A note on Economic Terms

A note on Economic Terms

Gross Domestic Product and Gross National Product : - Measure of level of production of a country. Actives resulting in the production of marketable goods and services are included in the figure. Thus, household activity is not a part of GDP. There are, however exceptions to this rule. Smuggling is excluded whereas self-consumption by farmers of produce is included.

GNP = GDP + Net factor income (Y) from abroad.

Net factor income = Factor income (Y) from abroad – Factor income (Y) paid to other countries.

Factor – Any means which helps in production, e.g. labour and capital. So Y of all Indians in the Gulf remitted will be a part of GNP, but not of GDP.

NDP = GDP – Depreciation
NNP = GNP – Depreciation (N stands for net)

Per Capita Income: NNP/Population, i.e. average income per hand in the country per year.

Taxes: Taxes are either paid directly by an individual/company (direct taxes), e.g. income tax or the brunt is born by an intermediary and finally passed on indirectly (indirect taxes), e.g. sales tax.

Excise Tax: Tax levied on production. Tax is paid on the total value of the output.

Value Added Tax(VAT): Means taxing goods and commodities produced only on the value added to that product in that stage of production, e.g. while producing bread, flour and yeast are ingredients which have already been taxed. So, the tax is on the value of the output – the value on the input.

Expenditure Receipts
1. Revenue Expenditure
• Salaries,
• Interest,
• Maintenance
• Capital Expenditure
• Creation of infrastructure.
• Loan repayment


Revenue Receipts
• Taxes (Direct/Indirect)
• Income
• Dividend
• Interest
• Capital Receipts
• Borrowings
Non – debt receipts
• Sales of shares
• Aid/Grand


Modified VAT (MODVAT): This modified – form of VAT allows the manufactures to deduct from the amount of taxes to be paid, the amount of taxes paid during the purchase of the goods.

Minimum Alternate Tax (MAT): The tax to be paid by the corporate sector on book value of profits @ 10.5%

The Budget: Plan for revenues and expenditures within a financial year. Vote on account happens when the govt. is unable to pass a budget.
Plan expenditure is expenditure on five – year plans. Other expenditure falls under non- plan expenditure.

Deficit and Types of Deficit: Excess of expenditure over the revenue in termed as deficit.

Revenue Deficit: The excess of expenditure: (i) over the revenue receipts, (ii) it shows the deficit of the government on the current account.

Fiscal Deficit: Total expenditure (1 + 3) over the revenue receipts (2) and Non – debt creating capital receipts (5). It represents the total borrowing requirement of the Central government.

Budgetary Deficit: Total excess expenditure (1 + 3) over total receipts (2 + 4+ 5) including revenue receipts capital receipts and all borrowings.

Monetised Deficit: The part of fiscal deficit financed by Reserve Bank of India by printing money.

Primary Fiscal Deficit: The fiscal deficit net of interest payments. It represents the non – interest defict and the current fiscal efforts of the government.

Cash reserve ratio (CRR): Minimum percentage of total deposits with banks to be maintained with RBI in form of cash.

Statutory Liquidity ratio (SLR): Percentage of total funds to be retained by banks in govt. approved securities.

Inflation: Rate of increase in the price level of an economy in a financial year. Measured with the help of Wholesale Price Index (WPI) or Consumer Price Index (CPI).

Balance of Trade:- Balance between total imports and exports of goods.
Balance of Payments (BOP): It is the net account of all transactions by a country with the rest of the world in one financial year. It is divided into current A/C and Capital A/C.

Current A/C consists of all transactions pertaining to goods (trade A?C) and Services *invisible A/C).

Capital A/C consists of all financial transactions. These are invariably of a longer period, e.g. foreign investment, NRI deposits, external assistance, etc.