Gross domestic product (GDP): The sum of values of all final
goods and services produced within the geographical limit of a country.
Gross National Product (GNP): The sum of values of
all final goods and services produced by the citizens of a country within the
country and the rest of the world. Gross National Product (GNP) = Gross Domestic Product (GDP) + Net
Factor Income from Abroad (NFIA)
Gross domestic product at market price (GDPMP): While deriving GDP of a country
we estimate value added at the market prices. The estimate of GDP obtained this
way is known as GDP at market price.
Gross National
Product at Factor Cost (GNPFC): Market prices normally include indirect taxes
net of subsidies. Gross national product at
factor cost {GNPFC) is simply, Gross national
product at market price (GNPMP) minus net indirect taxes (Net IT), i.e. GNPFC = GNPMP – Net IT
Net National Product (NNP): Net National Product (NNP)
is simply obtained as gross national product (GNP) minus
depreciation (D) i.e. Net National Product (NNP) = Gross National
Product (NDP) -- Total Depreciation (D). Fixed capitals have their own
life-time and depreciates in value every period of time after their
participation in the productive process. Depreciation of fixed capital takes
place because of their normal ‘wear and tear’.
National income (NI): Net national product
at factor cost is equivalent to the notion
of national income {NI), which the accrual of
income to all normal residents in a country due to their participation in
production anywhere in the world. Therefore, National Income(NI) = NNPFC
GDP Deflator: The GDP deflator, also called
the implicit price deflator for GDP, is defined as the ratio of nominal GDP to
real GDP:
GDP Deflator = (Nominal GDP/ Real GDP)
Nominal GDP measures the value
of the output of the economy at current prices. Real GDP measures output valued
at constant prices. The GDP deflator measures the price of output relative to
its price in the base year.
Aggregate demand shock: Shocks such as change in
government expenditure or change in money supply that cause a change in
aggregate demand in an economy.
Aggregate supply shock: Shocks such as increase in
petroleum price, a drought etc. that lead to a change in aggregate supply in an
economy.
Depreciation: The reduction in value of
asset through wear and tear. Also, fall in the value of a currency in terms of
another currency.
Rational expectations: Expectations
about the future making best use of available information.
Efficiency
wage:
Modern-sector urban employers sometimes pay a higher wage than the equilibrium
wage rate in order to attract a higher-quality work-force or to obtain higher
productivity on the job.
Keynesian model: Model developed by Lord John
Maynard Keynes in the early 1930s to explain the cause of economic depression
and hence the unemployment of that period. The model states that unemployment
is caused by insufficient aggregate demand and can be eliminated by increasing
government expenditure. Increase in aggregate demand would lead to increase in
production and hence create further employment.
Laissez-faire:
Free-enterprise market economy without any government intervention.
Macroeconomic
instability:
When an economy is passing through a phase with high inflation accompanied by
rising budget and trade deficits and a rapidly expanding money supply.
Macroeconomlc
stablllzatlon:
Policies designed to eliminate macroeconomic instability.
Procyclical
fiscal policy: Changes in government spending and taxes that
increase the cyclical fluctuations in the economy instead of reducing them.
Natural rate
of unemployment The
average rate of unemployment around which the economy fluctuates. The natural
rate is the rate of unemployment toward which the economy gravitates in the
long run, given all the labor-market imperfections that impede workers from
instantly finding jobs.
Recession:
A recession is a decline in a country's gross
domestic product growth for two or more consecutive quarters of a year.
Accounting classification of
government expenditure:
(i)
Revenue
and Capital (ii) Developmental and Non-Developmental and (iii) Plan and
Non-Plan.
Revenue and
capital expenditure:
— Expenditures
that result in the creation of new assets and those which do not.
— Revenue
expenditure is for the normal running of government departments and various
services, interest charges etc.
— The main
purpose of the capital account is to show the gross and net capital formation
in the public sector during the accounting period. Capital expenditure results
in creation of assets in the economy.
Revenue and
capital budget:
— Government
budget comprises Revenue Budget and Capital Budget.
— Revenue budget
consists of revenue receipts of government (tax revenues and other revenues)
and the expenditure met from these revenues.
— Tax revenues
comprise proceeds of taxes and other duties levied by the Union.
— Revenue
expenditure is for the normal running of government departments and various
services. Broadly speaking, expenditure which does not result in creation of
assets is treated as 'Revenue expenditure'. All financial administration grants
given to state governments and other parties are also treated as revenue
expenditure.
— Capital budget
consists of capital receipts and payments.
— The main items
of capital receipts are: a) loans raised by government from public which are
called market loans, b) borrowings from Reserve Bank of India and other parties
through sale of Treasury Bills, c) loans received from foreign governments and
d) loans granted by Central government to state and union territory governments
and other parties.
Capital
expenditure:
— A capital expenditure may be
defined as any expenditure the benefits of which extend over a period of time
exceeding one year.
— Capital expenditure is the
expenditure which is intended for creating concrete assets of a material
character in the economy.
— Examples of capital expenditure
are the acquisition of assets like land, buildings machinery, equipment and
also investment in shares and loans and advances granted by Central government
to state and union territory governments, government companies etc.
Developmental
and non-developmental expenditure:
— Developmental expenditure
comprises expenditure incurred on education. medical care, public health and
family planning, labour and employment, agriculture, cooperation, irrigation,
transport and communication and other miscellaneous services. Expenditure
incurred on these items both on Revenue and Capital accounts is also treated as
development expenditure.
— Non-Developmental expenditure,
on the other hand, comprises expenditure incurred on items like defence,
collection of taxes and duties, administrative services, interest on debt and
other services, stationery and printing and other expenditure on general
services.
— Developmental expenditure leads
to economic growth and development whereas Non-Developmental expenditure does
not, at least directly.
Plan
and Non-Plan Expenditure:
— Plan expenditure refers to the
expenditure incurred by the Central Government on programmes / projects, which
are recommended by the Planning Commission.
— Non-Plan expenditure, on the
contrary, is a generic term used to cover all expenditure of government, not
included in the plan.
— The distinction between 'plan
expenditure' and non-plan expenditure' is purely an administrative
classification.
— Non-Plan expenditure consists
of many items of expenditure, which are obligatory in nature.
— Items of expenditure, such as
interest payments, pensionary charges, statutory transfer to states come under
the obligatory nature.
— Defence, internal security are
essential obligations of a state.
— Besides, there are special
responsibilities of the Central Government like external affairs, currency and
mint, cooperation with other countries and the expenditure incurred in this
connection are treated as "non-plan" expenditure.
— Of all the major items of
Non-plan expenditure of the Central Government, interest payments, defence,
subsidies take the lion's share of expenditure.
Revenue
Deficit, Fiscal Deficit and Primary Deficit of Central Government:
— Revenue Deficit = Revenue
expenditure – Revenue receipts
— Fiscal Deficit = Total
expenditure—Revenue receipt— Recovery of
loans — Other receipt
— Primary Deficit = Fiscal Deficit – Interest payment
