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ECONOMICS

(Economic and Social Development-Sustainable, Development, Poverty, Inclusion, Demographics, Social Sector Initiatives, etc.)

Books/Sources to Refer ->

 

Economy may be daunting to some, but the questions are based on your conceptual understanding of  macroeconomics. No matter how many times you read and mug-up the data, you are bound to falter in the exam.  Conceptual clarity is what matters the most in Economics.

Weightage given to Economics (since 2011)

eco
On an average around 14-15% weightage is given to Economics.

If your basic funda’s of Economics is sound, then you will even be able to get all answers right in Prelims . So our sincere advice to you is to invest more time in understanding the concepts and analyzing how one concept is linked to another.

 For Example:

If the interest rate is decreased in an economy, it will  (2014)(a)   decrease the consumption expenditure in the economy

(b)   increase the tax collection of the Government

(c)   increase the investment expenditure in the economy

(d)   increase the total savings in the economy

Solution (c)

 

Under which of the following circumstances may ‘capital gains’ arise? (2012)

1. When there is an increase in the sales of a product2. When there is a. natural increase in the value of the property owned

3. When you purchase a painting and there is a growth in its value due to increase in its popularity

Select the correct answer using the codes given below :

(a) 1 only

(b) 2 and 3 only

(c) 2 only

(d) 1, 2 and 3

Solution (b)

 

How to Study Economics?

Some of them have misconceptions that Economics is only about ‘money’. No its about choices. Choices or decisions made based on the resource available (time, capability, money, interest etc.)

Decisions made in midst of alternatives at the National level is known as ‘Macroeconomics’ (Government making a decision to blend 10% Ethanol in petrol) and if the same choices/decisions are made at the individual level, it is known as ‘Micro-economics’.

Economics has so much of relevance to our day-to-day lives. Be it the choice that you make to take-up this exam or even choose or website ‘IASbaba’ for your preparation. It’s all about making choices suiting to your needs and available resources.

This makes reading Economics enjoyable and meaningful !!

Once you get hold of this subject, it will take very less time to revise and also more accuracy can be achieved in the exam.

 

Basic Economic and Indian Economy:

  1. Introduction to Economics:

Focus:

Understanding the basic concepts of:

  • MacroEconomics – Poverty, Growth, Employment etc
  • Microeconomics – decisions/choices made at a company, household or an individual level
  • Difference between Growth and Development; indicators used to measure.
  • Example: To measure Growth- GDP is used and for Development – HDI (Human Development Index)
  • National Income Accounting – Gross National Product (GNP), Gross Domestic Product (GDP), Gross National Income (GNI), Factor cost, Market Price, Purchasing power parity(PPP), Per-Capita Income (PCI) – a general understanding on how they are calculated and what all factors go into their calculation
  • Example: GDP is calculated using either of the following 3 methods- production method, expenditure method, income method.
  • Primary , Secondary, Tertiary Sectors – what constitutes each sector? What are their contributions to the GDP
  • Example: Primary sector covers agriculture and allied activities, mining . It contributes 13.7% to India’s GDP
  • Capitalist, State, Mixed Economic System – which type of Economic system India has adopted and why?

 

Note: Don’t just read definitions, analyze! For example: When do we use GDP for measurement of Growth and not GNP? Which method is followed in India and why?

When we say ‘why’ a particular method was adopted- it means that, one has to understand both positives and negatives of the method.

Example: 2013 Previous Year Question 


The national income of a country for a given period is equal to the:
(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

Solution (a)

2011 Previous Year Question

A “closed economy” is an economy in which(a.) the money supply is fully controlled

(b.) deficit financing takes place

(c.) only exports take place

(d.) neither exports nor imports take place

Solution (d)

 

  1. Growth & Development

Focus:

  • Poverty– concepts like Below Poverty line (BPL), Poverty Gap, Poverty estimates by National Sample Survey Organisation (NSSO), which Institution in India decides on Poverty line- Planning Commission
  • Different Committees set-up to measure poverty, methodology used – Alag committee, Lakadwala, Suresh Tendulkar Committee, NC Saxena Committee, Rangarajan Committee – A general understanding of how each committee differed in their measurement.
  • Example: Rangarajan Committee was set-up by Planning Commission in 2012; Methodology used is ‘Monthly Expenditure of family of five’. According to the estimates- poverty per day per person in urban area is 47 Rs and in rural area it is 32 Rs
  • Inequality– how is it measured –Gini co-efficient , Lorenz Curve; concepts like relative inequality, absolute inequality.
  • Issues with employment, different types of unemployment like disguised unemployment, underemployment etc; Globalization and its impact on labour.
  • Demographic Dividend, Skill Development
  • Development Indicators from International organisations like HDI, MPI (Multiple Poverty Index), Millennium Development Goals etc.

Note: Make a note of the Government Schemes, Committees related to growth, development, eradication of Poverty, Employment, Labour issues etc. like MGNREGA, National Rural Livelihood Mission, Bharat Nirman etc.

