ABM Paper Economic Terms Very Important

1. Closed Economy – An economy having no economic relations with the rest of the world i.e. it
doesn’t have trade, financial or investment relations with other countries.
2. Open Economy : An economy having economic relations with the rest of the world, i.e. it has
trade, financial and investment relations with other countries.
3. National Income : It refers-to the money value of all goods and services produced within the
domestic territory of a country plus net factor Income from abroad in a year.
4. Per capita income : It refers to the average income of a resident of a country and is calculated by
dividing the national income by the population of the country.
5. Gross Domestic Product (GDP) : It is the money value of all final goods and services produced
in the domestic territory of country in a year.
6. Net Domestic Product : obtained by reducing consumption of fixed capital (depreciation) from the
7. Gross National Product (GNP) : It is calculated by adding net factor income from abroad (NFIA) to
8. Law of Demand: It states that other things being equal, more of a commodity is demanded at a
lower price and less of it at a higher price.
9. Elasticity of Demand : It is the responsiveness of a demand to a change in a any factor of demand.
10. F
actors affecting elasticity of Demand : (a) Nature of Commodity (b) Availability of substitute goods
(c) Share in the total expenditure (d) Diverse uses of the commodity (e) Consumer’s behaviour etc.
11. Supply curve: A graph of the relationship between the price of a good and the amount supplied at
different prices
12. Consumer surplus: The difference between what a consumer would be willing to pay for a good
or service and what that consumer actually has to pay.
13. Sunk costs: When what is done cannot be undone. Sunk costs are costs that have been incurred
and cannot be reversed.
14. Marginal Cost : It is the addition to the total cost as a result of unit increase in production.
15. Propensity to Consume: The relationship between change in income and the resultant change in
16. Fiscal Measures : Measures to correct excess /deficient demand thorugh budget proposals of
government are called fiscal measures. These include tax changes, increase /reduction in government
expenditure etc.
17. Fiscal Policy: Fiscal policy is that part of government economic policy which deals with taxation,
expenditure, borrowing, and the management of public debt in the economy.
18. Fiscal deficit is the gap between the government’s total spending and the sum of its revenue
receipts and non-debt capital receipts. It represents the total amount of borrowed funds required by the
government to completely meet its expenditure
19. Budget Deficit: Budget may take a shape of deficit when the public revenue falls short to public
expenditure. Budget deficit is the difference between the estimated public expenditure and public revenue.
The government meets this deficit by way of printing net currency or by borrowing.
20. Primary Deficit: Fiscal Deficit minus Borrowings.
21. Inflation: A situation of a steady and sustained rise in general prices is usually known as inflation.
Inflation is a state in which the value of money is falling i.e. prices are rising.
22. Cost-push Inflation: It arises due to an increase in production cost. Such type of inflation is
caused by three factors: (i) an increase in wages, (ii) an increase in the profit margin and (iii) imposition of
heavy taxation.
23. Deflation: Deflation is the reverse case of inflation. Deflation is that state of falling prices which
occurs at that time when the output of goods and services increases more rapidly than the volume of
money in the economy. In the deflation the general price level falls and the value of money rises.
24. Recession: A period of slow or negative economic growth, usually accompanied by rising
25. Stagnation: A prolonged recession, but not as severe as a depression.
26. Disinflation: A fall in the rate of inflation. This means a slower increase in prices but not a fall in
27. Depression: A prolonged recession in economic activity. The textbook definition of a recession is
two consecutive quarters of declining outpur. A depression is an even deeper and more prolonged slump.
28. Duopoly: A market structure in which two producers of a commodity compete with each other.
29. Monopoly A market situation in which a product that does not have close substitutes is being
produced and sold by a single seller.
30. Perfect competition A market situation characterized by the existence of very many buyers and
sellers of homogeneous goods or services with perfect knowledge and free entry so that no single buyer
or seller can influence the price of the good or service.
31. Buyer’s market: A market in which supply seems plentiful and prices seem low; the opposite of a
seller’s market.
32. Tax haven: A country or designated zone that has low or no taxes,
33. Tax avoidance: A legal action designed to reduce or eliminate the taxes that one owes.
34. Tax evasion: An illegal strategy to decrease tax burden by underreporting income, overstating
deductions, or using illegal tax shelters.
35. Monetary policy: The regulation of the money supply and interest rates by a central bank in order to
control inflation and stabilize currency.
36. HDI: HDI (Human Development Index) is a composite index measuring average achievement in three
basic dimensions of human life-a long and healthy life, knowledge and a decent standard of living.
37. Engel’s Law: This law was formulated by Ernst Engel. This law states that, with given taste and
preference, the portion of income spend on food diminishes as income increases. According to this law,

