Basic Economic Concepts – 100 MCQs for UPSC, APPSC, TGPSC, State PSC exams and other competitive exams

Public goods are non-rivalrous (one persons use does not reduce availability for others) and non-excludable (cannot exclude non-payers). Free markets fail to provide them efficiently.

Primary Agricultural Credit Societies (PACS) are NOT scheduled commercial banks. They are cooperative credit institutions at village level.

Finance Commission recommends distribution of taxes between Centre and States grants-in-aid and principles for Centre-State finances. It does not augment Consolidated Fund.

NITI Aayog was established through Cabinet Resolution not Constitutional Amendment. It is a policy think tank without fund allocation powers.

Repo Rate is always higher than Reverse Repo Rate. Repo Rate is what banks pay to borrow from RBI while Reverse Repo Rate is what banks earn by depositing with RBI.

Twin deficits refer to simultaneous occurrence of fiscal deficit and current account deficit. Theory suggests they are linked through demand and interest rate channels.

NNP at Factor Cost is the official measure of National Income in India. Formula: National Income = NNP at FC = GNP at MP – Depreciation – Net Indirect Taxes.

Currently LAF corridor is bounded by MSF rate on upper side and SDF rate on lower side with Repo Rate in the middle.

India’s Foreign Exchange Reserves are managed by RBI as per RBI Act 1934 and FEMA 1999. Reserves consist of Foreign Currency Assets Gold SDRs and Reserve Tranche Position with IMF.

RBI uses CPI-Combined for inflation targeting as per the Monetary Policy Framework Agreement 2015. The inflation target is 4% with tolerance band of 2% to 6%.

Disguised unemployment occurs when more people are employed than necessary so removing some workers would not reduce output. Common in Indian agriculture.

SEZs in India are governed by the SEZ Act 2005 and SEZ Rules 2006. SEZs are duty-free enclaves for export production.

The original FRBM Act set a target of 3% of GDP for Fiscal Deficit by March 2008. This remains the medium-term target.

Headline Inflation is overall inflation rate including all items in price index basket. Core Inflation excludes volatile food and fuel prices.

GDP Deflator = (Nominal GDP / Real GDP) x 100. It is a measure of inflation that reflects change in prices of all goods and services produced in the economy.

IBC provides time-bound resolution framework for insolvency. NCLT is adjudicating authority. Resolution timeline is 330 days including litigation.

Higher domestic inflation erodes purchasing power causing depreciation. Higher CAD means more demand for foreign currency. FDI inflows would cause appreciation not depreciation.

Money Multiplier = M3 (Broad Money) divided by M0 (Reserve Money). It shows how much money supply is created for every unit of Reserve Money.

Open Market Operations is a tool of MONETARY policy implemented by RBI not fiscal policy. Fiscal policy tools include government expenditure taxation and public debt.

The Phillips Curve developed by A.W. Phillips shows an inverse relationship between inflation and unemployment. When unemployment is low inflation tends to be high.

REER = NEER adjusted for relative price or inflation differentials between India and trading partners. Increase in REER indicates loss of export competitiveness.

GST in India is a dual tax – CGST and SGST are levied on intra-state supplies while IGST is levied on inter-state supplies.

Disinvestment proceeds are credited to National Investment Fund and used for both capital expenditure and meeting fiscal targets.

CRR is maintained as percentage of Net Demand and Time Liabilities (NDTL). Banks do NOT earn interest on CRR deposits with RBI making it costlier than SLR.

The IBC was enacted in 2016 to provide a time-bound resolution framework for insolvency. NCLT is the adjudicating authority for companies.

Green GDP adjusts traditional GDP by subtracting costs of environmental degradation and natural resource depletion. It provides a more sustainable measure.

The 17 SDGs were adopted by UN General Assembly in September 2015 as part of 2030 Agenda. They replaced the 8 Millennium Development Goals.

Helicopter Money involves central bank financing government spending or direct transfers creating money without acquiring assets. India has not used helicopter money.

India revised the base year for GDP calculation from 2004-05 to 2011-12 in January 2015. This revision also changed methodology from GDP at Factor Cost to GDP at Market Prices.

OMO involves RBI buying or selling government securities in the open market. When RBI buys securities it injects liquidity. When it sells it absorbs liquidity.

Factor Cost = Market Price minus Indirect Taxes plus Subsidies. It represents actual earning of factors of production without distortion of government taxes and subsidies.

Twin Balance Sheet Problem refers to simultaneous stress in banking sector (high NPAs) and corporate sector (overleveraged balance sheets). Highlighted by Economic Survey 2015-16.

