3. INSIGHTSIAS
Upsc expectations from you...
• Preliminary Exam Syllabus:
• Economic and Social Development-Sustainable Development,
Poverty,
• Inclusion, Demographics, Social Sector Initiatives, etc.
4. INSIGHTSIAS
Mains : Economic Development
Indian Economy and issues relating to planning, mobilization of resources,
growth, development and employment.
Inclusive growth and issues arising from it.
Government Budgeting.
Land reforms in India.
Effects of liberalization on the economy
changes in industrial policy and their effects on industrial growth.
Infrastructure: Energy, Ports, Roads, Airports, Railways etc.
• Investment models.
5. INSIGHTSIAS
Our Prime focus
• Fundamentals of Economics
• Syllabus
• Upsc Prelims questions
• Upsc Mains questions
• Budget
• Survey or State Economic documents
• Newspapers
16. INSIGHTSIAS
So, based on this different Economic systems
took shape in the world.
• Market Economy or Laissez faire Economy
• Command Economy.
• Mixed Economy.
26. INSIGHTSIAS
Sectors of Economy from Mixed Economy
Perspective.
• Private sector
• Public sector or Government sector
• Household sector
• External sector
27. INSIGHTSIAS
Before delving more lets have some basics
handy,
Factors of Production
1. Land
2. Labour
3. Capital
4. Management
5. Entrepreneur
37. INSIGHTSIAS
Capital goods traits
• Durable good, man-made product.
• Input for further production process.
• To be sold in market.
• Shouldn’t be transformed or consumed.
43. INSIGHTSIAS
Some qualms
• A good being intermediate and also Final – Salt
• How to classify it as intermediate or Final for Economic calculations ?
- The distinguishing characteristic whether
a good is final or intermediate is “the last transaction in the market”.
44. INSIGHTSIAS
• A good being consumption as well as Capital good, then...
- a good is consumption or capital also depends on the purpose for
which it is being used.
45. INSIGHTSIAS
Goods that are brought not for meeting the
immediate need of the consumer but for producing
other goods are called _______. (RBI EXAM)
1. Intermediate
2. Consumer
3. Non-Durable
4. Capital
46. INSIGHTSIAS
Investment in the economy – Lets decode the
concepts.
• Gross investment = Production of Capital goods.
• Investment as a percentage of Output.
47. INSIGHTSIAS
Lets figure some variations in our scenario
1. If imports of capital goods worth Rs 20 then the Gross Investment
will be ______ & Gross Investment as percentage Output will be
_____
2. Now if we export Capital goods worth Rs 5, then Gross Investmnet
will be _____ & Gross Investment as percentage of Output will be
____
50. INSIGHTSIAS
What’s depreciation?
The deterioration of a capital good
The normal physical wear and tear of a capital good
The reduction in value of a capital good
1. The amount of the value of a capital good that is expensed for
accounting and tax purposes
52. INSIGHTSIAS
Based on last lecture & Questions lets revise
some stuff
Intermediate goods vs. Capital goods
Both intermediate and capital goods are used to produce consumer goods. But
while intermediate goods are the ingredients of that final product, capital
goods are the tools needed to “mix” them. Capital goods are items that help in
the production process.
• Capital goods don’t get transformed by dissolving or changing shape during
the production. For example, when the baker uses the intermediate good salt
to create his bread, the salt is transformed into an indistinguishable element
of the final loaf. But when he uses the oven, a capital good, the machine
doesn’t change while baking the loaf. It gets hot but then eventually cools
down again and retains the same shape and functionality it had before.
53. INSIGHTSIAS
Questions
Q)Which of the following is the best explanation of capital goods?
1. Goods purchased by a company
2. Goods purchased by a company for resale to consumers
3. Goods contributed by a company’s owners
4. Goods used by businesses to produce goods and services
62. INSIGHTSIAS
Inventory refers to all the items, goods, merchandise, and materials
held by a business for selling in the market to earn a profit.
• If a newspaper vendor uses a vehicle to deliver newspapers to the
customers, only the newspaper will be considered inventory. The
vehicle will be treated as an asset.
• For a cake manufacturer, inventory will include the packets of cakes
that are ready to sell, the semi-finished stock of cakes that haven’t
been cooled or packed yet, the cakes set aside for quality checking,
and raw materials like sugar, milk, and flour.
