantity of corn that
consumers demand will fall.

Demand in economics can be categorized into different types based on various factors. Here are some
common types of demand:
1. Price Elasticity of Demand:
 Elastic Demand: When the percentage change in quantity demanded is greater than the
percentage change in price. In other words, consumers are relatively responsive to price
changes.
 Inelastic Demand: When the percentage change in quantity demanded is less than the
percentage change in price. Here, consumers show less responsiveness to price changes.
2. Income Elasticity of Demand:
 Normal Goods: Goods for which demand increases as consumer incomes rise.
 Inferior Goods: Goods for which demand decreases as consumer incomes rise.
3. Cross Elasticity of Demand:
 Substitute Goods: When the demand for one good increases in response to a decrease in the
price of another.
 Complementary Goods: When the demand for one good increases in response to an
increase in the price of another.
4. Joint Demand:
  Joint or Complementary Demand: When two goods are demanded together, often because
they are used together. For example, cars and gasoline.
5. Composite Demand:
 Composite Demand: When a good is demanded for multiple purposes. For example, steel
can be demanded for use in construction and manufacturing.
6. Derived Demand:
 Derived Demand: When the demand for a factor of production (like labor or raw materials)
is derived from the demand for the final good it helps produce.
7. Individual and Market Demand:
 Individual Demand: The quantity of a good or service that an individual consumer is willing
to purchase at different prices.
 Market Demand: The sum of all individual demands for a particular good or service within a
market.
8. Short-Term and Long-Term Demand:
 Short-Term Demand: Refers to the quantity of a good or service that consumers are willing
to buy in the short run.
 Long-Term Demand: Refers to the quantity of a good or service that consumers are willing to
buy in the long run, allowing for adjustments in production and consumption patterns.
 4. Supply Demand
Annual supply refers to the total quantity of a good or service that producers are willing and able to
provide to the market over the course of a year. It represents the maximum amount of a product
that producers are prepared to sell at various prices during a specific time frame. Annual supply is
influenced by factors such as production costs, technological advancements, resource availability,
and government regulations.
Key points regarding annual supply include:
1. Quantity Available: It signifies the total quantity of a product that producers are ready to
bring to the market, considering factors like production capacity and efficiency.
2. Price Influence: The law of supply generally states that, all else being equal, as the price of a
good or service increases, the quantity supplied also increases. Conversely, as the price
decreases, the quantity supplied tends to decrease.
3. Production Factors: Factors such as the availability and cost of raw materials, labor, and
technology play a crucial role in determining the annual supply of a product.
4. Flexibility: The level of flexibility in production processes can impact the ability of producers
to adjust their output in response to changes in market conditions.
5. Market Equilibrium: The interaction between annual supply and annual demand determines
the equilibrium price and quantity in the market. When the quantity supplied matches the
quantity demanded, a market equilibrium is reached.
6. External Factors: Changes in external factors such as government policies, international
trade conditions, and natural disasters can influence the annual supply of goods and
services.

Understanding annual supply is essential for businesses, policymakers, and economists to make
informed decisions about production planning, pricing strategies, and resource allocation. It is a key
component in analyzing market dynamics and ensuring the efficient functioning of supply chains in
the economy. Supply demand: Qs=x+yP ( QS -Supply , x -Qty , P- price
The supply curve is a graphic representation of the correlation between the cost of a good
or service and the quantity supplied for a given period. In a typical illustration, the price will
appear on the left vertical axis, while the quantity supplied will appear on the horizontal
axis.

What Is the Law of Supply and Demand?

The law of supply and demand is an economics concept whereby the price
of a good will reach an equilibrium based on the amount of that good
available (the supply) and the amount that customers want (the demand)
 5. Money Multiplier
Money multiplier is a term in monetary economics that is a phenomenon of creating money in the
economy in the form of credit creation, which is based on the fractional reserve banking system.
Money multiplier is also known as the monetary multiplier. It is the maximum limit to which money
supply can be affected by bringing about changes in the amount of money deposits.The money
multiplier effect is seen in commercial banks as they accept deposits, and after keeping a certain
amount as a reserve, they distribute the money as loans for injecting liquidity in the economy. The
amount of money that should be kept by commercial banks in their reserve for withdrawal purposes
by the customers is referred to as the reserve ratio, required reserve ratio, or cash reserve ratio.
Mathematically, money multiplier formula can be represented as follows:
Money multiplier = 1/r

Where r = Required reserve ratio or cash reserve ratio. It means that if the reserve ratio is
higher, then the money multiplier will be lower and the banks need to keep more reserves. As
a result, they will not be able to lend more money to individuals and businesses. Similarly, a
lower reserve ratio results in a higher money multiplier that allows a lesser amount of money
to be kept as a reserve and more lending opportunities to the public. This completes the
article on the Money Multiplier Formula, which plays an important role in credit creation in
the economy.

The money multiplier effect is expressed in mathematical terms as-

Money Multiplier=

1r1�

where the required reserve ratio or the cash reserve ratio is represented
by r which is described as the minimum ratio that is required legally for
the commercial banks of the economy to keep the deposit with
themselves. This also applies to the central bank of India which is the RBI.

The deposit creation by a commercial bank

Money Multiplier- Example

Deposits Loans Cash Reserves (LRR=0.2)

Initial Round Rs. 100 Rs. 90 Rs. 10

Round 1 Rs. 90 Rs. 81 Rs. 9

Round 2 Rs. 81 Rs. 72.9 Rs. 8.1

Round 3 Rs. 72.9 Rs. 65.7 Rs. 7.2

Round 4 Rs. 65.7 Rs. 59.2 Rs. 6.5

Round 5 Rs. 59.2 Rs. 53.3 Rs. 5.9

Total Rs. 1000 Rs. 900 Rs. 100

Till the time the total deposits become equal to Rs. 1000, total loans lent
become 900, and the total cash reserve becomes Rs. 100, the rounds
following round 5 will be continued in the same manner.

The money multiplier is a concept which measures the amount of money

created by banks with the help of deposits after excluding the amount set
for reserves from the deposits. It tells the maximum number of times the
amount will be increased with respect to the given change in the deposits.
The money multiplier has an inverse relationship with the Legal Reserve
Ratio (LRR). LRR refers to the number of deposits that the banks are
required to keep with them as reserves all the time, to meet the
uncertainties, and also to maintain the trust of the public. There are two
types of reserves that the banks are required to maintain:

a. Cash reserves ratio (CRR), the reserves which the banks have to
maintain with the central bank.

b. Statutory Liquidity ratio (SLR), which shows the number of reserves

that the banks are required to maintain in the form of liquid assets
with themselves. The simple money multiplier formula works as a
great tool in the monetary economy for the Central Bank to control
the money creation because it works as a total money supply
formula that is used for calculating money supply
Money Multiplier Formula
Money multiplier = 1

Reserve Ratio

Money multiplier = 1 ÷ LRR

Where LRR = Legal Reserve Requirements

Money Multiplier Equation
Money Multiplier =
 Δ In Total Money SupplyΔ
Δ In the Monetary Base
It is also known as the credit multiplier formula. The higher the LRR leads
to a lower money multiplier because the commercial banks will have to
maintain the larger reserves due to which there will be less amount
available to lend to the public.