BASIC ECONOMIC TERMS MOST OFTEN IN NEWS

Relevance: Prelims: Economy

NATIONAL INCOME:  National income or Gross Domestic Product (GDP) refers to the money value of all final goods and services produced in an economy in an accounting year.

CAPITAL CONSUMPTION: The capital that is consumed by an economy or a firm in the production process. Also known as depreciation.

INCREMENTAL CAPITAL OUTPUT RATIO:  A measure of how much additional capital is needed to produce each extra unit of output. It reflects the efficiency of new investment.

CROWDING OUT EFFECT: A concept of public finance which means an increase in the government expenditure which has an effect of reducing the private sector expenditure.

ECONOMIES OF SCALE:  The long run reduction in average/unit cost as the scale of firm’s output increases.

FISCAL DRAG:  The negative effect of the progressive taxation that economies feel on their expansion – fall in the aggregate demand of the economy due to people moving from lower to higher tax brackets.

INVESTMENT:  Investment refers to the addition to the physical stock of capital. It is inversely related to the rate of interest in the economy. An increase/decrease in interest rate will result in decrease/increase in investment in the economy.

LIQUID ASSETS : The monetary assets that can be used directly as payments.

LIQUIDITY TRAP:  A situation when interest rate is so low that people prefer to hold money rather than invest it.

NET WORTH:  Net worth for a company is total assets minus total liabilities.

PREDATORY PRICING:  The pricing policy of a firm with the purpose of harming rivals or exploiting the consumer.

PURCHASING POWER PARITY:  It is an economic theory that compares different countries currency through a market basket of goods approach. According to this concept, two currencies are in equilibrium or at par when a market basket of goods (taking into account the exchange rate) is priced the same in both countries.

SEIGNORAGE:  It is the profit made by the RBI by issuing currency especially the difference between the face value of currency and their production costs.

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