Primary Deficit = Fiscal Deficit minus Interest Payments. It indicates borrowing requirement excluding interest obligations on past debt.

Fiscal Deficit = Total Expenditure minus Total Receipts excluding borrowings. It represents the government borrowing requirement during the year.

Addition to inventories is NOT part of GFCF. GFCF measures investment in fixed assets like buildings machinery equipment and software.

Demand-pull inflation occurs when aggregate demand exceeds aggregate supply at the existing price level. This too much money chasing too few goods scenario pushes prices up.

Cost-push inflation occurs when rising production costs like wages raw materials energy push up prices independent of demand. Also called supply-side inflation.

GNP = GDP + Net Factor Income from Abroad.
NFIA is the difference between factor income received from abroad and factor income paid to abroad. India’s GNP is typically higher than GDP due to large remittance inflows.

GST Council is a constitutional body under Article 279A not statutory. Union FM is Chairman. Decisions require 3/4 majority with Centre having 1/3 and States 2/3 weightage.

HDI is published by UNDP in its annual Human Development Report. HDI was developed by Pakistani economist Mahbub ul Haq.

Capital Account includes FDI FPI ECB Banking Capital and Short-term trade credit. Services tourism and remittances are part of Current Account.

QE is unconventional monetary policy where central bank purchases government bonds and other assets to inject liquidity when conventional policy has reached limits.

SARFAESI Act allows secured creditors to recover NPAs without court intervention. Notice period is 60 days. Agricultural land cannot be taken as collateral.

Merit goods are those whose benefits are underestimated by individuals leading to under-consumption. Examples include education healthcare and vaccinations.

Priority Sector Lending target for domestic scheduled commercial banks is 40% of Adjusted Net Bank Credit. Agriculture has 18% sub-target.

FDI is NOT external debt as it represents equity investment without repayment obligation. External debt includes ECBs NRI Deposits multilateral loans.

India uses all three methods for comprehensive National Income calculation. Production Method for agriculture mining. Income Method for banking. Expenditure Method for cross-check.

SDRs are international reserve assets created and allocated by the International Monetary Fund (IMF). SDR value is based on a basket of 5 currencies.

Core Inflation = Headline Inflation minus Food and Fuel Inflation. Core inflation excludes volatile components to show the underlying inflation trend.

SLR comprises Cash in hand Gold and Government securities. Banks earn interest on SLR assets unlike CRR. Foreign currency is not part of SLR.

Structural unemployment occurs due to fundamental changes creating mismatch between workers skills and job requirements. Examples include automation and decline of industries.

NITI Aayog (National Institution for Transforming India) was established on January 1 2015 replacing the Planning Commission.

Capital Expenditure creates assets or reduces liabilities. Construction of highways creates infrastructure assets. Salaries and subsidies are Revenue Expenditure.

Per Capita Income = National Income divided by Mid-year Population. Mid-year population is used because population changes throughout the year.

State exclusive taxes include State Excise on alcohol Stamp Duty and Land Revenue. GST is NOT state-exclusive it is concurrent with CGST and SGST.

Transfer payments like pensions scholarships and subsidies are NOT included in GDP because they do not represent payment for current production of goods or services.

Raja Chelliah Committee 1991 recommended comprehensive tax reforms including rationalization of taxes introduction of VAT and eventual move towards GST.

Current Account Deficit means country’s total imports exceed exports. The deficit must be financed by capital inflows – hence the country becomes a net borrower.

As per RBI norms an asset becomes NPA when principal or interest payment remains overdue for more than 90 days.

Capital Receipts either create liability or reduce assets. Disinvestment proceeds reduce government assets. Corporation Tax is Revenue Receipt.

Inclusive Growth means economic growth whose benefits are shared broadly across all sections especially the poor and marginalized. India’s 11th and 12th Plans emphasized this.

WTO was established on January 1 1995 replacing GATT. Headquarters is in Geneva Switzerland. India is a founding member.

Disinvestment reduces government shareholding but may retain control. Privatization involves transfer of management control. Strategic sale involves selling majority stake.

FDI involves long-term investment with lasting interest and significant management influence. FPI is portfolio investment without management control and is volatile.

Double counting refers to including the value of intermediate goods along with final goods in GDP calculation. This inflates GDP figures incorrectly.

Customs Duty was NOT subsumed under GST. GST subsumed Central taxes like Excise Service Tax and State taxes like VAT Entry Tax.

PPP involves sharing of risks and responsibilities between public and private sectors. BOT and BOOT are PPP models. Projects may receive Viability Gap Funding.

