Macroeconomics key Terms UPSC



Macroeconomics key Terms:

Base year – the first year in index, in context of which other years are compared.


Bonus share   (Read rights share - below)

A company rather than giving dividend  may offer shareholders bonus shares. Suppose a share is valued at Rs. 100/share, if company gives a bonus in the ratio of 5:1, it means a shareholder gets 1 share for every 5 shares held or 20% returns, dividend is complicated paperwork which can be avoided this way.


Capital-output ratio: it refers to the number of units of capital required to produce an additional unit of output. In financial year 2022 it was 3.5:1 or simply 3.5. low capital output ratio is better that means capital required is less to produce an additional unit of output.


 Capital formation -  is the stock of capital goods that have been generated over accounting period that can help generating the higher output in economy. Machines, electricity, vehicles are capital assets.


Circular flow of income – represents the flow of money from consumers to producers to sellers of wage, capital and land during processes of purchase and sale.


CRAR: Capital to Risk-Weighted Assets Ratio (CRAR): The ratio of a bank’s capital to its risk.

Crowding out – is a situation when government increases spending, leading to high inflation & interest rates, thereby making it difficult for private or non government businesses to borrow from the market.


Credit deposit ratio – percent of total bank deposits loaned out. Bank has total 100 rupees as deposit & Rs. 80 has been loaned out C-R ratio is 80:100 or 4:5.


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

Depository - A bank holds your funds, and just like that, a depository holds your financial assets. A depository is a financial institute that does this and you have to pay certain dp charges to open an account with a depository participant linked to a main depository.


Depository Participant - depository participant is a mediator between depository(CDSL and NSDL), and traders and investors.

Disposable income – or disposable personal income is the income left after paying direct tax.


Earning guidance - In share markets in developed countries, good transparency norms, mandate listed companies to put forward a future earning guidance to the market so that they can take an informed decision.


Economies of scale – when more of same item is produced systems, technology, distribution and raw material sourcing become efficient leading to low cost of production per unit.


 Equalization levy – is a direct tax charged or applicable to digital cross border payments to entities who are non-resident service providers & where total tax payments are above Rs. 1,00,000 in a financial year.


Elasticity of demand – refers to a change in demand for a service or commodity or goods in response to changes in any of the other variables that affects the concerned decisions.

Foreign institutional investors (FIIs) - Foreign institutional investors (FIIs) are those institutional investors(big companies such as investment banks, mutual funds, etc.) which invest in the financial assets belonging to a different country other than that where these organizations are registered as parent company.

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.


Giffen goods – In microeconomics it is normally understood that once the price of an article increases demand will fall. Contrary to the general convention giffen goods act differently, that means the Demand for Giffen goods rises when the price rises and falls when the price falls. Giffen goods are mostly non luxury items used by low income people. Veblem goods are similar to Giffen goods and exhibit similar market behavior but are luxury items.


GDP deflator – is the inverse of percentage increase in GDP compared to base year.


Hindu rate of growth – is a term coined by prof. raj Krishna to denote growth rate between 3-4% that was range in which India was stuck in since 1980. The term was used to explain india’s dismal growth.


Hot money – money that moves from one country to another country in search of quick profits, which may Be high interest rates volatile prices in a particular sector. Money moves from low growth areas to high growth areas.


Insider trading

When shares are traded by people with illegal inside knowledge of company affairs, which should otherwise be private, this trading is illegal and known as insider trading.


Intermediate goods – are those that serve as raw materials in final production of goods or commodity.


Liquidity trap – a situation when interest rates are very low but people rather than spending are saving more,  this happens during uncertain times like recession.


Law of diminishing returns – is a general economic idea that explains that more investment will increase production & supply of a particular good which will reduce production cost because of better technology & mass production & higher competition.

Macroeconomics key Terms:

Negative yield bond – is a bond type that pays less than what it costs to buy on maturity.


NDP: Net Domestic Product: NDP = GDP – Depreciation


NNP: Net National Product: NNP = GNP – Depreciation


Non-tax payments – refers to recurring payments or receipts of government  outside taxes, such as interest from loans or royalty payments.


Nominal GDP – only takes into account the prices as they exist at present or the current prices.


Off budgetary borrowings refers to debts raised by state run companies, organizations or agencies to fund government’s welfare expenditure, the problem with this expenditure is that it is not reflected in government accounts & fiscal prudency norms are compromised, i.e. fiscal deficit seems less than what actually is.

Example of off budgetary borrowings – FCI OR NABARD OR RIDF raising debt on its accounts.


Optimum growth-  it represents the best possible way factors of production are deployed in an economy to achieve the highest possible growth.


Paradox of thrift—also known as paradox of savings explains that more savings during recession are bad because they prohibit the economy from achieving full potential.

Participatory notes(PN’s) -- Participatory notes also known as P-notes, or PNs, are financial instruments required by investors or any other fund to invest in Indian securities without having to register with the Securities and Exchange Board of India (SEBI).

Participatory notes are risky

  • Since they allow non-registered investors to invest in the Indian market.
  • Due to the investor remaining anonymous.
  • Can be highly volatile.

Per capita income: GDP per person is called per capita income.


Personal income – is the total income a person from all his sources of income like wages, investments & rent.

Qualified foreign investor (QFI)– is a sub group of FII & is an individual, group or association resident in a foreign country which is allowed to invest in limited number of securities, taxes to be paid & compliances are less as compared to an FII.

Real GDP – is GDP adjusted to base year, thereby making it more real for purpose of comparison.


Rights share - A company might offer shares at a lower price than the existing value in market to raise capital known as rights share in a certain ratio, referred to as rights share.


Round tripping – selling and re-buying the same asset to increase balance sheet and dupe analysts and investors about business prospects.


Savings – The money or assets saved by the earned over the course of the year.


Stagflation: A combination of stagnation and inflation, it refers to a period of low growth and high inflation. A classic example of stagflation is the 1970s. The World Bank has drawn comparisons between the current situation and the 1970s, citing the prolonged period of highly accommodative monetary policy in major advanced economies followed by persistent supply-side disturbances pushing inflation higher.

Macroeconomics key Terms:

Terms of trade – is a general measure of a country’s export prices as compared to import prices, which is broadly rising of countr’s currency exchange rate.


Tobin tax – was a tax proposed by noble laureate james tobin, on money movements from one currency to another for quick profits by creating volatile fluctuations in foreign exchange market.


Transfer income/payments – money received by way of subsidy, cass transfer, charity,etc but not earned is treated as transfer in the hands of the receiver. Governments tax receipt can be considered transfer income.

If a country become more productive over time as compared to other countries, it will get more money for less exports, thereby improving the terms of trade.


Veblem goods are similar to Giffen goods and exhibit similar market behavior but are luxury items.

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