Basic Concepts of Economy

GDP (Gross Domestic Product)

• Definition: Total value of all final goods and services produced within the domestic territory of a country in one financial year.
• Includes: Production by residents and foreigners within India.
• Types:
  • Nominal GDP: At current prices (includes inflation)​.
  • Real GDP: At constant prices (adjusted for inflation).
• Important for: Measuring economic growth.

🔹 GNP (Gross National Product)

• GDP + Net Factor Income from Abroad (NFIA).
• Reflects income earned by Indians abroad minus income earned by foreigners in India.
• Indicates national income generation capacity.

🔹 NNP (Net National Product)

• GNP – Depreciation.
• Depreciation = Loss of value of capital due to wear and tear.
• It reflects the actual addition to the economy’s productive capacity.

🔹 National Income

• Usually measured as NNP at Factor Cost (NNP FC).
• NNP FC = NNP at Market Price – Indirect Taxes + Subsidies
• Represents real income earned by citizens.

🔹 Inflation

• Definition: Sustained rise in general price levels.
• Measured in India using:
  • WPI (Wholesale Price Index): Tracks price movement at wholesale level. Published by Office of Economic Adviser, Ministry of Commerce.
  • CPI (Consumer Price Index): Measures prices of a basket of goods at the retail level. Published by NSO, Ministry of Statistics.
  • CPI Combined is the official measure for inflation targeting by RBI.
• Core Inflation: Excludes food and fuel items (which are volatile).

🔹 Deflation

• Fall in general price levels.
• Often occurs during a recession or demand slump.
• Opposite of inflation.

🔹 Stagflation

• Situation with high inflation + stagnant growth + high unemployment.
• Rare and very difficult to manage.

🔹 Reflation

• Deliberate inflation created by the government to revive demand during a slowdown (e.g. stimulus measures).

🔹 Fiscal Deficit

• Total expenditure – (Revenue receipts + Non-debt capital receipts).
• Indicates total borrowings needed by the government.
• High fiscal deficit may lead to inflation or crowding out of private investment.

🔹 Revenue Deficit

• Revenue Expenditure – Revenue Receipts.
• Shows the shortfall in day-to-day government income.
• Indicates poor fiscal health.

🔹 Budget Deficit

• Total Expenditure – Total Receipts (excluding borrowings).
• Not commonly used anymore; replaced by fiscal deficit as official measure.

🔹 Monetary Policy

• Controlled by RBI.
• Tools: CRR, SLR, Repo Rate, Reverse Repo, Bank Rate, Open Market Operations.
• Objective: Control inflation, ensure liquidity, and stabilize currency.

🔹 Fiscal Policy

• Managed by Government of India (Ministry of Finance).
• Tools: Taxation, Subsidies, Government Expenditure, Borrowing.
• Objective: Economic growth, social equity, employment generation.