• In the hotel industry, a vacant room is inventory for the owner.
• For a research consultancy firm, inventory consists of all the
information collected for a project.
63. INSIGHTSIAS
So, Imventory can be roughly put as...
An asset, tangible or intangible,
• An asset that can be realized for revenue generation or has a value for
exchange
• An asset which is in process but is meant for sale in the market
66. INSIGHTSIAS
For us simplified
• Gross Capital Formation = Gross Fixed Capital Formation (machinery +
equipment + new construction + intellectual property) + Net
acquisition of valuable Metals like gold, silver, platinum, gems and
stones + Change in stock/inventory
• GFCF = MEN in India & Pak.
67. INSIGHTSIAS
World Bank definition
• Gross fixed capital formation (formerly gross domestic fixed
investment) includes land improvements (fences, ditches, drains, and
so on); plant, machinery, and equipment purchases; and the
construction of roads, railways, and the like, including schools, offices,
hospitals, private residential dwellings, and commercial and industrial
buildings.
68. INSIGHTSIAS
Consider the following statements:
1) Gross capital formation as percentage of GDP has been increasing since last two decades.
2) Gross capital formation of country indicates the economic growth of country.
• 1 only
• 2 only
• Both 1 and 2
• Neither of the two
69. INSIGHTSIAS
Ans b)
• India’s gross capital formation was on the rise till 2008 but later there
was reversal of the trend due to global financial crisis. Gross capital
formation indicates the economic growth of country.
70. INSIGHTSIAS
Mock question
Q) Consider the following statements:
Human capital formation as a concept is better explained in terms of a
process, which enables
• 1. individuals of a country to accumulate more capital.
• 2. increasing the knowledge, skill levels and capacities of the people
of the country.
• 3. accumulation of tangible wealth.
• 4. accumulation of intangible wealth.
Which of the statements given above is/are correct?
71. INSIGHTSIAS
Gross capital formation will necessarily increase if which of the following
takes place?
1- Gross domestic saving increases
2- Gross domestic consumption increases
3- GDP increases
only 1
only 1 and 2
only 1 and 3
• none of above
72. INSIGHTSIAS
Explaination
• Gross capital formation, in simple terms is equivalent to investment
made. It was earlier called gross domestic investment. The part of
GDP that is used is called gross domestic consumption, while the part
that is saved is gross domestic savings (GDS). Some part of this GDS
will be re-invested back, and that is called gross capital formation.
Now, an increase in GDP or GDS will not necessarily lead to an
increase in capital formation. Because how much in invested back will
depend on many other factors.
77. INSIGHTSIAS
• More the savings, more is the investment and thus more is the
possibility of the production of capital goods.
• More the capital goods more it gives GROWTH for Economy.
• Caution : Its simplified version we havent yet brought in Government
and External Sector.
87. INSIGHTSIAS
MOSPI
The Ministry of Statistics and Programme Implementation came into existence
as an independent Ministry on 15th
October 1999 after the merger of the
Department of Statistics and the Department of Programme
Implementation.The Ministry of Statistics and Programme Implementation
attaches considerable importance to coverage and quality aspects of statistics
released in the country. The Ministry has two wings, one relating to Statistics
and the other relating to Programme Implementation.The Statistics Wing re-
designated as National Statistics Office (NSO) consists of the Central Statistics
Office (CSO) and National Sample Survey Office (NSSO). CSO is an attached
Office and NSSO is subordinate Office under the control of Ministry of S&PI. The
Programme Implementation Wing has three Divisions, namely,
• (i) Twenty Point Programme.
94. INSIGHTSIAS
Thus, GNP = .............
• GNP = GDP + NET FACTOR INCOME FROM ABROAD
• GNP IS FOR RESIDENTS OF COUNTRY.
• WHERE, FACTOR INCOME IS THE INCOME EARNED VIA FACTORS OF
LAND, LABOUR, CAPITAL, ENTREPRENUERSHIP / RENT, WAGES,
INTEREST, PROFITS.
• GNP ONLY CONCERNS ABOUT INDIANS.
• NO FREE MONEY IS USED FOR CALCULATIONS LIKE DONATIONS BY
FOREIGNERS.
