ECONOMY NOTES FOR UPSC

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ECONOMY NOTES FOR UPSC

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Economy holds a very important role in UPSC civil service examination be it in prelims or mains. Generally, it is seen that student from non economics background fear a lot with this subject so here we are with the solution i.e. a series of economy notes for upsc examination.

Economy question related to Indian economy are generally asked in prelims and mains but in mains certain occurrence of any event in global arena with light on Indian economy can be asked.

Notes presented here are in a series with a simpler and understandable language so follow regularly to get them.

Note- soon there will also notes for economy survey and budget too.

Chapter 5 – NATIONAL INCOME ACCOUNTING

National income accounting father is Simon Kuznet(got Nobel prize)

National income accounting means calculation of income of a country. It can be in the form of GROSS DOMESTIC PRODUCT (GDP).

GDP:- is market value of all final goods and services produced within country for a given time period.

Before going in to the methods other terms to be aware of are:-

Base year-the year which is regarded as standard year to compare with like year 2011.

Base year prices are also considered as constant price.

Current prices :-price in this year 2017. Current year price=nominal GDP

Real GDP = Nominal price – constant price

GDP deflator = nominal GDP/Real GDP*100

There are three ways to calculate the national income

Product method Expenditure method Income method
Also called as value addition method because at each stage in product manufacturing some value is added so is we add the value addition of products at various stages (like at raw material, intermediate goods, finished product)we can lead to GDP Expenditure in economy can be from following variables:-

consumption private +investment

+government expenditure

+foreign expenditure=GDP

 

So GDP=c+i+g(export-import)

if we see money flow in economy we find transaction between households and business firms by land, labor, capital provided by households and rent wages and interest in return from business firms.

So when we add

Rent+wages+interst=GDP

we will be getting GDP at factor cost(factor cost because income is from factors of production.

Variables in GDP

GROSS ,DOMESTIC product, factor cost

So if we want to change gross to net we will be deducting depreciation.

Gross-depreciation=net

If we want to change domestic product into national product we will we adding income from abroad

Domestic product+net income from abroad= national product

If we want to change factor cost to market price we will be adding taxes and deducting subsidies

Factor cost+tax-subsidies =market price

Relationship of GDP with other factors

GDP and import = direct relation

GDP and export = due to increase or decrease in GDP export are not affected much. Exports are independent from GDP, whereas due to increase in export GDP increases.

Investment and interest – reverse relationship but during the period of deflation interest rates are less considered so it effect effectiveness of monetary policy so here need of fiscal policy is raised.

The role of investment and saving in economic development-

Virtuous-Investment-Cycle-720-Global.png

Incremental capital output ration :- ratio that shows productivity of capital that can be shown as ICOR=%change in capital/%change in gdp

Higher the ICOR lower the growth rate due to saving rate.

GROSS CAPITAL FORMATION

In simple worda it is investment when people save they tend to invest then % of investment made each yeart out of total gdp is gross capital formation.

GCF=(investment/gdp) * 100

Usually 40%is considered optimum.

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