PTS 2023 -24 REVISION

NATIONAL INCOME
GDP
• REAL GDP | NOMINAL GDP

• CONSTANT PRICE | CURRENT PRICE

• 2011 -12

• NSO

• GDP calculated @ Constant Market Price

NOMINAL GDP
GNP
• Gross National Product (GNP) is the total
value of all final goods and services
produced by a country’s citizens in a given
financial year, irrespective of their
location.
• GNP = GDP + NFIA

• NFIA - Net Factor Income from Abroad

• NFIA = Factor income earned abroad –

Factor income paid abroad
GNP > GDP

GNP < GDP

GNP = GDP
 NDP vs. NNP

NDP = GDP – Depreciation

NNP = GNP - Depreciation

MARKET PRICE VS FACTOR COST
• Factor Cost = Market Price – Indirect Taxes
+ Subsidies

• Market Price = Factor Cost + Indirect taxes

– Subsidies
• GDP at Factor Cost = GDP at Market Price –
Indirect Taxes + Subsidies

• GDP at Market Price = GDP at Factor Cost +

Indirect taxes – Subsidies

• India - GDP @ Constant Market Price

 GROSS VALUE ADDED
• GVA = Value of output - value of
intermediate consumption.

• Measured at Basic Prices.

• GVA at basic prices = GVA at factor costs +
Production taxes – Production Subsidies

• GDP at Market Prices = ∑ GVA at basic

prices + product taxes – product subsidies.
 GDP VS GVA
• GVA:
– National income from the supply / Producer side
– Sector output
• GDP:
– National income from the Demand / Consumer side
– Total output
• Both measures need not match because of the
difference in treatment of net taxes.
 Who measures?

• NSO provides both quarterly and annual

estimates of output measured by the gross
value added by economic activity.
SECTORAL CLASSIFICATION – 8 BROAD
CATEGORIES
 METHODS

PRODUCT INCOME

EXPENDITURE
 PRODUCT METHOD

• GDP = ∑GVA
 EXPENDITURE METHOD

• GDP by expenditure method at market

prices = C+ I + G + (X – M)
 INCOME METHOD

• GDP = Wages for Labour + Rent for Land +

Interest for Capital + Profit for Entrepreneur.
 DIFFICULTIES IN MEASURING NI
• Double counting
• Non – Monetary exchanges
• Change in prices
• Non-reliable data
• Goods kept for self consumption
• Black money
• Transfer Payments
• Illegal activities
• Environmental Costs
GREEN GDP (OR) GGDP
• It is an index of economic growth
with the environmental
consequences of that growth
factored into a country's
conventional GDP.

• Green GDP monetizes the loss of

biodiversity, and accounts for costs
caused by climate change.

• Green GDP = GDP – the value of

environmental degradation
GROSS CAPITAL FORMATION (GCF / GFCF) / GROSS
DOMESTIC INVESTMENT

• It refers to addition of capital goods

such as equipment, tools, transportation
assets and electricity.

• Countries need capital goods to

replace the older ones that are used to
produce goods and services.

• Generally, the higher the capital

formation of an economy, the faster an
economy can grow its aggregate income.
INCREMENTAL CAPITAL OUTPUT RATIO (ICOR)

• The ICOR indicates an additional

unit of capital or investment
needed to produce an additional
unit of output.

• A lower ICOR is preferred as it

indicates a country's production is
more efficient.

• ICOR which was 7.5 in FY12 is now

only 3.5 in FY22.
GDP DEFLATOR
• It gives us an idea of how
the prices have moved
from the base year to the
current year.