104. INSIGHTSIAS
GDP at Constant price = Real GDP
• It refers to the GDP estimates that are obtained by expressing the
values of goods and services in terms of base year price or a constant
price. It is also known as ‘Real GDP’, which is inflation adjusted. GDP
at constant price or Real GDP provides a more precise picture of a
nation’s actual rate of economic growth.
107. INSIGHTSIAS
Question.
• Real GDP is a measure of a country’s...
• A) ...wealth.
• B) ...money.
• C) ...economic transactions.
• D) ...physical output.
111. INSIGHTSIAS
Which of the following statements is correct?
(a) GDP at factor cost = Net Value Addition + Depreciation
(b) GDP at factor cost = Net Value Addition – Depreciation
(c) GDP at factor cost = Net price increase + indirect tax
• (d) GDP at factor cost = Net price increase + direct tax
112. INSIGHTSIAS
• GDP at factor cost = Net Value Addition + Depreciation is correct. GDP
at at factor cost is the sum of net value addition by all producers
within the country.
113. INSIGHTSIAS
Which of the following is a method to measure the National Income?
Expenditure method
Income method
Product method
• All of the above
117. INSIGHTSIAS
Why GDP DEFLATOR ?
• The gross domestic product (GDP) price deflator is an economic
metric used to measure inflation.
• The GDP price deflator measures the changes in prices for all the
goods and services produced in an economy.
• The GDP price deflator is a more comprehensive inflation measure
than the CPI because it isn’t based on a fixed basket of goods.
• We will return to it during our discussion of Inflation and its
corresponding measuring Indices.
123. INSIGHTSIAS
UPSC 2022 Mains
• “Economic growth in the recent past has been led by an increase in
labor productivity”.Explain this statement. Suggest the growth
pattern that will lead to the creation of more jobs without
compromising labor productivity
125. INSIGHTSIAS
Lets be more clear....
The rate of economic growth of output country depends on the rate of
capital formation and capital output ratio.
Capital output ratio determines the rate at which output increases as a
result of a given amount of capital investment.
• For example, a capital output ratio of 5 means that a capital
investment of Rs.5 results in addition of output worth Rs.1. So, if the
capital output ratio is small, then a smaller capital investment would
be need to produce a given level of output and vice versa.
126. INSIGHTSIAS
• Despite being a high saving economy, capital formation may not
result in significant increase in output due to,
a) Weak Administration
b) Illiteracy
c) High Capital/Output Ratio
d) Population density
128. INSIGHTSIAS
ICOR
ICOR is a metric that assesses the marginal amount of investment capital
necessary for a country or other entity to generate the next unit of production.
• A lower ICOR is preferred as it indicates a country’s production is more
efficient.
• The incremental capital output ratio (ICOR) explains the relationship
between the level of investment made in the economy and the consequent
increase in GDP.
• Some critics of ICOR have suggested that the use of ICOR is limited as it
favors developing countries that can increase infrastructure and technology
use as opposed to developed countries, which are operating at the highest
level possible.
132. INSIGHTSIAS
• Consider the following statements about incremental capital-output
ratio (ICOR):
• 1. ICOR for an economy refers to the units of capital needed to drive
one unit of growth.
• 2. India’s ICOR is about 3.5, which translates to a capital investment
requirement of 30% of GDP.
• Which of the statements given above is/are correct?
• [A] 1 only
• [B] 2 only
• [C] Both 1 and 2
• [D] Neither 1 nor 2
133. INSIGHTSIAS
Solution
The incremental capital-output ratio (ICOR) for an economy refers to
the units of capital needed to drive one unit of growth.
• India’s ICOR is about 4.5, which translates to a capital investment
requirement of 40% of GDP. Further, India’s domestic savings rate
hovers at around 28% of GDP (World Bank)
134. INSIGHTSIAS
Consider the following statements about incremental capital-output ratio (ICOR):
The productivity of investments is measured by the incremental capital-output
ratio (ICOR)
Lower the ICOR, higher is the productivity of capital because ICOR measures the
capital required to produce an additional unit of output.
Which of the given statements is/are correct?
A) Both 1 and 2
b) Only 1
c) Only 2
• d) None of the above
135. INSIGHTSIAS
TNPSC- 2021
To reduce the Investment and the Incremental capital-output ratio the
following approaches are to be accomplished:
I. Static efficiency
II. Dynamic efficiency
III. Allocative efficiency
• IV. Technical efficiency
137. INSIGHTSIAS
Why there is less capital formation in India ?
