[Prelims Spotlight] Important keyword related to various economic Indicators


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23 March 2020

Important Keywords related to Various Economic Indicators

Economic indicators are key stats about the economy that can help you better understand where the economy is headed. Here are several of the different types of economic indicators and how they may be used to understand the state of the economy. The most frequently used economic indicators are- GDP, The Stock Market, Unemployment, Consumer Price Index, Balance of Trade, Interest rate, Currency strength, Income and Wages etc.

Types of Economic Indicators

There are three types of economic indicators: leading, lagging and coincident.

  1. Leading indicators point to future changes in the economy. They are extremely useful for short-term predictions of economic developments because they usually change before the economy changes.
  2. Lagging indicators usually come after the economy changes. They are generally most helpful when used to confirm specific patterns. You can make economic predictions based on the patterns, but lagging indicators cannot be used to directly predict economic change.
  3. Coincident indicators provide valuable information about the current state of the economy within a particular area because they happen at the same time as the changes they signal.

Terms to economic indicators

Asset turnover ratio-

 Asset turnover ratio is the ratio between the value of a company’s sales or revenues and the value of its assets. It is an indicator of the efficiency with which a company is deploying its assets to produce the revenue.


The running down or payment of a loan by instalments. An example is a repayment mortgage on a house, which is amortised by making monthly payments that over a pre-agreed period of time cover the value of the loan plus interest. With loans that are not amortised, the borrower pays the only interest during the period of the loan and then repays the sum borrowed in full.


A rise in the value of an asset and the opposite of depreciation. When the value of a currency rises relative to another, it appreciates.

Balance of payment-

The total of all the money coming into a country from abroad less all of the money going out of the country during the same period. This is usually broken down into the current account and the capital account. The current account includes:

*visible trade (known as merchandise trade), which is the value of exports and imports of physical goods;

*invisible trade, which is receipts and payments for services, such as banking or advertising, and other intangible goods, such as copyrights, as well as cross-border dividend and interest payments;

*private transfers, such as money sent home by expatriate workers;

*official transfers, such as international aid.

The capital account includes:

*long-term capital flows, such as money invested in foreign firms, and profits made by selling those investments and bringing the money home;

*short-term capital flows, such as money invested in foreign currencies by international speculators, and funds moved around the world for business purposes by multinational companies. These short-term flows can lead to sharp movements in exchange rates, which bear little relation to what currencies should be worth judging by fundamental measures of value such as purchasing power parity.

As bills must be paid, ultimately a country’s accounts must balance (although because real life is never that neat a balancing item is usually inserted to cover up the inconsistencies).

According to the RBI, the balance of payment is a statistical statement that shows

1. The transaction in goods, services and income between an economy and the rest of the world,

2. Changes of ownership and other changes in that economy’s monetary gold, special drawing rights (SDRs), and financial claims on and liabilities to the rest of the world, and

3. Unrequited transfers.

Balanced Budget

When total public-sector spending equals total government income during the same period from taxes and charges for public services. Politicians in some countries, such as the United States, have argued that the government should be required to run a balanced budget in order to have sound public finances. However, there is no economic reason why public borrowing needs necessarily be bad. For instance, if the debt is used to invest in things that will increase the growth rate of the economy–infrastructure, say, or education–it may be justified. It may also make more economic sense to try to balance the budget on average over an entire economic cycle, with public-sector deficits boosting the economy during recession and surpluses stopping it overheating during booms than to balance it every year.

Bank rate-

Bank rate is the rate charged by the central bank for lending funds to commercial banks.

Base rate-

Base rate is the minimum rate set by the Reserve Bank of India below which banks are not allowed to lend to its customers.

Basis point

One one-hundredth of a percentage point. Small movements in the interest rate, the exchange rate and bond yields are often described in terms of basis points. If a bond yield moves from 5.25% to 5.45%, it has risen by 20 basis points.

Broad money to reserve money

It is a measure of the money multiplier. Money multiplier shows the mechanism by which reserve money creates money supply in the economy. It is again dependent on two variables, namely the currency deposit ratio and reserve deposit ratio.

