Economy Key Terminologies — Economic Growth
1. Previous Year Questions
Context: Understanding key economic terminologies is crucial for UPSC preparation. The following terms have been asked in previous years' examinations.
| Year | Term | Explanation |
|---|---|---|
| 2018 | Per Capita Real GNP | Per capita real Gross National Product (GNP) is a measure of a country's economic output that accounts for inflation and is adjusted for population size. It is calculated by dividing the total real GNP of a country by its population. |
| 2013 | National Income | The total income earned by a country's residents in a given period, including wages, salaries, profits, and other sources of income. National income is an important indicator of a country's economic performance. |
| 2011 | GDP Growth Rate | Gross Domestic Product (GDP) growth rate is a measure of the change in a country's economic output over a specific period of time, usually a year or a quarter. It is calculated by comparing the current period's GDP with the previous period's GDP and expressing the change as a percentage. |
| 2011 | Base Effect | The distortion in economic data is caused by a significant change in the underlying conditions or data used as a reference point. Base effects can occur in data related to inflation, economic growth, or other economic indicators. |
2. Important Terms in News
Context: These economic terms frequently appear in news and policy discussions, making them essential for UPSC aspirants to understand.
GDP and Related Concepts
- GDP (Gross Domestic Product): It is defined as the total value of all final goods and services produced in an economy in a given period of time, usually a year. The Base Year of the GDP Series was revised from 2004-05 to 2011-12.
- Nominal GDP: Nominal GDP is GDP given in current prices, without adjustment for inflation.
- Real GDP: Real GDP is GDP given in constant prices and refers to the volume level of GDP.
- Potential GDP: Potential gross domestic product (GDP) is the level of output that an economy could produce at a constant inflation rate.
- GDP Deflator: It measures the average change of prices of all goods and services in the economy which is an indication of overall inflation across all goods and services in the economy compared to the base year.
GDP Calculation Methods
- Production Approach: It sums the "value-added" at each stage of production.
- Income Approach: It measures the total income earned by the factors of production.
- Expenditure Approach: It measures the total expenditure incurred by all entities on goods and services.
NDP, GNP, GVA and Related Concepts
- NDP (Net Domestic Product): Net Domestic Product is defined as the difference in Gross Domestic Product and Depreciation. NDP = GDP - Depreciation
- GNP (Gross National Product): Gross national product (GNP) includes GDP, income earned by residents from overseas investments, minus income earned by foreign residents.
- GVA (Gross Value Added): According to the RBI, the Gross value added (GVA) of a sector is defined as the value of output minus the value of its intermediary inputs. Thus it is the value addition done to a product resulting in the production of the final product.
- NNP (Net National Product): Net National Product is defined as the difference in Gross National Product and Depreciation. NNP = GNP - Depreciation
- Gross National Income: OECD defines it as (GDP + Net factor income from abroad + Net taxes and subsidies receivable from abroad). GNP = GDP + Factor income from abroad - Factor income sent abroad = GDP + Net Factor Income from abroad
Capital and Investment Terms
- GFCF (Gross Fixed Capital Formation): As per RBI, Gross Fixed Capital Formation refers to the aggregate of gross additions to fixed assets (i.e. fixed capital formation) plus changes in stocks during the counting period. Fixed asset refers to the construction, machinery, and equipment etc.
- Capital Output Ratio: It refers to the amount of capital needed to produce one unit of output.
- ICOR (Incremental Capital Output Ratio): Incremental Capital Output Ratio refers to the marginal investment capital amount necessary for an entity to generate the next unit of production.
Per Capita Income
- Per Capita Income: Per capita income = (National Income / Population)
Recovery Patterns
- V-shaped Recovery: It is characterised by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
- K-shaped Recovery: It occurs when, following a recession, different parts of the economy recover at different rates, times, or magnitudes.
Other Important Terms
- Middle Income Trap: A middle-income trap is a situation in which a country attains a certain average income and gets stuck at that level, failing to graduate to a high income group.