Constraints to efficient conversion of savings to investments:
Low savings rate – Indians usually prefer investing in immovable assets/gold
rather than savings in banks.
Aversion to investments – Retail investment is affected by reluctance to
invest in equity and preference for gold/immovable property.
NPA crisis – proliferation of bad loans makes it difficult for banks to lend for
businesses.
Lacunae in corporate governance – recent instances of malafide
disbursement of loans leads to reluctance in credit access.
Regulatory hurdles in setting up of new businesses affects investments
138. INSIGHTSIAS
Applications
• Recession
• A general decline in economic activity, a contraction in the business
cycle is known as recession. This decline in economic activity is
spread over a few months, and there will be decline in industrial
productivity, real income, real GDP, employment, etc.
• Recession could happen due to pandemic, adverse supply shock,
trade shock, financial crisis etc.
139. INSIGHTSIAS
To analyse graphs lets understand,
The potential Gross Domestic Product (GDP) refers to the highest level
of output (goods and services) that an economy can produce without
generating inflation.
It is a theoretical concept that represents the maximum level of
output that an economy can achieve in the long run, given its
available resources, technology, and potential for growth.
• The potential GDP is often used as a benchmark to gauge the actual
level of output in an economy, and to measure the extent to which
an economy is operating at or above its potential.
145. INSIGHTSIAS
Depression
• A recession is a decrease in gross domestic product (GDP) that lasts
for at least two quarters. It is a slowdown in economic activity. A
depression is a severe drop in GDP that lasts for a year or more.
151. INSIGHTSIAS
• NEER is used to measure the overall strength of a country’s currency.
• NEER is useful for short-term analysis of a country’s currency movements.
• Every NEER compares one individual currency against a basket of foreign
currencies. This basket is chosen based on the domestic country’s most
important trading partners as well as other major currencies.
• An increase in Nominal Effective Exchange Rate (NEER) indicates the
appreciation of rupee.
• The NEER may be adjusted to compensate for the inflation rate of the
home country relative to the inflation rate of its trading partners.
152. INSIGHTSIAS
Purchasing Power Parity Exchange Rate
(PPPER)
• To understand PPP, let’s take a commonly used example, the price of a
hamburger. If a hamburger is selling in London for £2 and in New York for
$4, this would imply a PPP exchange rate of 1 pound to 2 U.S. Dollars.
• This PPP exchange rate may well be different from that prevailing in
financial markets (so that the actual dollar cost of a hamburger in
London may be either more or less than the $4 it sells for in New York).
• This type of cross-country comparison is the basis for the well-known
“Big Mac” index, which is published by the Economist magazine and
calculates PPP exchange rates based on the McDonald’s sandwich that
sells in nearly identical form in many countries around the world.
153. INSIGHTSIAS
RER : Real Exchange Rate.
• In simple terms, RER = NER/PPP.
• No need for complex formulas.
155. INSIGHTSIAS
REER
• Uses multiple basket of currencies.
• The real effective exchange rate (REER) compares a nation’s currency
value against the weighted average of the currencies of its major
trading partners.
• THUMB RULE : An increasing REER indicates that a country
is losing its competitive edge in trading.
156. INSIGHTSIAS
With reference to the Indian economy, consider the following statements:
1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade
competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to
cause an increasing divergence between NEER and REER.
• Which of the above statements are correct?
• [A] 1 and 2 only
• [B] 1 and 2 only
• [C] 1 and 3 only
• [D] 1, 2 and 3
157. INSIGHTSIAS
The indices of Nominal Effective Exchange Rate (NEER) and Real Effective Exchange Rate (REER) are
used as indicators of external competitiveness.
Statement 1 is correct: NEER is the weighted average of bilateral nominal exchange rates of the home
currency in terms of foreign currencies. An increase in Nominal Effective Exchange Rate (NEER)
indicates the appreciation of rupee.
Statement 2 is incorrect: REER is the weighted average of nominal exchange rates adjusted for
relative price differential between the domestic and foreign countries.
An increase in a nation’s REER is an indication that its exports are becoming more expensive and its
imports are becoming cheaper. Means, it is losing its trade competitiveness.