smaller a person’s income, the greater the proportion of it that he will spend on food and vice versa.
38. Giffin Goods: Giffin goods have the positive relationship between price and quantity demanded and
as a result demand curve of Giffin goods slopes upward from left to right.
39. Gresham’s Law: Bad money (if not limited in quantity) drives good money out circulation
40. Laffer Curve: It represents relationship between total tax revenue and corresponding tax rates.
41, Lorenz Curve: The Lorenz curve is a graphical representation of the cumulative distribution function of
a probability distribution. This curve shows the degree of inequalities of a frequency distribution in a
graphical manner.
42. Pareto efficiency: A situation in which nobody can be made better off without making somebody
else worse off.
43. Pigou effect: A fall in the price level increases the real value of people’s savings making them feel
wealthier and thus causing them to spend more. This increase in demand can lead to higher employment
44. Okun’s Law: A relationship between an economy’s GDP gap and the actual unemployment rate. The
relationship is represented by a ratio of 1 to 2.5. Okun found that an annual 2.5% increase in the rate of
real growth above the trend growth results in a 1% decrease in the rate of unemployment.
45. Philips Curve: Inflation and unemployment have a stable and inverse relationship. The theory states
that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment.
46. Say’s Law: Supply creates its own demand.
47. Real exchange rate: An exchange rate that has been adjusted to take account of any difference in
the rate of inflation in the two countries whose currency is being exchanged.
48. Real interest rate: The interest rate less the rate of inflation.
49. Tobin tax: A proposal to reduce speculative cross-border flows of capital by levying a small tax on
foreign exchange transactions.
50. Predatory pricing: Charging low prices now so you can charge much higher prices later.
51. PPP: Purchase Power Parity is the exchange rate that equates the price of a basket of identical traded
goods and services in two countries.
52. Crowding out: When the state does something it may discourage, or crowd out, private-sector
attempts to do the same thing. At times, excessive Government borrowing has been blamed for low privatesector
53. Currency board: A means by which some countries try to defend their currency from speculative
attack. A country that introduces a currency board commits itself to converting its domestic currency on
demand at a fixed exchange rate.
54. Currency peg: When a Government announces that the exchange rate of its currency is fixed against
another currency or currencies.
55. Dumping: Selling something for less than the cost of producing it.
56. Fiscal drag: is the tendency.of revenue from taxation to rise as a share of GDP in a growing
57. Fiscal neutrality: When the net effect of taxation and public spending is neutral, neither stimulating
nor dampening demand
58. Hard currency: A hard currency is expected to retain its value, or even benefit from appreciation,
against softer currencies.GLOSSARY OF ECONOMIC TERMS
59. Aggregate demand is the sum of all demand in an economy. This can be computed by adding the
expenditure on consumer goods and services, investment, and not exports (total exports minus total
60. Aggregate supply is the total value of the goods and services produced in a country, plus the value of
imported goods less the value of exports.
61. Base year: In the construction of an index, the year from which the weights assigned to the different
components of the index is drawn. It is conventional to set the value of an index in its base year equal to
62. Boom: A state of economic prosperity
63. Broad sectors of an Economy : In India Primary Sector-Agriculture, Secondary Sector – Industry,
Tertiary Sector-Service.
64. Capitalism : Economic system featuring private property in means of production, commodity
production and profit as the guiding motivation force of production.
65. Competition : A market phenomenon indicating rivalry amongst buyers and sellers of goods or
resources classified as perfect (or pure) competition and where market power is widely diffused and free
mobility in and out of the industry exists.
66. Cost-Push Inflation : A situation of general rise in prices in which costs (payment made to factors
owners) increase
than productivity or efficiency. Familiar examples, wage-push and profit-push