It is a measure of the money multiplier. Money multiplier shows the mechanism by which reserve money creates money supply in the economy. It is again dependent on two variables, namely the currency deposit ratio and reserve deposit ratio.


When the price of an asset rises far higher than can be explained by fundamentals, such as the income likely to derive from holding the asset.

Capacity cost-

An expenditure or cost incurred by a company in order to expand its business operations. In other words, these are expenses incurred by an organization to increase its capacity to conduct business operations.

Capital account

The capital account can be regarded as one of the primary components of the balance of payments of a nation. It gives a summary of the capital expenditure and income for a country.

The capital expenditure and income is tracked by way of funds in the form of investments and loans flowing in and out of an economy. This account comprises foreign direct investments, portfolio investments, etc. It gives a summary of the net flow of both private and public investment into an economy.

A capital account deficit shows that more money is flowing out of the economy along with an increase in its ownership of foreign assets and vice-versa in case of a surplus. The balance of payments contains the current account (which provides a summary of the trade of goods and services) in addition to the capital account which records all capital transactions.

Capital adequacy ratio

The ratio of a BANK’s CAPITAL to its total ASSETS, required by regulators to be above a minimum (“adequate”) level so that there is little RISK of the bank going bust. How high this minimum level is may vary according to how risky a bank’s activities are.

Capital flight

When CAPITAL flows rapidly out of a country, usually because something happens which causes investors suddenly to lose confidence in its economy. (Strictly speaking, the problem is not so much the MONEY leaving, but rather that investors in general suddenly lower their valuation of all the assets of the country.) This is particularly worrying when the flight capital belongs to the country’s own citizens. This is often associated with a sharp fall in the EXCHANGE RATE of the abandoned country’s currency.

Capital gains

The PROFIT from the sale of a capital ASSET, such as a SHARE or a property. Capital gains are subject to TAXATION in most countries. Some economists argue that capital gains should be taxed lightly (if at all) compared with other sources of INCOME. They argue that the less tax is levied on capital gains, the greater is the incentive to put capital to productive use. Put another way, capital gains tax is effectively a tax on CAPITALISM. However, if capital gains are given too friendly a treatment by the tax authorities, accountants will no doubt invent all sorts of creative ways to disguise other income as capital gains.

Call money rate-

Call money rate is the rate at which short term funds are borrowed and lent in the money market.
The duration of the call money loan is 1 day. Banks resort to these type of loans to fill the asset-liability mismatch, comply with the statutory CRR and SLR requirements and to meet the sudden demand of funds. RBI, banks, primary dealers etc are the participants of the call money market. Demand and supply of liquidity affect the call money rate. A tight liquidity condition leads to a rise in call money rate and vice versa.

Consumer surplus-

Consumer surplus is defined as the difference between the consumers’ willingness to pay for a commodity and the actual price paid by them, or the equilibrium price.

Total social surplus is composed of consumer surplus and producer surplus. It is a measure of consumer satisfaction in terms of utility.

Graphically, it can be determined as the area below the demand curve (which represents the consumer’s willingness to pay for a good at different prices) and above the price line. It reflects the benefit gained from the transaction based on the value the consumer places on the good. It is positive when what the consumer is willing to pay for the commodity is greater than the actual price.

Consumer surplus is infinite when the demand curve is inelastic and zero in case of a perfectly elastic demand curve.

Contractionary policy

Contractionary policy is a kind of policy which lays emphasis on reduction in the level of money supply for lesser spending and investment thereafter so as to slow down an economy.

Core inflation

An inflation measure which excludes transitory or temporary price volatility as in the case of some commodities such as food items, energy products etc. It reflects the inflation trend in an economy.

Cost-push inflation

Cost-push inflation is inflation caused by an increase in prices of inputs like labour, raw material, etc. The increased price of the factors of production leads to a decreased supply of these goods. While the demand remains constant, the prices of commodities increase causing a rise in the overall price level. This is in essence cost-push inflation.