• GDP deflator = Nominal

GDP / Real GDP
Despite being a high saving economy, capital
formation may not result in significant increase in
output due to (2018)
(a) weak administrative machinery
(b) illiteracy
(c) high population density
(d) high capital-output ratio
The substitution of steel for wooden ploughs in
agricultural production is an example of
(2015)
(a) labour-augmenting technological progress
(b) capital-augmenting technological progress
(c) capital-reducing technological progress
(d) None of the above
Economic growth in country X will occur if
(2013)
(a) there is technical progress in the world
economy
(b) there is population growth in X
(c) there is capital formation in X
(d) the volume of trade grows in the world
economy
PTS 2023 -24 REVISION

BALANCE OF PAYMENTS
 Balance of
Current Account
BOP
Balance of Capital
TRANSACTIONS - CREDIT & DEBIT Account
FINANCIAL & ECONOMIC

BOP = CUR + CAP

 Balance of
Current Account

Visible Invisible

Balance of Trade Services Income Transfers

Profit Remittances

Interest Gifts

Current Account is the record of trade in goods and services

and transfer payments. Dividend Donations
Petroleum products continued to be the most exported commodity in FY22 followed
by gems and jewellery, organic & inorganic chemicals, and drugs & pharmaceuticals
Largest Imports - Coal and Petroleum, Oil & Lubricants (POL)
Other principal Imports - Electronic goods; coal, coke & briquettes, machinery electrical & non-
electrical, and organic & inorganic chemicals
Top export destination – USA, UAE and the Netherlands.
Top Import destination – China, UAE, USA, Russia, and Saudi Arabia
With reference to the international trade of India at present, which
of the following statements is/are correct? (UPSC 2020)
1. India’s merchandise exports are less than its merchandise imports.
2. India’s imports of iron and steel, chemicals, fertilisers and
machinery have decreased in recent years.
3. India’s exports of services are more than its imports of services.
4. India suffers from an overall trade/current account deficit.
Select the correct answer using the code given below :
a) 1 and 2 only
b) 2 and 4 only
c) 3 only
d) 1, 3 and 4 only
Capital Account records all international transactions of assets - Money, stocks, bonds, Government debt, etc.

External Bilateral &

assistance Multilateral loans
Borrowings
ECB & Short term
FDI
debt
Balance of
Capital Account FPI

Foreign Depository
Investments
investments receipts

Offshore funds

NRI a/c
 EXTERNAL DEBT REPAYMENT DENOMINATED IN (%)
US Dollar 55.5%
Indian Rupee 30.2%
Other Currencies 14.3%
Total 100%
Sovereign External Debt (SED) amounted to
US$ 124.5 billion, decreasing by 5.7 per cent
over the level a year ago.

Non-SED, estimated at US$ 486.0 billion as of

end-September 2022, posted a growth of 3.2
per cent over the level a year ago.

Deposit-taking Corporations (except the

Central Bank) and non-financial
corporations accounted for the bulk of non-
SED.
Consider the following statements: (UPSC 2019)
1. Most of India’s external debt is owed by governmental
entities.
2. All of India’s external debt is denominated in US dollars.
Which of the statements given above is/are correct?
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 nor 2
 It is a foreign entity registered @SEBI, and who buys upto 10% in equity /
shares of an Indian Company. Can be in debt (bond) or in equity

FPI
Make money from buying and selling of shares through the capital market
/ share market

Not involved in the actual operations/ production/ management /

business policy making of a company

Better returns in the other countries’ – Capital flight – Hot Money

K.M. Chandrasekhar committee: FPI = FII + QFI (FATF) – $ laundering &

Terror financing

Sectoral Cap up to 100%

 FDI is the (more than 10% equity / share)

FDI investment made by a foreign entity into an Indian

company, with the objective to get involved in the
management / production of that Indian company.

Aravind Mayaram Committee on FDI and FII has

suggested that the investment in a company above
10% needs to be treated as FDI.
 ROUTE

Automatic Route Government Route

Prior to investment, they’ve to get approval

Foreign entity doesn’t require Indian Govt’s from the Govt of India’s respective
approval Administrative Ministry/ Department (+
Commerce Ministry).
• Computer Software and Hardware attracted
the highest share of FDI equity inflow
followed by Services and Trading

• Top investing countries – Singapore,

Mauritius, UAE and the USA.
 DEPOSITARY RECEIPT (DR)
• A depositary receipt (DR) is a negotiable certificate issued by a bank
representing shares in a foreign company traded on a local stock exchange.

• The depositary receipt gives investors the opportunity to hold shares in the
equity of foreign countries and gives them an alternative to trading on an
international market.

