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Economy Basics

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Economy Basics

shape Introduction

General Awareness is an important section of most of the competitive exams for employment in the government sector in India including, but not limited to, Banking, SSC, UPSC, Railways Insurance, etc. The article Economy Basics presents the key points related to Economy with detailed explanation.

shape Economy

Economy – Economy Basics:

What is meant by Economy:

An economy is an area of the production, distribution, or trade, and consumption of goods and services by different agents in a given geographical location.

What is the purpose of Economy:

The purpose of the economy should be to distribute the earth’s resources such as food, water, land, minerals etc among human beings in a sustainable manner.

Economy Basics – National Income :

The total Value of all final goods and services produced in a country in a particular period (Generally one year).

Economy Basics – Measures of National Income:

  • GDP (Gross Domestic Product)

  • GNP (Gross National Product)

  • NNP (Net National Product)

  • PI (Personal Income)

  • DPI (Disposable Personal Income)

Economy Basics – GDP (Gross Domestic Product):

GDP is the total value of all final goods and services produced within the geographical boundary of the country during a particular period (Generally one year).

GDP Formula:

GDP = C + G + I + NX

= Consumption + Government Expenditures + Investment + Exports – Imports


Suppose there are 100 crore Indians who earn RS. 100 crores in Indian territory and 1 crore foreigners who earn RS. 10 crores in Indian territory and send it to their respective countries. At the same time, 10 crores Indians living in foreign countries earn RS. 40 crores and send it to India.

Here, GDP is (100 + 10 = 110 crores).

What is meant by GDP Growth Rate:

The percentage increase in GDP from quarter to quarter.

GNP (Gross National Product):

The total value of the final goods and services produced by Indians in India as well as abroad during a particular period.

GNP = GDP + Net income inflow from abroad – Net income outflow to foreign countries

GNP includes

The value of goods produced by resident citizens of a country

The value of goods produced by Non – resident citizens of a country

Net National Product (NNP):

It is calculated by deducting depreciation from Gross National Product (GNP)

NNP = GNP – Depreciation

Factor Cost – Cost incurred to produce goods and service.

Market price:

For calculating market price we add Indirect taxes and deduct subsidies given by the government in Factor cost.

Market Price = Factor cost + Indirect Taxes – Subsidy

NNP at factor cost = NNP at market price – Indirect taxes + subsidy

Personal income:

  • It is the sum of all the income received by the people of the country in one year.

  • Personal Income = National Income + Transfer payments – Undisclosed profits of corporate + Payment for social security provisions

  • Transfer Payments are the payments that are not against any productive work. (Example- Old Age Pension, Unemployment compensation etc.)

  • Social Security Provisions– Payment made by employees towards PF, Insurance etc

Disposable Personal Income:

  • Income available to individuals after deducting direct taxes.

  • Disposable Personal Income = Personal Income – Direct Taxes

Real Income:

  • Calculating National Income on the basis of base year price, this is called the real income.

Economy Basics – Nominal Income:

  • Calculating National Income on the basis of particular year (current year), this income is called
    the Nominal income.

GDP Deator:

  • Used to calculate overall price rise

Estimation of National Income in India:

  • In 1868, Dadabhai Naoroji wrote a book ‘Poverty and Un British Rule in India’.

  • It was the first attempt at the calculation of National Income.

  • The first person to estimate National Income scientifically was Dr. V. K. R. V. Rao and he estimated national income for the period 1925-29.

  • The National Income committee was formed after Independence in 1949 under the chairmanship of P.C. Mahalanobis.