Countervailing Duties

Duties that are imposed in order to counter the negative impact of import subsidies to protect domestic producers are called countervailing duties.

In cases foreign producers attempt to subsidize the goods being exported by them so that it causes domestic production to suffer because of a shift in domestic demand towards cheaper imported goods, the government makes mandatory the payment of a countervailing duty on the import of such goods to the domestic economy.

This raises the price of these goods leading to domestic goods again being equally competitive and attractive. Thus, domestic businesses are cushioned. These duties can be imposed under the specifications given by the WTO (World Trade Organization) after the investigation finds that exporters are engaged in dumping. These are also known as anti-dumping duties.


An ASSET pledged by a borrower that may be seized by a lender to recover the value of a loan if the borrower fails to meet the required INTEREST charges or repayments.

Crowding out effect

A situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending is called crowding out effect.

Sometimes, the government adopts an expansionary fiscal policy stance and increases its spending to boost economic activity. This leads to an increase in interest rates. Increased interest rates affect private investment decisions. A high magnitude of the crowding-out effect may even lead to lesser income in the economy.

Currency Deposit ratio

The currency deposit ratio shows the amount of currency that people hold as a proportion of aggregate deposits.


When the overall price level decreases so that inflation rate becomes negative, it is called deflation. It is the opposite of the often-encountered inflation.


The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.


Depression is defined as a severe and prolonged recession. A recession is a situation of declining economic activity. Declining economic activity is characterized by falling output and employment levels. Generally, when an economy continues to suffer a recession for two or more quarters, it is called depression.

The level of productivity in an economy falls significantly during a depression. Both the GDP (gross domestic product) and GNP (gross national product) show a negative growth along with greater business failures and unemployment.

When a recession continues to take its toll on any economy, the built-in process triggers further cuts in investment as well as consumption spending due to loss of confidence among investors and consumers. Also, the financial crisis may lead to decreased availability for credit. Excessive fluctuations happen in the relative value of the currency. Overall trade and commerce get reduced. The Great Depression of 1929 is considered to be the most classic example of depression in economic history.


ETFs or exchange-traded funds are similar to index mutual funds. However, they trade just like stocks.

ETFs were started in 2001 in India. They comprise a portfolio of equity, bonds and trade close to its net asset value. These funds mainly track an index, a commodity, or a pool of assets.

They have the following advantages over mutual funds and equity/debt funds:

1. Lower Costs: An investor who buys an ETF doesn’t have to pay an advisory/management fee to the fund manager and taxes are relatively lower in ETFs.

2. Lower Holding Costs: As commodity ETFs are widely traded in, there isn’t any physical delivery of the commodity. The investor is just provided with an ETF certificate, similar to a stock certificate.

Gross Domestic Saving

Gross Domestic Saving is GDP minus the final consumption expenditure. It is expressed as a percentage of GDP.

Gross National Product

Gross National Product (GNP) is the Gross Domestic Product (GDP) plus net factor income from abroad.

GNP measures the monetary value of all the finished goods and services produced by the country’s factors of production irrespective of their location. Only the finished or final goods are considered as factoring intermediate goods used for manufacturing would amount to double counting. It includes taxes but does not include subsidies.

Inferior goods

An inferior good is a type of good whose demand declines when income rises. In other words, the demand of inferior goods is inversely related to the income of the consumer.


LIBOR, the acronym for London Interbank Offer Rate, is the global reference rate for unsecured short-term borrowing in the interbank market. It acts as a benchmark for short-term interest rates. It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages. It is an indicator of the health of the financial system and provides an idea of the trajectory of impending policy rates of central banks.

LIBOR is administered by the Intercontinental Exchange or ICE. It is computed for five currencies with seven different maturities ranging from overnight to a year. The five currencies for which LIBOR is computed are Swiss franc, euro, pound sterling, Japanese yen and US dollar. ICE benchmark administration consists of 11 to 18 banks that contribute for each currency.