Initiatives like ‘Make in India’, Innovation Council, Skill Development Initiative Scheme (SDIS)

Example: 2013 Previous Year Question

Disguised unemployment generally means (2013)(a) large number of people remain unemployed

(b) alternative employment is not available

(c) marginal productivity of labour is zero

(d) productivity of workers is low

Solution (c)

 

Economic growth in country X will necessarily have to occur if (2013)(a) there is technical progress in the world economy

(b) there is population growth in X

(c) there is capital formation in X

(d) the volume of trade grows in the world economy

Solution (c) 

 

 

  1. Inflation and Business Cycle

Focus:

  • Inflation, Depression, Recession and related terms and concepts like deflation, disinflation, reflation, stagflation, Philip’s curve
  • Types of Inflation – based on the rate of growth of the prices– creeping, trotting, galloping, hyper-inflation
  • Types of Inflation – based on the causes– Demand-pull, Cost-push, Structural, Speculation.
  • Impact of Inflation on Indian Economy, different stakeholders in the economy. Is a minimum inflation necessary? If so why?
  • Inflation measurements like CPI, WPI, GDP deflator
    • Composition or what constitutes these indicators
    • Their merits and demerits
    • Which measurement is better indicator of inflation and why? Which index is used to measure inflation in India currently?
  • Base year from which it’s calculated.
    • What is this Base year?
    • Why does Government change the Base Year?
    • What impact it has on the economic growth or inflation?
    • Example: In WPI there are totally 676 items, out of that 20% weightage is given to Food, 14% to Power and Fuel, 66% to Manufactured goods. It does not include Services. Base year for WPI is 2010-11. It is published by Ministry of Commerce and Industry
  • Role of Government and RBI in controlling inflation

Example: 2013 Prelims Question

Consider the following statements : (2013)1. Inflation benefits the debtors.
2. Inflation benefits the bond-holders.Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2Solution (a)

 

 

A rise in general level of prices may be caused by: (2013)1. an increase in the money supply
2. a decrease in the aggregate level of output
3. an increase in the effective demandSelect the correct answer using the codes given below.
(a) 1 only
(b) 1 and 2 only
(c) 2 and 3 only
(d) 1, 2 and 3Solution (d)

 

 2011 Prelims Question

A rapid increase in the rate of inflation is sometimes attributed to the “base effect”. What is “base effect”?(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 growth
(c.) It is the impact of the price levels of previous year on the calculation of inflation rate
(d.) None of the statements (a), (b) and (c) ‘given above is correct in this contextSolution (c)

 

 

  1. Money and Banking Systems

Focus:                         

  • Role and functions of RBI
  • Monetary Policy/measures taken by RBI like Bank rate, repo rate, reverse repo rate, Statutory Liquidity Ratio (SLR), Cash reserve Ratio (CRR), Liquidity Adjustment Facility (LAF), Marginal Standing Facility (MSF)
    • Why are these measures taken?
    • What impact it has on the Supply of money, Inflation and the Economy?
  • Different types of Banks and their functioning– Commercial Banks, RRB’s, Development banks, NABARD, Co-operative Banks, Development Banks, Merchant Banks, Non-Banking Financial Company’s (NBFC’s), Regional Rural Banks (RRBs) etc.
    • Functions of these Banks, to whom do they lend?
    • How are these Banks regulated? Concepts like priority sector lending
    • Example: NBFC’s are regulated by RBI, unlike the normal banks, NBFC cannot accept demand deposits (DD); NBFCs do not form part of the payment and settlement system and cannot issue ‘cheques’ drawn on itself.
  • Banking reforms like Bank Nationalisation (1969, 1980) Basel Norms etc.
    • Why were/are these reforms needed?
    • What was/is the Purpose of these reforms
  • Understand Key-Terms– Financial Inclusion, Fiscal Consolidation, Narrow Banking, Non-Performing Assets, Shadow Banks, Weak Bank, Core Banking, Bank Run, Priority Sector lending, Capital to Risk Weighted Assets (CRAR) etc., and other related concepts related to Banking – what steps have been taken by the Government and RBI in this regard.
  • Steps taken by government with regard to Financial Inclusion.
    • Example: Introduction of Business Correspondent model in rural areas or Woman only banks,  Jan Dan Yojana, Micro-finance, Mudra Bank etc
  • Recent Committee’s setup with regard to Banking Reforms and its important recommendations

 

Few Example’s from Previous Year’s Prelims Questions Paper

If the interest rate is decreased in an economy, it will     (2014)A.      decrease the consumption expenditure in the economy
B.      increase the tax collection of the Government
C.      increase the investment expenditure in the economy
D.     increase the total savings in the economySolution (c)

 

 

The Reserve Bank of India regulates the commercial banks in matters of (2013)1. liquidity of assets
2. branch expansion
3. merger of banks
4. winding-up of banksSelect the correct answer using the codes given below.
(a) 1 and 4 only
(b) 2, 3 and 4 only
(c) 1, 2 and 3 only
(d) 1, 2, 3 and 4Solution (d)

 

What is/are the facility/facilities the beneficiaries can get from the services of Business Correspondent (Bank Saathi) in branchless areas? (2014)1. It enables the beneficiaries to draw their subsidies and social security benefits in their villages.
2. It enables the beneficiaries in the rural areas to make deposits and withdrawals.Select the correct answer using the code given below.A.1 only
B.2 only
C.Both 1 and 2
D.Neither 1 nor 2

Solution (c)

 

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