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67. Centrally planned economy: An economic system in which the production, pricing, and
distribution of goods and services are determined by the government rather than market forces. Also
referred to as a “non market economy.” Former Soviet Union, China, and most other communist nations
are examples of centrally planed economy
68. Demand-Pull Inflation : A state of rising prices brought about by increase in aggregate demand in
the face of short supply.
69. Depression : A phase of the business cycle in which economic activity is at a low ebb and there is
unemployment/under employment of resources; prices, profits, consumption and rate of capital investment
are also at a low level.
70. Economic development: The process of improving the quality of human life through increasing
per capita income, reducing poverty, and enhancing individual economic opportunities.
71. Economic Growth : Rate of increase of an economy’s real incomes over a period, expressed in
terms of GNP or NNP as total or per capita.
72. Economic policy: A statement of objectives and the methods of achieving these objectives (policy
instruments) by government, political party, business concern, etc. Some examples of government
economic objectives are maintaining full employment, achieving a high rate of economic growth, reducing
income inequalities and regional development inequalities, and maintaining price stability.
73. Equilibrium Price : Price of a commodity in the market at which supply equals demand; the point
of intersection of supply and demand curve; price at which a firm’s profits are maximized (or losses
minimized if the firm has to produce at a loss).
74. Equilibrium Quantity : Quantity of a commodity at which demand equals supply; quantity of a
commodity at which a firm’s profits are maximized.
75. Hyper Inflation : A situation in which general prices are rising sharply with no or little increases in
output, also called ‘runway’ or ‘galloping inflation’.
76. Inflation : Rise in the general or average price level of goods and services; consequently, a decline
in the value of money-doubling of the general price level means halving the value of money.
77. Indirect tax: A tax you do not pay directly, but which is passed on to you by an increase in your
expenses. For instance, a company might have to pay a fuel tax. The company pays the tax but can
increase the cost of its products so consumers are actually paying the tax indirectly by paying more for the
78. Macroeconomics The branch of economics that considers the relationships among broad
economic aggregates such as national income, total volumes of saving, investment, consumption
expenditure, employment, and money supply. It is also concerned with determinants of the magnitudes of
these aggregates and their rates of change over time.
79. Market mechanism: The system whereby prices of commodities or services freely rise or fall when
the buyer’s demand for them rises or falls or the seller’s supply of them decreases or increases.
80. Microeconomics: The branch of economics concerned with individual decision units–firms and
households–and the way in which their decisions interact to determine relative prices of goods and factors
of production and how much of these will be bought and sold. The market is the central concept in
81. Money supply: the total stock of money in the economy; currency held by the public plus money in
accounts in banks. There are various measures of money supply, including M1, M2, M3 and L; these are
referred to as monetary aggregates.
82. Market Economy : Economy system in which the central problems of an economy-what, how and
for whom are decided by the operation of free market forces of supply and demand.
83. Mixed Economy : An economy in which both the state and the private sector co-exit; decisions on
what how and for whom are made partially by the market and particularly by the state or any other public
authority; many consider it essentially a transitory form.
84. Money : Anything which is acceptable in a economy as medium of exchange, measure of value, a
standard for deferred payments, and a store of value; different things used as money at different times.
85. Open economy An economy that encourages foreign trade and has extensive financial and
nonfinancial contacts with the rest of the world in areas such as education, culture, and technology.
86. Planned Economy : Economic system in which basic decisions in an economy are made according
to a plan.
87. Price : Value of a commodity in terms of money.
88. Real Income : Purchasing power of money income; quantity of real goods and services that money
income can buy; contrasted with money income.
89. Recession : Down swing of business activity in a trade cycle. Income prices, profits and
employment are falling during this phase of the trade cycle.

90. Closed economy: An economy in which there are no foreign trade transactions or any other form
of economic contacts with the rest of the world.
91. 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, death tax, etc.

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