• ADR, GDR
 OFFSHORE FUND
• An offshore fund refers to mutual funds that invests its assets abroad and

not in India.

• Offshore funds offer investors access to international markets and major

stock exchanges. They are similar to traditional mutual funds.

• Offshore mutual funds are usually established in countries that provide

significant tax benefits to foreign investors.

NRI ACCOUNT

• NR-EXTERNAL
• NR-ORDINARY
• FCNR
Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are
related to investment in a country. Which one of the following statements
best represents an important difference between the two?(UPSC 2011)
a) FII helps bring better management skills and technology, while FDI only
brings in capital.
b) FII helps in increasing capital availability in general, while FDI only targets
specific sectors.
c) FDI flows only into the secondary market, while FII targets primary market.
d) FII is considered to be more stable than FDI
Consider the following: (UPSC 2021)
1. Foreign currency convertible bonds.
2. Foreign institutional investment with certain conditions
3. Global depository receipts
4. Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?
a) 1, 2 and 3
b) 3 only
c) 2 and 4
d) 1 and 4
Which of the following constitute Capital Account? (UPSC 2013)
1. Foreign Loans.
2. Foreign Direct Investment.
3. Private Remittances.
4. Portfolio Investment.
Codes:
a) 1, 2 and 3
b) 1, 2 and 4
c) 2, 3 and 4
d) 1, 3 and 4
NET INTERNATIONAL INVESTMENT POSITION
(NIIP)
NIIP= value of overseas assets owned by a nation
minus value of domestic assets owned by foreigners

• Determines -> Net creditor (+ve) or Debtor (-ve)

• Nation’s balance sheet with the rest of the world at a

specific point in time.

• Important barometer of a nation’s financial condition

and creditworthiness.
Liabilities at US$ 1,237.1 billion
Assets at US$ 847.5 billion
S.NO Approx Bn. USD 2020-21 2021-22 2022-23
1 CURRENT ACCOUNT +23.9 -38.7 -54.5

2 CAPITAL ACCOUNT +63.3 +86.2 +28.7

3 ERRORS & OMISSIONS -0.3 +0.4 -0.2

4 OVERALL BALANCE +87.2 +47.5 -25.7
5 OFFICIAL RESERVE -87.2[Meaning -47.5 [Meaning +25.7 [Meaning
TRANSACTIONS OR RBI bought this RBI bought this RBI sold $$ from
MONETARY MOVEMENTS much $$ from much $$ from its
IN RBI'S FOREIGN market] market]
EXCHANGE RESERVES
NET BALANCE OF 0 (ZERO) 0 (ZERO) 0 (ZERO)
PAYMENT FOR INDIA
 ACCOMMODATING VS. AUTONOMOUS TRANSACTIONS

• S.No. 5 is called Accommodating transaction, because RBI will do it

based on whether we are having surplus or deficit due to previous four
items (so that RBI can accommodate NET BoP to ZERO)

• S.No. 1 to 4 are called Autonomous transactions because they occur

independently on their own without RBI’s involvement.
 STERILIZATION
‘ABSORB’
BOP EXCESS ₹ -
SITUATION ₹ INC. OMO

SELL ₹ TO INFLATION
BUY $
Which one of the following activities of the
Reserve Bank of India is considered to be part
of 'sterilization? (UPSC 2023)
(a) Conducting 'Open Market Operations'
(b) Oversight of settlement and payment systems
(c) Debt and cash management for the Central and
State Governments
(d) Regulating the functions of Non-banking
Financial Institutions
 RBI’S FOREX RESERVE
GOVERNED BY - RBI Act, 1934 & FEMA, 1999

As on June 23, 2023

Item
US$ Mn.
Total Reserves 593198
Foreign Currency Assets – FC, G-Secs of Foreign
525440
govt.
Gold 44304
SDRs 18334
Reserve Position in the IMF 5120
 ES 2023 – 6th RANK
• Import Cover: US$ 562.7 billion (Dec 2022)
covering 9.3 months of imports.