• Statement 3 is correct: A real effective exchange rate (REER) is the NEER adjusted by relative prices
or costs, typically captured in inflation differentials between the home economy and trading
partners. A nation’s nominal effective exchange rate (NEER) when adjusted for inflation in the home
country, equals its real effective exchange rate (REER). Higher the inflation higher will be divergence
(difference between) NEER and REER.
158. INSIGHTSIAS
• With regard to the Real Effective Exchange Rate (REER) and Nominal
Effective Exchange Rate (NEER), which of the following statements is
correct?
• A)NEER is determined for each currency separately.
• B)NEER and REER has the basket of SDR currencies.
• C)When the weight of inflation is adjusted with the REER we get the
NEER of the rupee.
• D)The REER of the rupee is a weighted average of exchange rates
before the currencies of India’s major trading partners.
159. INSIGHTSIAS
• Option a is incorrect: The NEER may be adjusted to compensate for the inflation rate of
the home country relative to the inflation rate of its trading partners. The resulting figure
is the real effective exchange rate (REER). Unlike the relationships in a nominal exchange
rate, NEER is not determined for each currency separately. Instead, one individual
number, typically an index, expresses how a domestic currency’s value compares against
multiple foreign currencies at once.
• Option b is correct: NEER and REER has the basket of SDR currencies
• Option c is incorrect: When the weight of inflation is adjusted with the Nominal Effective
Exchange Rate (NEER) we get the real effective exchange rate (REER) of the rupee.
• Option d is incorrect: The Nominal Effective Exchange Rate (NEER) of the rupee is a
weighted average of exchange rates before the currencies of India’s major trading
partners.
164. INSIGHTSIAS
• Post -1929.
• The model implies that economic growth depends on policies to
increase investment, by increasing saving, and using that investment
more efficiently through technological advances.
• The model concludes that an economy does not “naturally” find full
employment and stable growth rates.
165. INSIGHTSIAS
Trickle down theory
• The trickle-down theory states that tax breaks and benefits for
corporations and the wealthy will trickle down to everyone else.
• Trickle-down economics involves less regulation and tax cuts for
those in high-income tax brackets as well as corporations.
• In India, the trickle-down theory was first experimented in the year
1991 when privatization, decentralization and globalization of
resources began. The new policy envisages disinvestment of
government equity and marked a leap towards liberalization and
privatization.
171. INSIGHTSIAS
• The HDI was developed by the Pakistani economist Mahbub ul Haq
working alongside Indian economist Amartya Sen, often framed in
terms of whether people are able to “be” and “do” desirable things in
their life, and was published by the United Nations Development
Programme.
172. INSIGHTSIAS
Global Multidimensional Poverty Index
• The global Multidimensional Poverty Index (MPI) is an international
measure of acute multidimensional poverty covering over 100
developing countries. It complements traditional monetary poverty
measures by capturing the acute deprivations in health, education,
and living standards that a person faces simultaneously.
176. INSIGHTSIAS
• The UN Sustainable Development Solutions Network released the
World Happiness Report 2023 which ranks countries on happiness.
• The ranking uses six key factors to measure happiness — social
support, income, health, freedom, generosity, and absence of
corruption.
179. INSIGHTSIAS
For Information
In 2012, the UN SDSN was launched under the auspices of the UN
Secretary-General.
• SDSN promotes integrated approaches to implement the Sustainable
Development Goals (SDGs) and the Paris Agreement on Climate
Change, through education, research, policy analysis, and global
cooperation.
182. INSIGHTSIAS
Other Misc concepts.
• Green GDP
• Green GDP is essentially a measure of economic growth, factoring in
the environmental consequences of the growth.
• Environmental impacts such as carbon dioxide and particulate
emissions damage, opportunity cost of energy depletion along with
mineral and net forest depletion are given a value which is then
subtracted from the actual GDP.
• The country’s expenditure on environmental protection is then
added to arrive at the Green GDP value.
183. INSIGHTSIAS
Carbon TAX
• Under a carbon tax, the government sets a price that emitters must
pay for each ton of greenhouse gas emissions they emit. Businesses
and consumers will take steps, such as switching fuels or adopting
new technologies, to reduce their emissions to avoid paying the tax.
• Taxes on greenhouse gases come in two broad forms: an emissions
tax, which is based on the quantity an entity produces; and a tax on
goods or services that are generally greenhouse gas-intensive, such as
a carbon tax on gasoline.
