Important Economics Terms for UPSC Preparation
Economics is an integral part of UPSC preparation. Moreover, it is a crucial part of our daily life also. A piece of basic knowledge about economics is essential to maintain and understand the financial part of our life. Hence, we have compiled a list of the most important Economics terms for UPSC preparation to help you efficiently understand the basics. IAS ke Funde is your ever-present partner in your journey to the top of Indian Bureaucracy.
Let’s dive into our list of top economic terms for UPSC preparation.
In Economics, the macroeconomics field deals with the large-scale issues faced by the economy. Economic issues like inflation, recession, unemployment, economic growth, and monetary problems.
Microeconomics is the study of individual economic issues. This field of economics focuses more on the household and small firm economies. The behaviour and decision-making process that affect them financially comes under the scope of microeconomics. Moreover, the factors like supply and demand that decide the prices in the market are also a part of the study.
Bank rate is the rate of interest at which the commercial banks lend money from the central bank of the country, for instance, the Reserve Bank of India. The central banks control the economic activities of commercial banks in the country.
Base Rate is the minimum rate of interest set by the central bank at which consumers can take a loan from the commercial banks. To maintain transparency in the credits, the central bank ensures that commercial banks follow fair practices while lending money.
When a country or business faces bankruptcy, a bailout is a financial aid given to save them from a financial breakdown. The assistance could be in the form of assets, cash, bonds, etc. However, bankruptcy should affect a significant amount of people to be considered for a bailout. For instance, a company’s bankruptcy affects the lives of thousands of its employees.
Capital Account is the account of a country that gives a summary of its income and expenditure. This considers all the private and public sector funding and expenses. Therefore, it is a primary component to decide the payment balance of a nation.
A market that deals with the trade of financial securities are called Capital Market. These financial securities are in the form of bonds or stocks. The stock markets and bond markets are a part of the Capital Market. The rise and fall of the capital market give a lot of information about the economic condition of a country.
Deflation is the reduction in the price level in the market due to low money supply or credit availability. It causes an increase in unemployment because of the lack of demand in the market. Sometimes, deflation is a result of the low investment by the government. To curb deflation, the government promotes open market activities, lowers the bank reserve limits, and lowers the target interest rate.
Inflation is the exact opposite of Deflation. It is also the most commonly occurring phenomenon in the markets around the world. Inflation occurs when there is a fall in the value of a currency, and hence, the market prices increase significantly. It can also happen when an economy rises rapidly due to increased spending. To stop or reduce inflation, the government will put a limit on the money supply or increase the reserve cash requirement of the banks.
Recession is one of the effects of inflation. There is a slowdown in the economy of a country when there is a lack of market activity because of increased prices. Recession is the economic term for this slowdown in the market. The U.S. financial crisis has proven that recession can hit a country’s economy hardly even if they have been financially stable for years. A significant factor that causes a recession is inflation. To avoid recession, the government can cut interest rates and taxes. Moreover, the government can increase spending and also guarantee bank loans and mortgages.
EMI or equated monthly instalment is the monthly payment of a part of the total sum lent by an individual or business.
The exchange rate is the value of a currency in comparison to other money. The exchange rate of a currency depends on the economic strength of the respective country.
Repo rate is the interest rate at which the commercial banks lend money from the central bank when there is a financial crunch. In the case of Inflation, the government will decrease the Repo Rate to minimise the ill-effects.
Reverse Repo Rate
Opposite to Repo Rate, Reverse Repo Rate is the interest rate at which the central banks lend money from other commercial banks. When there is a shortage of money in the market, the government has to push money to stabilise the market. The commercial banks then get the return of their amount according to the decided reverse repo rate.
Reserve Ratio is a percentage decided by the central bank of a country. The commercial banks have to keep their cash and loans under the limits specified by the central bank to stay safe from the penalties. Reserve Ratio is commonly referred to as Cash Reserve Ratio.
Human Development Index
The Human Development Index (HDI) statistically measures the growth of a country in the social and economic fields. The HDI is decided by ranking the standard of living, health, the level of education of the citizens of the country. HDI is crucial in assessing the growth of the citizens of a nation.
Gross Domestic Product
GDP or Gross Domestic Product measures the market value of a country. Therefore, it assesses all the economic activities going on in a country. The yearly GPD report shows the development of a nation.
Gross National Product
Gross National Product (GNP) is the Gross Domestic Product (GDP) plus net factor income from abroad.
A liquid asset doesn’t lose its value when it’s converted into cash. Ideally, most liquid assets are only banknotes and accounts.
Liquidity is the ease of getting your cash in hand. This cash can be your emergency savings or the money that you keep with you. Liquidity allows you to seize financial opportunities without any hassle.
Statutory Liquidity Ratio
In addition to Cash Reserve Ratio, commercial banks have to maintain SLR too. Statutory liquidity ratio or SLR is the ratio of liquid assets to net demand and time liabilities (NDTL) that the commercial banks have to maintain. Every Friday, banks report their SLR to the central bank of the country. A failure to maintain the SLR defined by the central bank will impose penalties on the bank. It is one of the most Important Economics Terms.
Non Performing Assets
A loan is labelled as non-performing assets (NPA) when there has been no activity to repay it for more than 90 days. The NPAs are classified into three categories according to their duration – Substandard, Doubtful, and Loss assets.
1. Substandard assets:
Substandard Assets are NPA that has remained on the list for at least or less than 12 months.
2. Doubtful assets:
Doubtful NPAs have remained in the substandard category for 12 months without any activity to repay the loan.
3. Loss assets:
The NPAs which can not be recovered fully even after the complete acquisition is called loss assets. Such NPAs cause a massive loss to the banks. Hence, it is a significant contributor to an economy with a declining growth rate.
These were the most important economics terms for UPSC preparation that you should keep on your fingertips. Make sure you read about these topics in detail to understand these concepts more effectively. Our list has all the most used economics terms for UPSC CSE and beyond. Moreover, a knowledge of the basic terminology of Economics will help in the understanding of articles and the books more efficiently. Use them in your answers and enhance the credibility of your knowledge.
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