Liquidity means how quickly you can get your hands on your cash. In simpler terms, liquidity is to get your money whenever you need it.

Liquidity trap

A liquidity trap is a situation when expansionary monetary policy (increase in the money supply) does not increase the interest rate, income and hence does not stimulate economic growth.

The liquidity trap is the extreme effect of monetary policy. It is a situation in which the general public is prepared to hold on to whatever amount of money is supplied, at a given rate of interest. They do so because of the fear of adverse events like deflation, war.

In that case, a monetary policy carried out through open market operations has no effect on either the interest rate or the level of income. In a liquidity trap, the monetary policy is powerless to affect the interest rate.

Marginal standing facility

Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely.

Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short.

Moral hazard

Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both parties have incomplete information about each other.

Net interest income

Net interest income (NII) is the difference between the interest income a bank earns from its lending activities and the interest it pays to depositors.

Net interest income = Interest earned – interest paid

Net interest margin

Net interest margin or NIM denotes the difference between the interest income earned and the interest paid by a bank or financial institution relative to its interest-earning assets like cash.

Net interest margin = (Investment returns – interest expenses) / average earning on assets

NIM measures the effectiveness of a company’s investment decisions, particularly for financial institutions.

Non-performing asset

A non-performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.

1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.

2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.

3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value.”

Phillips curve

The inverse relationship between the unemployment rate and inflation when graphically charted is called the Phillips curve. William Phillips pioneered the concept first in his paper “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957,’ in 1958. This theory is now proven for all major economies of the world.

Producer surplus

Producer surplus is defined as the difference between the amount the producer is willing to supply goods for and the actual amount received by him when he makes the trade.

Purchasing power parity

The theory aims to determine the adjustments needed to be made in the exchange rates of two currencies to make them at par with the purchasing power of each other. In other words, the expenditure on a similar commodity must be the same in both currencies when accounted for the exchange rate. The purchasing power of each currency is determined in the process.

Quantitative easing

Quantitative easing is an occasionally used monetary policy, which is adopted by the government to increase the money supply in the economy in order to further increase lending by commercial banks and spending by consumers. The central bank (Read: The Reserve Bank of India) infuses a pre-determined quantity of money into the economy by buying financial assets from commercial banks and private entities. This leads to an increase in banks’ reserves.

Real GDP at factor cost

Real GDP is the nominal GDP after adjusting for any price changes attributable to either inflation or deflation.

 Nominal GDP or the GDP at current price can present a distorted picture of the actual growth in GDP owing to price changes. However, if we consider the price of the base year as constant and compute the GDP growth rate of the current year using that constant price, the value so arrived at will give a true picture of the actual growth rate in GDP. This measure is called the Real GDP or the GDP at a constant price. It does not factor taxes and subsidies.

A new indicator called GDP deflator is derived by dividing nominal GDP by real GDP. It is a measure of price changes in the economy.


Recession is a slowdown or a massive contraction in economic activities. A significant fall in spending generally leads to a recession.

Such a slowdown in economic activities may last for some quarters thereby completely hampering the growth of an economy. In such a situation, economic indicators such as GDP, corporate profits, employment, etc., fall.

Recessionary gap

This is a situation wherein the real GDP is lower than the potential GDP at the full employment level. The economy operates below the full employment level in a recessionary gap.

A recessionary gap is also termed as a contractionary gap. An economy doesn’t necessarily operate at the full employment level. So the difference that exists between the potential full-employment equilibrium and the actual ones is the recessionary gap.

Regressive risk

Under this system of taxation, the tax rate diminishes as the taxable amount increases. In other words, there is an inverse relationship between the tax rate and taxable income. The rate of taxation decreases as the income of taxpayers increases.

This system of taxation generally benefits the higher sections of the society having higher incomes as they need to pay tax at lesser rates. On the other hand, people with lesser incomes are burdened with a higher rate of taxation.

Repo rate

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.