• INDIA : GREEN CESS (GOA) & ECO TAX (WHEN ENTERING MUSSORIE)
184. INSIGHTSIAS
• Despite not levying carbon taxes, India employs an array of schemes
and implicit taxation mechanisms that effectively place an implicit
price on carbon. Examples include Coal Cess, Perform Achieve Trade
schemes, and Renewable Energy Certificates.
187. INSIGHTSIAS
• Kuznets Curve is an inverted U shape that, initially, economic growth
leads to greater inequality, which is later followed by the reduction of
inequality. Economist Simon Kuznets developed the Kuznets Curve in
the 1950s and 1960s.
188. INSIGHTSIAS
Environmental Kuznets curve
The environmental Kuznets curve suggests that economic development
initially leads to a deterioration in the environment, but after a certain
level of economic growth, a society begins to improve its relationship
with the environment and levels of environmental degradation reduces.
• From a very simplistic viewpoint, it can suggest that economic growth
is good for the environment.
190. INSIGHTSIAS
• However, critics argue there is no guarantee that economic growth
will lead to an improved environment – in fact, the opposite is often
the case. At the least, it requires a very targeted policy and attitudes
to make sure that economic growth is compatible with an improving
environment.
192. INSIGHTSIAS
• The Lorenz curve is a graphical representation of the distribution of
income or wealth in a society. Basically, the farther the curve moves
from the baseline, represented by the straight diagonal line, the
higher the level of inequality.
194. INSIGHTSIAS
Solution
The correct option is C Approximately 60%
• From the Lorenz curve, it can be observed that the bottom 80 percent
of the population controls approximately 60 percent of the wealth.
Corresponding to 80% on the population axis, the curve just passes
over 60% on the wealth axis.
195. INSIGHTSIAS
Gini coefficient
• Gini coefficient measures the degree of deviation of the Lorenz curve
from the line of perfect equality.
• A society with a Lorenz curve that closely follows the line of perfect
equality will have a Gini coefficient close to 0, indicating low-income
inequality.
• Conversely, a society with a Lorenz curve that deviates significantly
from the line of perfect equality will have a higher Gini coefficient,
indicating greater income inequality.
199. INSIGHTSIAS
Phillips curve
• The Phillips curve is an economic theory that inflation and
unemployment have a stable and inverse relationship.
• Developed by William Phillips, it claims that with economic growth
comes inflation, which in turn should lead to more jobs and less
unemployment.
200. INSIGHTSIAS
• What relationship does the Phillips Curve illustrate?
When inflation is low, unemployment is high.
When inflation is low, unemployment is low.
When inflation is low, the real interest rate is high.
When unemployment is high, inflation is high.
1. When unemployment is low, nominal GDP is negative.
203. INSIGHTSIAS
Inflation
• Inflation refers to the rise in the prices of most goods and services of
daily or common use, such as food, clothing, housing, recreation,
transport, consumer staples, etc. Inflation measures the average price
change in a basket of commodities and services over time.
• The opposite and rare fall in the price index of this basket of items is
called ‘deflation’.
• Inflation is indicative of the decrease in the purchasing power of a
unit of a country’s currency. This is measured in percentage.
204. INSIGHTSIAS
A rise in inflation indicates a fall in consumer purchasing power and, as
a result, an increase in the cost of living.
• The opposite of inflation is deflation, an decrease in the price of
goods and services
210. INSIGHTSIAS
Demand-pull inflation. Caused by an increase in aggregate demand, or total spending in an
economy. This can happen when consumers increase their spending, or when the government
increases its spending.
Cost-push inflation. Caused by an increase in the prices of production inputs such as labour,
materials, and energy. This can happen when companies have to pay more for their inputs, which
leads to them increasing their prices to cover the higher costs.
Monetary inflation. Caused by an increase in the money supply. It can happen when the central
bank prints more money, or when banks make more loans. The additional money in circulation
causes prices to rise.
• Structural inflation. Caused by a mismatch between supply and demand in the economy. This
can happen when there is an imbalance between the number of goods and services produced
and the number of people who want to buy them. It can also happen when there is an increase
in the cost of production inputs, but the prices of goods and services do not increase as much
213. INSIGHTSIAS
• When inflation is more than 10%, then it is known as galloping
inflation.