JUNE 2023 – 4th RANK

• CHINA>JAPAN>SWITZERLAND>INDIA>RUSSIA
Which one of the following groups of items is included
in India's foreign exchange reserves? (UPSC-2013)
a) Foreign-currency assets, Special Drawing Rights (SDRs)
and loans from foreign countries.
b) Foreign-currency assets, gold holdings of the RBI and
SDRs.
c) Foreign-currency assets, loans from the World Bank and
SDRs.
d) Foreign-currency assets, gold holdings of the RBI and
loans from the World Bank.
 Floating Fixed or Managed
or Flexible Pegged Float

EXCHANGE RATE REGIME

 FLOATING OR FLEXIBLE
• ER determined by the market forces of
demand and supply
• Central banks do not intervene
• If ₹ strengthens - ‘Appreciation’
• If ₹ weakens - ‘Depreciation’
 FIXED OR PEGGED
• ER determined by the central bank of a country
• If ₹ strengthens - ‘Revaluation’
• If ₹ weakens - ‘Devaluation’
• CHINA – Net Exporter
• INDIA – Net Importer - 1949, 1966 & 1991
 MANAGED FLOAT

• Mixture of flexible + fixed rate system

• Central banks intervene – volatile
• Market forces of D & S – Normal days
• Dirty floating
 CURRENCY MANIPULATOR
• Currency manipulation is a policy used by
governments and central banks to artificially
lower the value of their currency to gain an
unfair competitive advantage.
• Watchlist: US Department of Treasury | US’ 20
biggest trading partners
 CURRENCY WAR

• It refers to a situation where a number of

nations seek to deliberately depreciate /
devaluate the value of their domestic
currencies in order to stimulate their
economies.
NEER & REER
• NEER: It is the average rate at which one
nation's currency is valued in comparison with a
basket of other currencies (40), weighted for
the percentage of trade that each currency
represents to that nation.

• REER: The NEER can be adjusted to

compensate for the CPI-inflation rate in the
home country.
• NEER / REER (dec) = foreigners will find our
export prices attractive.
• NEER / REER (inc) = foreigners will find our
export prices less attractive.
 CURRENCY CONVERTIBILITY

• It is the ease with which the currency of a country

can be freely converted into any other foreign
currency at market determined exchange rate

Foreign Exchange Management Act, 1999

 CC

CURRENT CAPITAL
ACCOUNT ACCOUNT
CONVERTIBILITY CONERTIBILITY

International Monetary Fund (IMF) - Article VIII, section

2, section 3 and section 4
 CURRENT ACCOUNT CONVERTIBILITY

• Current account convertibility refers to the freedom in

payments and transfers in the current account
international transactions.

• Fully convertible
 CAPITAL ACCOUNT CONVERTIBILITY

• It is the freedom to convert the local financial assets into

foreign financial assets at the market determined
exchange rates.

• Partial convertible - Mexican crisis | East Asian crisis

EXTERNAL COMMERCIAL BORROWING (ECB)

• RBI’s ECB ceiling is up to $750 million (or

equivalent other currency) per year for
Indian Companies
 FOREGIN PORTFOLIO INVESTMENT

• 6% of available government securities in the

Indian market
• 20% of the available corporate bonds in the
Indian market.
• FDI – Automatic & Approval
FULL CONVERTIBILITY OF RUPEE

• India should permit unrestricted conversion

of Indian ₹ to foreign currency for both
current account and capital account
transactions
 Trade oriented Industrial
development policy of the
strategy country

Sufficient
Macroeconomic foreign
stability exchange
reserves
Preconditions
 MERITS
• INVESTMENT
• EMPLOYMENT
• TECH TRANSFER
• CREATE COMPETITION
• GROWTH

DEMERITS
• FLIGHT OF CAPITAL
• X LABOUR INTENSIVE
• OUTDATED TECH TRANSFER
• COMPETITION B/W
UNEQUALS
TARAPORE COMMITTEE
Reduce the fiscal deficit to 3.5 percent of the GDP.
inflation targeting between 3% to 5%.
Deregulating the interest rates
Reducing the NPAs 5%
Cash reserve ratio to 3%
Liquidate - weak banks or merge
Current account deficit
Adequate foreign exchange reserves
Restrictions on the movement of gold
• SRVA ARRANGEMENT
• CURRENCY SWAP