REPO means Re Purchase Option – the rate by which RBI gives loans to other banks. Bank re-purchase the securities deposited with RBI at the REPO rate.

Repo rate is used by monetary authorities to control inflation.

Reserve ratio

Also known as Cash Reserve Ratio, it is the percentage of deposits which commercial banks are required to keep as cash according to the directions of the central bank.

Reverse repo rate

Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country. It is a monetary policy instrument which can be used to control the money supply in the country.

Secondary market

This is the market wherein the trading of securities is done. Secondary market consists of both equity as well as debt markets.

Securities issued by a company for the first time are offered to the public in the primary market. Once the IPO is done and the stock is listed, they are traded in the secondary market. The main difference between the two is that in the primary market, an investor gets securities directly from the company through IPOs, while in the secondary market, one purchases securities from other investors willing to sell the same.


Securitization is a process by which a company clubs its different financial assets/debts to form a consolidated financial instrument which is issued to investors. In return, the investors in such securities get interest.

This process enhances liquidity in the market. This serves as a useful tool, especially for financial companies, as it helps them raise funds. If such a company has already issued a large number of loans to its customers and wants to further add to the number, then the practice of securitization can come to its rescue.

Shorting or short selling

In capital markets, the act of selling a security at a given price without possessing it and purchasing it later at a lower price is known as shorting. This is also termed as short selling.

Social capital

In capital markets, the act of selling a security at a given price without possessing it and purchasing it later at a lower price is known as shorting. This is also termed as short selling.

Social capital is an important constituent of the prosperity of a company. Social networks in an organization include the trust among the employees, their satisfaction level with the job and also the quality of communications that take place with the peers, seniors and subordinates.

Strong social networking, coupled with an efficient performance by the workforce, signifies a healthy state of affairs for the company. Social capital stresses the importance of these social networks and relationships and aims to use it in the best possible way for achieving organizational goals.

Social capital might have its share of pros and cons, but if it is utilized properly, it can pave the way for an organization’s prosperity.

Soft currency

Soft currency is a currency which is hypersensitive and fluctuates frequently. Such currencies react very sharply to the political or the economic situation of a country.

Soft loans

A soft loan is basically a loan on comparatively lenient terms and conditions as compared to other loans available in the market. These easier conditions might be in the form of lower interest rates, prolonged repayment duration, etc.

Special Drawing Rights

This is a kind of reserve of foreign exchange assets comprising leading currencies globally and created by the International Monetary Fund in the year 1969.

SDR is often regarded as a ‘basket of national currencies’ comprising four major currencies of the world – US dollar, Euro, British Pound and Yen (Japan). The composition of this basket of currencies is reviewed every five years wherein the weightage of currencies sometimes get altered.

Statutory liquidity ratio

The ratio of liquid assets to net demand and time liabilities (NDTL) is called the statutory liquidity ratio (SLR).

Stimulus package

The stimulus package is a package of tax rebates and incentives used by the governments of various countries to stimulate the economy and save their country from a financial crisis.


Underwriting is one of the most important functions in the financial world wherein an individual or an institution undertakes the risk associated with a venture, an investment, or a loan in lieu of a premium. Underwriters are found in banking, insurance, and stock markets.

The nomenclature ‘underwriting’ came about from the practice of having risk takers to write their name below the total risk that s/he undertakes in return for a specified premium in the early stages of the industrial revolution.

Velocity of circulation

 Velocity of circulation is the amount of units of money circulated in the economy during a given period of time.

Velocity of circulation is measured by dividing GDP by the country’s total money supply. A high velocity of circulation in a country indicates a high degree of inflation. It helps in determining how vigorous a country’s economy is.

Venture capital

Start up companies with a potential to grow need a certain amount of investment. Wealthy investors like to invest their capital in such businesses with a long-term growth perspective. This capital is known as venture capital and the investors are called venture capitalists.

Windfall gain

Windfall gain (or windfall profit) is an unexpected gain in income which could be due to winning a lottery, unforeseen inheritance or shortage of supply. Windfall gains are transitory in nature.


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