• When the rise in prices is 3% to 10% in a year, then it is known as
walking inflation.
• When the rise in prices is 3% or less, then it is known as creeping
inflation.
• Running inflation is a condition in an economy where the prices of
goods and services increase by 10 per cent to 20 percent every year
214. INSIGHTSIAS
• Generally, inflation is termed hyperinflation when the rate of inflation
grows at more than 50% a month.
• Examples: Germany in the 1920s, Zimbabwe in the 2000s, American
Civil War, and Venezuela in 2018. Price rise at a very high rate (20% to
100%).
216. INSIGHTSIAS
Inflation & base effect
The base effect is the impact that selecting a different reference point
for a comparison between two data points can have on the
comparison’s outcome.
• For Eg: In the context of inflation, the base effect is a distortion in a
current inflation figure caused by exceptionally high or low levels of
inflation in the previous reference period.
• Lets understand how it works.
217. INSIGHTSIAS
Simply,
• the choice of base (denominator) could make the inflation look too
high or too low even if the price rise has been same as the same.
218. INSIGHTSIAS
MCQ. A rapid increase in the rate of inflation is sometimes attributed to
the “base effect”. What is “base effect”?(Asked in UPSC-Pre-2011)
(a) It is the impact of drastic deficiency in supply due to failure of crops
• (b) It is the impact of the surge in demand due to rapid economic gro
• (c) It is the impact of the price levels of previous year on the
calculation of inflation rate
• (d) None of the statements.
219. INSIGHTSIAS
Effects of Inflation
• 🤩🤩 Business men & Borrowers : They make huge profits because the
price of final product is rising at a much faster speed than the price of
raw materials.
• Fixed income group & lenders : Salaried individual, pensions
😰😰
suffer.Lenders suffer because even if borrowed money is returned
their ‘real Purchasing Power’ would have declined due to the fall in
Real Interest Rate.
220. INSIGHTSIAS
Currency exchange rate
• Since rupee’s purchasing power will decrease, its exchange rate value
will weaken against foreign currencies, as foreigners get less keen to
buy from India
• E.g. If 1kg onion = ₹50 rises to 1kg = ₹100. then even if currency
exchange rate moving from $1 = ₹50 to $1=₹70 rupee (rupee
weaking)= still foreign will be able to purchase less quantity of goods
from India. Then $ supply decrease → rupee gets weak
228. INSIGHTSIAS
CFPI
Consumer Food Price Index (CFPI) is a measure of change in retail prices of food
products consumed by a defined population group in a given area with reference
to a base year.
The Central Statistics Office (CSO), Ministry of Statistics and Programme
Implementation (MOSPI) started releasing Consumer Food Price Indices (CFPI) for
three categories –rural, urban and combined – separately on an all India basis with
effect from May, 2014.
• Like Consumer Price Index (CPI), the CFPI is also calculated on a monthly basis
and methodology remains the same as CPI. The base year presently used is
2012. The CSO revised the Base Year of the CPI and CFPI from 2010=100 to
2012=100 with effect from the release of indices for the month of January 2015.
![INSIGHTSIAS
• Consider the following statements about incremental capital-output
ratio (ICOR):
• 1. ICOR for an economy refers to the units of capital needed to drive
one unit of growth.
• 2. India’s ICOR is about 3.5, which translates to a capital investment
requirement of 30% of GDP.
• Which of the statements given above is/are correct?
• [A] 1 only
• [B] 2 only
• [C] Both 1 and 2
• [D] Neither 1 nor 2](https://image.slidesharecdn.com/lecture1m2m3m4m5m6-250509125533-b3d41c9f/85/Lecture-1-M2-M3-M4-M5-M6-pptx-Economics-notes-132-320.jpg)
![INSIGHTSIAS
With reference to the Indian economy, consider the following statements:
1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade
competitiveness.
3. An increasing trend in domestic inflation relative to inflation in other countries is likely to
cause an increasing divergence between NEER and REER.
• Which of the above statements are correct?
• [A] 1 and 2 only
• [B] 1 and 2 only
• [C] 1 and 3 only
• [D] 1, 2 and 3](https://image.slidesharecdn.com/lecture1m2m3m4m5m6-250509125533-b3d41c9f/85/Lecture-1-M2-M3-M4-M5-M6-pptx-Economics-notes-156-320.jpg)
