A SNEAK PEEK INTO IMPORTANT ECONOMIC TERMINOLOGIES

Banking industry is a backbone of economic and financial development of any nation. It plays a major role in channelling funds to borrowers with productive investment opportunities in return for interest on the borrowed amount. It helps the public to keep their money safely in a bank and utilise the same depending upon their needs. Money so entrusted with the banking system does not remain static but instead remains in a continuous motion. This motion or flow of money may be referred to as liquidity. This liquidity, in turn, is again regulated or affected by the demand and supply which in turn again depends upon absolute and comparative advantages with respect to production and transaction of products and services.

Banking as a whole is a person, company who carrying on the business of receiving money and collecting drafts, for customers subject to the obligation of honouring cheques drawn upon them from time to time by the customers to the extent of the amounts available on the current accounts.

Under the current situation of economic slowdown due to the impact of coronavirus let us get ourselves acquainted with the real meaning and concept od some of the terms floating in the news these days-

FINANCAL TERMS-

• GROSS DOMESTIC PRODUCT (GDP) of a nation is the monetary value of all the final goods and services newly produced in a specific time period within the territorial boundaries of that particular nation. It does not consider the production of an intermediate product or service. It is an economic indicator is used worldwide to depict the economic health of a nation. For low-income or middle-income countries, higher year-on-year GDP growth is essential to meet the growing needs of the population. It is also essential for the economic development and progress.

• GROSS NATIONAL PRODUCT (GNP) of a nation is the monetary value of all the final goods and services newly produced by the nationals of that country within a given time period irrespective of the territorial boundaries of that particular nation. It does not consider the production of an intermediate product or service.

• REPO RATE– Repo rate is the cost of credit at which commercial banks borrow money from the Central bank of our country, i.e. Reserve Bank of India to maintain liquidity of funds. It is one of the main tools of the RBI to keep inflation under control. Rise inflation is directly proportional to the increase in repo rate so that loans become expensive thus, disincentivising the investment or demand of products and services which eventually brings down the prices.

• REVERSE REPO RATE- RRP is the rate at which RBI borrows funds from the commercial banks within the country. It is the cost of credit at which commercial banks in India park their excess money with RBI usually for the short-term. It is an important benchmark to regulate the growth within an economy. RBI can curtail the flow of fund in the market by increasing the reverse repo rate to bring inflation under control.

•  INFLATION– Inflation is phenomena that witnesses an increase in the prices of most goods and services of daily or common use, such as food, clothing and shelter, recreation and transport, etc. It measures the change in the average price of a basket of commodities and services on time. This reduces the purchasing power of the people of a nation. Inflation, if it gets too high ultimately leads to a deceleration in economic growth. However, a certain level of optimised inflation is required in the economy to promote the supply of a product or service in demand.

• CONSUMER PRICE INDEX (CPI)- is a measure of the aggregate price level in an economy and an important indicator for inflation. Price of a fixed basket or bundle of goods and services is ascertained for a base year. Now, the price of a fixed basket or bundle of goods and services is ascertained for the target/ given year. The CPI measures the changes in the purchasing power of the country’s currency, and the price level of a basket of goods and services.
  • CPI= (Cost of the market basket in a given year/ Cost of the market basket in the base year) *100
  • The CPI expresses the changes in the current prices of the market basket in terms of the prices during the same period in the previous year. This is usually computed annually and quarterly. It is based on the expenditure pattern of almost all urban residents and includes people of all ages.

• FISCAL DEFICIT- Is the measure of the difference between the government’s expenditure and revenue earned by it during a given financial year. Government borrows from the market to bridge this gap, this also indicates the total borrowings needed by the government in a particular year. Fiscal deficit is expressed as a percentage of GDP.