- Anarcho-Capitalism: Anarcho-capitalism, political philosophy and political-economic theory that advocates the voluntary exchange of goods and services in a society broadly regulated by the market rather than by the state. The term anarcho-capitalism was coined by Murray Rothbard, a leading figure in the American libertarian movement from the 1950s. Anarcho-capitalists assert that private companies in a free market can efficiently provide policing and legal services.
Key Formulas to Remember:
- NDP = GDP - Depreciation
- NNP = GNP - Depreciation
- GNP = GDP + Net Factor Income from abroad
- Per Capita Income = National Income / Population
- GDP Deflator = (Nominal GDP / Real GDP) × 100
- NDP = GDP - Depreciation
- NNP = GNP - Depreciation
- GNP = GDP + Net Factor Income from abroad
- Per Capita Income = National Income / Population
- GDP Deflator = (Nominal GDP / Real GDP) × 100
3. Summary: Key Economic Terminologies
| Term | Definition/Formula |
|---|---|
| GDP | Total value of all final goods and services produced in an economy in a year. |
| Nominal GDP | GDP at current prices without inflation adjustment. |
| Real GDP | GDP at constant prices (inflation-adjusted). |
| NDP | GDP - Depreciation |
| GNP | GDP + Net Factor Income from abroad |
| NNP | GNP - Depreciation |
| GVA | Value of output - Value of intermediary inputs |
| GDP Deflator | (Nominal GDP / Real GDP) × 100 |
| Per Capita Income | National Income / Population |
| GFCF | Gross additions to fixed assets + changes in stocks |
| ICOR | Incremental Capital Output Ratio (marginal investment for next unit of production) |
Key Takeaways for UPSC
- GDP Base Year: 2011-12 (revised from 2004-05)
- GDP Calculation Methods: Production, Income, Expenditure
- NDP = GDP - Depreciation
- GNP = GDP + Net Factor Income from abroad
- NNP = GNP - Depreciation
- Per Capita Income = National Income / Population
- V-shaped Recovery: Quick recovery after sharp decline
- K-shaped Recovery: Uneven recovery across sectors
- Middle Income Trap: Stuck at middle income level
High-Yield Interactive UPSC Quiz (Economy Key Terminologies)
Q1. Gross Domestic Product (GDP) is defined as:
Correct Answer: B. GDP is defined as the total value of all final goods and services produced in an economy in a given period of time, usually a year.
Q2. The current base year for GDP calculation in India is:
Correct Answer: B. The Base Year of the GDP Series was revised from 2004-05 to 2011-12.
Q3. The formula for Net Domestic Product (NDP) is:
Correct Answer: B. Net Domestic Product is defined as GDP minus Depreciation (NDP = GDP - Depreciation).
Q4. Gross National Product (GNP) is:
Correct Answer: B. GNP = GDP + Net Factor Income from abroad (Income earned by residents from overseas investments minus income earned by foreign residents).
Q5. The GDP Deflator is calculated as:
Correct Answer: B. GDP Deflator = (Nominal GDP / Real GDP) × 100. It measures overall inflation across all goods and services compared to the base year.
Q6. Per Capita Income is calculated as:
Correct Answer: B. Per Capita Income = National Income / Population.
Q7. A V-shaped recovery is characterized by:
Correct Answer: B. A V-shaped recovery is characterised by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
Q8. The term 'Middle Income Trap' refers to:
Correct Answer: B. A middle-income trap is a situation in which a country attains a certain average income and gets stuck at that level, failing to graduate to a high income group.
Q9. Who coined the term 'Anarcho-Capitalism'?
Correct Answer: C. The term anarcho-capitalism was coined by Murray Rothbard, a leading figure in the American libertarian movement from the 1950s.
Q10. The formula for Net National Product (NNP) is:
Correct Answer: B. Net National Product is defined as GNP minus Depreciation (NNP = GNP - Depreciation).