Thursday, 9 February 2017

Important Economic terms for Competitive exams

Economic Terms

Balanced budget:

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

Balance of Trade

 Refers to the relationship between the values of country's imports and its export, i.e., the visible balance. These items only form part of the balance of payments which are (a) invisible items and (b) movements of capital.

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 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 certain percentage between their holdings of cash and their time liabilities.


Decline in the general price level of goods and services leading to 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 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 countries 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 quantity of particular goods purchased or sold.


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

Laissez faire: 

 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 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, 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. If brings a value added tax, a tax levied on the values that is 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 favour. 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.