(i)  Gross Domestic Product (GDP)

The money value of the sum total of goods and services produced in a country is called Gross Domestic Product. Market prices, which are applied for calculating the money value, do not fully reflect the real value of production as market prices include elements of subsidy and indirect taxes. Therefore, subsidies are added and indirect taxes deducted from GDP at market prices to arrive at GDP at factor cost. Let us study other related terms:

Net Domestic Product: It is obtained by deducting depreciation from Gross Domestic Product.

National Income: Since countries engage in international trade, there will be inflows and outflows on that account. Net inflow from abroad is added to NDP to arrive at National Income. National Income is calculated as Net Domestic Product NDP + Net inflows.

Base Year: As discussed above the real income of a country is the sum total of goods and services produced in that country. Since, the goods and services come in different measures; it is not possible to quantify the sum total in a common measure. The values are therefore expressed in terms of money. National Income is the money value of all the final goods and services produced in a country in a year. Since in year to year comparison prices undergo change, therefore for comparison purposes National Income is measured at constant prices with a base year. We are currently having 2011-12 as the new base year (Previously it was 1980-81).

Transfer Payments: Usually income is taken to be payments made for goods and services. But sometimes payments are made by households and governments without any quid pro quo. These payments are known as transfer payments. These payments include the taxes paid by households, voluntary payment to charities, pension, unemployment allowance, scholarships etc. These payments are known as Transfer Payments.

Output Gap: Output Gap is the difference between actual output of an economy and its potential output. The gap is positive when the economy is growing at a rate faster than the potential rate. The output gap is negative if the economy is growing slower than the potential rate of growth. During the 2013-14 Indian economy had a potential rate of growth of 7% whereas the economy is growing nearly 5%, meaning that it was growing with a negative gap of 2%.

Potential Output: Means production capacity of the economy and sometimes it is referred to as non-inflationary rate of growth. Simply saying, it is the maximum amount of goods and services an economy produces when it is working at its full capacity. It is not real output; it is estimating what an economy can produce.

Negative Gap: Means the economy has potential to produce more goods and services but is producing lower than its potential. It implies that demand is not very high and workers/machines/economy is not working to their full capacity.

Positive Gap: When the economy is growing at a rate more than potential rate, implies that demand is higher than production capacity of the economy. It can be further inferred that if there is inflation along with Negative Gap, the inflation is Cost Push Inflation. If there is inflation in the Positive Gap, it is Demand pull inflation.

GDP Deflator: It is arrived at by dividing GDP at current prices by GDP at constant prices in terms of base year. This indicates how much the growth in GDP in a year is due to price rise and how much due to increase in input.

(ii)  Gross Value Added (GVA):

It is the measure of the value of goods and services produced in an area, industry or sector of an economy. In national accounts, GVA is output minus intermediate consumption; it is a balancing item of the national accounts product account.

Relationships to Gross Domestic Product: GVA is linked as a measurement to Gross Domestic Product (GDP) as both are measures of output. The relationship is defined as

            GVA taxes on products- subsidies on products = GDP

As total aggregates of taxes on products and subsidies on products are only available at the whole economy level, Gross Value Added is used for measuring Gross Regional Domestic Product and other measures of the output of entities smaller than a whole economy. Restated

           GVA = GDP + subsidies -(direct, sales) taxes

GVA is the grand total of all revenues, from final sales and net subsidies, which are income into business Those incomes are then used to cover expenses (wages & salaries, dividends), savings (profits, Depreciations and taxes (indirect).

GVA gives a picture of economic activity from producers (supply) side and GDP from consumer (Demand side. Both the measures can have divergence and this divergence depends upon Net Indirect taxes (Net indirect Taxes = Indirect Taxes-Subsidies). GDP is therefore generally less than GVA, however GVA ca et more significance because:

●      The GDP can increase due to substantial increase in tax rates, whereas GVA is insulated from, the effect of increase in taxes

●      A sector wise breakdown provided by the GVA measure can help policymakers to decide which sectors need incentives/stimulus or vice versa

(iii)  Types of Deficit

Revenue Deficit: Means the excess of current expenditure over current revenue. The revenue deficit indicates that the government cannot meet its current expenditure through current revenues.

Budget Deficit: Is overall deficit i.e. the excess of total expenditure over total receipts. It includes both capita; and revenue items in receipts and expenditure. So deficit financing means filling this gap. Government Usually fills this gap by borrowing from RBI and other internal means.