Stagflation is simultaneous occurrence of stagnation (slow growth high unemployment) and inflation. This contradicts the Phillips Curve relationship. The 1970s oil shocks caused global stagflation.

As per World Bank classification based on GNI per capita India is classified as a Lower-Middle-Income Country. India’s GNI per capita is around 2300-2500 USD.

HDI is based on Health (Life Expectancy) Education (Schooling Years) and Standard of Living (GNI per capita PPP). Infant Mortality Rate is not directly used.

Crowding Out Effect occurs when increased government borrowing leads to higher interest rates making private sector borrowing expensive and reducing private investment.

Trickle-Down theory suggests benefits of economic growth at the top automatically reach the poor through employment generation increased wages and lower prices.

The 1991 reforms substantially abolished industrial licensing except for a few strategic industries. MRTP Act was repealed and replaced by Competition Act 2002.

PLFS is conducted and published by the National Statistical Office (NSO). PLFS was launched in 2017 replacing the quinquennial Employment-Unemployment Surveys.

Anti-dumping duty is imposed when foreign goods are sold at prices below normal value causing material injury to domestic industry. It is a WTO-permitted trade remedy.

Revenue Deficit = Revenue Expenditure minus Revenue Receipts. It indicates government is using borrowed funds to finance current consumption expenditure.

Depreciation is also called Capital Consumption Allowance (CCA) or Consumption of Fixed Capital. It represents wear and tear of fixed capital assets.

The Urjit Patel Committee 2014 recommended adoption of flexible inflation targeting framework with CPI-Combined as the nominal anchor.

MPC consists of 6 members: 3 from RBI (Governor Deputy Governor and one officer) and 3 external members appointed by Government. Decisions are by majority vote.

WPI measures wholesale prices while CPI measures retail prices. CPI includes services like housing healthcare. WPI traditionally excluded services.

Current Account includes Trade Balance Services Primary Income and Secondary Income like remittances. FDI is part of Capital Account not Current Account.

The Laffer Curve illustrates that beyond an optimal point increasing tax rates actually reduces tax revenue. Revenue is maximized at some intermediate rate.

Gini Coefficient measures income or wealth inequality in a population. It ranges from 0 (perfect equality) to 1 (perfect inequality).

Demographic dividend refers to economic growth potential from favorable age structure – a bulge in working-age population relative to dependents. India is currently in this phase.

Lorenz Curve is graphical representation of income or wealth distribution. The further it bows from diagonal line the greater the inequality.

M1 = Currency with public + Demand deposits with banks + Other deposits with RBI. M1 is the most liquid form of money. Time deposits are not included in M1.

Direct taxes cannot be shifted to others. The person on whom they are levied bears the burden. Indirect taxes can be shifted to consumers through higher prices.

External debt to GDP ratio below 40% is considered sustainable for developing countries. India’s ratio is around 18-20% which is comfortable.

The National Statistical Office (NSO) under Ministry of Statistics and Programme Implementation is responsible for calculating India’s National Income.

The Fiscal Responsibility and Budget Management (FRBM) Act was enacted in 2003 coming into effect from July 2004.

GVA at Basic Prices = GVA at Factor Cost + Production Taxes – Production Subsidies. Basic prices include production taxes like property tax stamp duty but exclude product taxes.

Frictional unemployment occurs when workers are temporarily between jobs or searching for better opportunities. It is voluntary and short-term.

Fiscal Federalism refers to division of financial powers responsibilities and resources between Centre and States. Constitution specifies Union and State List taxes.

Repo Rate is the rate at which RBI lends short-term money to commercial banks against government securities. When RBI increases Repo Rate borrowing becomes costlier.

Black money is income legally or illegally earned but hidden from tax authorities. It exists in various forms like cash real estate gold and foreign accounts.

BEPS refers to tax avoidance strategies by multinational companies to shift profits from high-tax to low-tax jurisdictions. OECD/G20 launched BEPS project with 15 action plans.

MSF rate is typically 25 basis points ABOVE Repo Rate making it costlier than regular Repo. Banks can borrow under MSF even by dipping into SLR up to 2% of NDTL.

Multi-brand retail trading allows only 51% FDI under government approval route. 100% FDI automatic route is allowed in IT BPO single-brand retail coal mining.

MPI measures deprivations across Health Education and Living Standards dimensions. Unlike HDI it does not use per capita income but measures actual deprivations.

The Consumer Price Index (CPI) is released by the National Statistical Office (NSO) under Ministry of Statistics and Programme Implementation. CPI measures retail inflation.

India faced severe BoP crisis in 1991. Forex reserves fell to about 1.2 billion USD covering about 2 weeks of imports. India pledged 67 tonnes of gold.