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Important Economic Terms

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Important Economic Terms

shape Introduction

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. General Awareness(General Knowledge) 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 Important Economic Terms presents the key points related to Economy with detailed explanation.

shape Economy

Economy – Important Economic Terms:

Balanced budget:

A budget is said to be a balanced budget when current income is same as current expenditure.

The balance of Trade:

Refers to the relationship between the values of the country’s imports and its export, i.e., the visible balance. These items only form part of the balance of payments which are

  • invisible items

  • movements of capital.

Budget Deficit:

When the expenditure of the Govt. exceeds the revenue, the balance between the two is the budget deficit.

Budget Deficit: When the expenditure of the Govt. exceeds the revenue, the balance between the two is the budget deficit.

Call Money: Is a loan that is made for a very short period of a few days only or for a week. It sanctions with a low rate of interest. In case of a stock exchange, the duration length of the call money may be for a fortnight.

Cash Reserve Ratio:

Refers to the ratio which banks have to maintain with the RBI as the certain percentage of their holdings of cash and their time liabilities.


Decline in the general price level of goods and services leading to a rise in the value (purchasing power). A method of statistical conversion of a series of data to compensate for the general rise in prices.


Official reduction in the foreign value of domestic currency. It is done to encourage the country’s export and discourage imports.

Direct Tax:

Tax that cannot be shifted. The burden of the direct tax is borne by the person on whom it is initially fixed. Examples: Personal income tax, Social Security tax paid by employees.


The degree of responsiveness of quantity demanded or supplied to a change in price.

Excise Tax:

Tax imposed on the manufacture, sale or the consumption of different commodities, such as taxes on textiles, fabric, cloth, liquor etc.

Fiscal policy:

Government’s expenditure and tax policy, an important means of moderating the upswings and downswings of the business cycle.

Foreign Exchange:

Claims on a country by another, held in the form of currency of that country. Foreign ‘exchange system enables one currency to be exchanged for another thus facilitation trade between countries.

Foreign Exchange Rate:
Prices of the domestic currency in terms of foreign currencies.

Indirect taxes:

Taxes levied on goods purchased by the consumer (and exported by the producer) for which the tax payer’s liabilities varies in proportion to the number of particular goods purchased or sold.


A sustained and appreciable increase in the price level over a considerable period.


The principle of non-intervention of government in economic affairs.

National Income (at factor cost):
Total of all incomes earned or imputed to factors of manufacturing, used in economic literature to represent the output or income of an economy in a simple fashion.

Per Capita Income:

Total GNP of a country divided by the total populace. Per capita income is often used as an economic indicator of the levels of living and development. If however, can be a biased index because it takes no account of the income distribution.

Statutory Liquidity Ratio:

The SLR is the ratio of cash in hands, exclusive of cash balance maintained by ranks to meet required CRR, but no excess reserves.

Tariff (ad valorem):

A fixed percentage tax on the value of an imported product, the tax levied at the point of entry into the importing country.

Tobin tax:

Named after James Tobin, the Nobel prize winner for economics in 1981, a global tax on capital transfers, which could raise possibly $250 billion from financial markets worldwide. And this huge sum could be used to support the developing economies of the third world. The revenue from the Tobin tax can also be used to write off the third world countries debts.

Value Added Tax (VAT):

This form of tax has been in operation in some countries. It brings a value-added tax, a tax levied on the values that are added to goods and services turned out by the producers during stages of production and distribution.

Zero Based Budgeting:

The practice of justifying the utility in cost-benefit terms of each government expenditure on projects. The ZBB technique involves a serious review of every scheme before a budgetary provision is made in its favor. This form of financial planning is with an objective to ensure that every rupee spent is result oriented. If ZBB is properly implemented it could help to reverse the trend of large deficits on the revenue account of the Union Government.

shape Quiz

1. Balance of Trade is the difference between ?

    A. Country’s Income and Expense
    B. Country’s Exports and Imports
    C. Country’s Tax Revenue and Expense
    D. Country’s capital inflow and outflow

Answer: Option B

Explanation: The name ‘Hindustan’ combines Sindhu and Hindu and thus refers to the Land of Hindus. The Aryan worshippers referred to the river India as the Sindhu. The Persian invaders converted it into Hindu.

  • According to the Shastras, Bharatavarsha and Jambudwipa are two of the earliest names by which our country was known.

  • It is also called Aryavart.

2. Which of the following is included in balance of trade ?

    A. Goods
    B. Services
    C. Transaction of Payment
    D. All of the above

Answer: Option D

3. Which of the following deficits is not mentioned in the budget statement ?

    A. Primary Deficit
    B. Revenue Deficit
    C. Budeget Deficit
    D. Secondary Deficit

Answer: Option D

4. In the Union Budget, what does the term ‘primary deficit’ mean ?

    A. Revenue DEficit – Interest Payment
    B. Fiscal Deficit – Interest Payment
    C. Revenue Expenditure – Revenue Receipts
    D. Total Expenditure – Total Borrowing

Answer: Option B

5. Which of the following deficits is not mentioned in the budget statement ?

    A. Primary deficit
    B. Revenue deficit
    C. Budget deficit
    D. Secondary deficit

Answer: Option A

6. Increase in cash reserve ratio leads to ?

    A. increase in bank credit
    B. decrease in bank credit
    C. constant bank credit
    D. excess bank bank credit

Answer: Option B

7. The type of inflation which does not consider the inflation in food and fuel is known as ?

    A. Headline Inflation
    B. Core Inflation
    C. ConsumerInflation
    D. Real Inflation

Answer: Option B

8. Per capita income ?

    A. Gross National Product/Net National Product
    B. Total Population/National Income
    C. Net National Product/Total Population
    D. Gross National Income/Total Popullation

Answer: Option D

9. Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are deposited respectively in which of the following forms ?

    A. Liquidity & Cash
    B. Cash & Liquidity
    C. Assets& Cash
    D. Assets & Liquidity

Answer: Option B

10. “Choose the correct division of the Budget. ?

    A. Revenue Budget
    B. Capital Budget
    C. Expenditure Budget
    D. Only A and B

Answer: Option D