Fiscal Deficit: is budget deficit plus borrowings and other liabilities. Fiscal deficit indicates the total borrowing requirements of the government from all sources. So fiscal deficit financing means filling the overall gap by borrowing from all sources internally and externally as well, whereas budget deficit means meeting the gap by internal borrowings. Let us understand same by an example:

a)     Revenue Receipts                                                             Rs. 2.00 bn

Capital Receipts      

                                            Loan recoveries - 0.50 bn

                                            Borrowings        - 1.50 bn          

               Total Receipt                                                         RS. 4.00 bn

        b) Revenue Expenditure                                                                           Rs.2.50 bn

          Capital Expenditure                                                                                 Rs.1.50 bn

The government, in our example, requires Rs. 4.00 bn for the given financial year for its total expenditure; revenue and capital. On the receipt side it is able to generate Rs.2.50 bn through revenue receipts (2 bn) and recoveries (0.50 bn). The difference of Rs.1.50bn is fiscal deficit. This fiscal deficit is financed through borrowings.

Current Account Deficit: India is a current account deficit country that means we spend more on imports than we earn on exports. The Current Account deficit gap is filled up by Capital Flows/foreign savings. Capital Flows can be debt or equity, short or long term. Preference is for equity linked capital flows and or long term like FDI and not short term like Fill.

(iv)  Money Aggregates

1.  Money Supply: money supply or money stock is the total amount of monetary assets available in an economy at a specific time. The standard measure of money supply is currency in circulation and demand Deposit. The relationship between money supply and prices is evidenced in Quantity theory of Money. It states that there is a direct relation between money supply growth and long term price inflation. This is one of the reasons for relying on supply of money as a measure of inflation control. The different types of money supplies are typically classified as M’s. i.e. Mo (monetary base/reserve money), M1 (narrow money), M2 and M3 (broad money)

▪        Mo = Currency in Circulation + Bankers’ Deposits with the RBI + ‘Other’ Deposits with the RBI

▪        M1 = Currency with the Public + Demand Deposits with Banking System + ‘Other’ Deposits with the RBI

  = Currency with the Public + Current Deposits with the Banking System + Demand Liabilities Portion of Savings Deposits with the Banking System + ‘Other’ Deposits with the RBI

▪        M2 = M1 + Time Liabilities Portion of Savings Deposits with the Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents with a contractual maturity of up to and including one year with the Banking System (excluding CDs)

  = Currency with the Public + Current Deposits with the Banking System + Savings Deposits with the Banking System + Certificates of Deposit issued by Banks + Term Deposits of residents with a contractual maturity up to and including one year with the Banking System (excluding CDs) + ‘Other’ Deposits with the RBI

▪        M3 = M2 + Term Deposits of residents with a contractual maturity of over one year with the Banking System + Call/Term borrowings from ‘Non-depository’ Financial Corporations by the Banking System

2.  Velocity of Money:  refers to how fast money passes from one holder to another. So velocity of money refers to how quickly the transactions are happening between the individuals. If the rate of interest is high, the velocity of money will be low as people will not like to part away with money and it holds vice versa as well. Volume of money is controlled through CRR and Open Market Operations by RBI

(v)  Black Market, Underground Economy, or Shadow Economy

It is a market characterized by some form of noncompliant behavior with an institutional set of rules. If the rule defines the set of goods and services whose production and distribution is prohibited by law, non-compliance with the rules constitutes a black market trade since the transaction itself is illegal. Parties engaging in the production or disruption of prohibited goods and services are members of the illegal economy. Examples include the drug trade, prostitution, illegal currency transactions and human trafficking. Similarly, violating tax code and evading income tax also constitutes part of black economy. Since tax evasion or participation in a black market activity is illegal, participants will attempt to hide their behavior from the government or regulatory authority. Cash usage is the preferred medium of exchange in illegal transactions since cash usage does not leave a footprint. This is why every nation intends that its economy should move to cashless transactions from cash oriented transactions. Common motives for operating in black markets are to trade contraband, avoid taxes and regulations or skirt price controls or rationing. Typically, the totality of such activity is referred to with the definite article as complement to the official economies, by market for such goods and services e.g. “black market in bush meat”

The black market is distinct from the grey market, in which commodities are distributed through channels which, while legal, are unofficial, unauthorized or unintended by the original manufacturer and the white market.