ClearIAS

Basic Concepts of Economics In

Simple Language
LAST UPDATED ON MARCH 29, 2020 BY ALEX ANDREWS GEORGE
(HTTPS://WWW.CLEARIAS.COM/AUTHOR/ALEX-ANDREWS-GEORGE/)

Economics is a tough nut to crack for many – GDP, GNP, NDP, NNP, Repo,
Reverse Repo, SLR, CLR, CRAR – there are many concepts to be understood.
But if the concepts are properly understood economics is fun
(https://www.clearias.com/economics/).
ClearIAS.com is trying to provide an overview of the basic concepts of
Economics in a simple language for easy understanding.

The main areas covered are – national income monetary policy fiscal policy
The main areas covered are – national income, monetary policy, fiscal policy,
and balance of payments(BoP).

National Income
Under the broad topic of national income, you may hear terms like GDP, GNP,
NNP etc.

GDP: Gross Domestic Product (GDP) is the total money value of final goods
and services produced in the economic territories of a country in a given year.
The total value of goods and services produced in India for 2014-15 is
projected to be around 100 lakh crore Indian rupees or around 2 trillion US
dollars at current market prices. This is the value of Indian GDP when
expressed at current market price.

GDP stands for the total value of goods and services produced inside the
territory of India irrespective of whom produced it – whether by Indians or
foreigners.

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GNP: Gross National Product (GNP) is the total value of goods and services
produced by the people of a country in a given year. It is not territory specific.
If we consider the GNP of India it can be seen that GNP is lesser than GDP
If we consider the GNP of India, it can be seen that GNP is lesser than GDP.

Also, see Indian Economy: Issues Related to Planning

(https://www.clearias.com/indian-economy-issues-related-to-planning/).

Monetary Policy
Monetary Policy refers to the policy of the central bank. In India Reserve Bank
of India (RBI) is responsible for monetary policy. Repo, Reverse Repo, CRR,
SLR etc are part of monetary policy.

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REPO rate: REPO means Re Purchase Option – the rate by which RBI gives
loans to other banks. Bank re-purchase the securities deposited with RBI at
the REPO rate. The present rate is 4.4%.

Reverse REPO rate: RBI at times borrows from banks at a rate lower than
REPO rate, and that rate is known as Reverse REPO rate (now 4%). REPO and
Reverse Repo are two major options under LAF (Liquidity Adjustment
Facility).

Also see : REPO and CRR Rate Cuts – What Should You Understand?
(https://www.clearias.com/repo-and-crr-rate-cuts-what-should-you-
understand/)

Marginal Standing Facility (MSF): MSF is the rate at which scheduled

commercial banks could borrow money overnight from RBI against approved
securities. Borrowing limit of banks under the marginal standing facility is 2
per cent of their respective Net Demand and Time Liabilities (NDTL).

The current MSF Rate is 5.4%.

Bank Rate: Bank rate is a higher rate, (1% higher than REPO rate) charged by
RBI when it gives loans to commercial banks. Present bank rate is 5.4 %.
Bank rate is different from MSF in the nature that Bank rate is long term,
applies for all commercial banks and there is no limitation like 2 per cent of
their respective Net Demand and Time Liabilities (NDTL).

CRR: CRR corresponds to Cash Reserve Ratio. It corresponds to the

percentage of liquid reserves each bank have to keep as cash reserve
with RBI (in their current accounts) corresponding to the deposits they have.
Banks will not get any interest for these deposits Present CRR is 3%
Banks will not get any interest for these deposits. Present CRR is 3%.

SLR: SLR (Statutory Liquidity Ratio) corresponds to the percentage of liquid

reserves each bank have to keep as cash reserve with themselves
corresponding to the deposits they have. Banks have to mandatory keep
reserves corresponding to SLR locked with themselves in the form of gold or
government securities. Present SLR is 18.5 %. The main difference between
CRR and SLR is that banks need to keep CRR with RBI, but SLR with
themselves, but locked.

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CRAR: Capital to Risk Weighted Assets Ratio is arrived at by dividing the

capital of the bank with aggregated risk weighted assets. The higher the
CRAR of a bank the better capitalized it is.

Fiscal Policy
Fiscal policy refers to the policy actions of the Government. Budget, tax,
subsidies, expenditure etc. form part of the fiscal policy. You might need to
understand various deficits like Fiscal Deficit and Primary Deficit as part of
Fiscal Policy.

Fiscal Deficit (FD):  The fiscal deficit (https://www.clearias.com/fiscal-deficit-

current-account-deficit/) is the difference between the government’s total
expenditure and its total receipts (excluding borrowing). In layman’s term, FD
corresponds to borrowings and other liabilities
corresponds to borrowings and other liabilities.

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Balance of Payments
Current Account Deficit (CAD): Current Account is the sum of the balance of
trade (exports minus imports of goods and services), net factor
income (such as interest and dividends) and net transfer payments (such as
foreign aid). Current account deficit in simple terms is dollars flowing in
minus dollars flowing out.

Also see :  Fiscal Deficit and Current Account Deficit

(https://www.clearias.com/fiscal-deficit-current-account-deficit/).

Capital Account Deficit: Capital account Deficit occurs when payments made

by a country for purchasing foreign assets exceed payments received by that
country for selling domestic assets. (For example, if Indians are buying a lot

of properties in the US, but if Americans are not buying any properties or
buildings in India, India will have a Capital Account Deficit.)

A deficit in the capital account means money is flowing out the country but it
A deficit in the capital account means money is flowing out the country, but it
also suggests the nation is increasing its claims on foreign assets. In other
words at times of Capital Account Deficit, foreign investment in domestic
assets is less and investment by the domestic economy in foreign assets is
more. If you need to know more about BoP, refer our notes on Balance of
Payments (https://www.clearias.com/balance-of-payments/).

Tip: For more free notes on economics

(https://www.clearias.com/category/economics-notes/), browse our
economics archive.

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