1. GDP and GNP

1. Gross Domestic product (GDP) is money value of final goods and services inside the Domestic economy whether produced by nationals or foreigners
2. Gross National product (GNP) is money value of Final goods and services produced by Nationals whether they produce it within the nation or abroad
3. GDP = GNP – Net Factor Income from abroad
4. Nominal GDP (GDP at market price) is at current market prices while Real GDP (GDP at constant price) is adjusted for inflation w.r.t base year
5. Measure of that inflation is not CPI or WPI but GDP Deflator
6. GDP Deflator = Nominal GDP/Real GDP
7. Net Domestic Product = GDP – Depreciation
8. GDP at market price = GDP at factor cost + Indirect taxes – subsidies

• Discuss – Recent changes to the method of calculating GDP
• Discuss – what are these factors in factor cots

2. Fiscal Deficit, Revenue Deficit, Primary Deficit

1. Fiscal Deficit = Total expenditure – Total non debt creating  receipts ( total revenue receipt plus non debt creating capital receipt)
2. In the above formula only debt creating capital receipt is excluded which is borrowing and that is exactly the fiscal deficit
3. Revenue deficit = revenue receipt -revenue expenditure
4. Effective revenue deficit = revenue deficit-grants for creation of capital assets
5. Primary deficit = fiscal deficit -deficit due to interest paid

Note – As grants are donation, creates no liability, are not to be repaid, they come under revenue budget not capital part similarly under international transaction grants come under current account not capital account

• Discuss – FRBM act targets
• Discuss – Deficit financing and monetizing deficits

3. Current account and Capital account

1. Current account deals with current, ongoing, short term transactions like trade in goods, services (invisible)
2. It includes 1.trade in goods (BoT), 2.trade in services (invisible trade), 3.investment income,4.Unilateral transfers – GIFTS, GRANTS ,REMITTANCES
3. Capital account deals with investments (FDI, FII, FPI), loans (ECB, External Commercial Borrowings), reserves (dollar, Special Drawing Right , gold etc). <bulk transactions which create liabilities>
4. Balance of Payment is systematic record of all the transaction of a country with the world

Note – Grants, remittances etc. are in current account not capital account

Note 2- Investment income is under current account while Investments under capital account

• Discuss – Balance of Trade v/s Balance of Payment
• Discuss – Current account deficit

4. Plan v/s non plan expenditure

1. Plan expenditure simply means expenditure according to erstwhile 5 year plans (mostly for creation of capital assets)
2. all other things included in non plan -interest payment , subsidies, pensions, military expenditure etc

Discuss – Why is plan- non plan division being done away with

5. Monetary Policy and Fiscal Policy

1. Monetary Policy – what RBI does i.e interest rates (Repo, reverse repo, MSF, bank rate), Open Market Operations, CRR, SLR
2. It affects money supply in the economy
3. Fiscal Policy – what govt., finance ministry does, mainly taxes and expenditure (subsidies, wages etc)
4. It mainly affects aggregated demand in the economy

Discuss – Countercyclical monetary and Fiscal Policies

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5 Questions 

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#1. Net National product at factor cost is equal to
(a) Gross Domestic product + Net factor income from abroad – depreciation
(b) Gross National product at market prices -indirect taxes + subsidies – Depreciation
(c) Gross domestic product – depreciation + Indirect taxes -subsidies
(d) National product at market prices + Indirect taxes + subsidies + Depreciation

2. The balance of payments of a country is a systematic record of (2012)

• (a) all import and export transactions of a country during a given period normally a year
• (b) goods exported from a country during a year
• (c) economic transaction between the government of one country to another
• (d) capital movements from one country to another

£3. Which of the following constitute Capital Account? (2013)

• 1. Foreign Loans
• 2. Foreign Direct Investment
• 3. Private Remittances
• 4. Portfolio Investment

Select the correct answer using the codes given below.

• (a) 1, 2 and 3
• (b) 1, 2 and 4
• (c) 2, 3 and 4
• (d) 1, 3 and 4

£4. The national income of a country for a given period is equal to the: (2013)

• (a) total value of goods and services produced by the nationals
• (b) sum of total consumption and investment expenditure
• (c) sum of personal income of all individuals
• (d) money value of final goods and services produced

5. With reference to Union Budget, which of the following is/are covered under Non-Plan Expenditure?

• 1. Defense -expenditure
• 2. Interest payments
• 3. Salaries and pensions
• 4. Subsidies

Select the correct answer using the code given below.

• a. 1 only
• b. 2 and 3 only
• c. 1, 2, 3 and 4
• d. None