RBSE VU Economics cheat sheet

Circular flow in a two-sector economy without government: households supply land, labour, capital and enterprise to firms; firms pay factor incomes which households spend on output, so income flow = expenditure flow = value of output.

Leakages from the flow are saving, taxes and imports; injections are investment, government expenditure and exports. Equilibrium requires total leakages = total injections.

GDP at market price = C + I + G + (X − M), counting only final goods produced within domestic territory during an accounting year.

GDP at factor cost = GDP at market price − indirect taxes + subsidies. Indirect taxes inflate market prices above factor cost.

GNP = GDP + net factor income from abroad (NFIA). For India NFIA is usually negative because factor payments abroad exceed factor income received.

NNP = GNP − depreciation (consumption of fixed capital). NNP at factor cost is the standard figure called national income.

Private income = national income − income from property and entrepreneurship accruing to government departments + national debt interest + current transfers from government + net current transfers from abroad.

Personal disposable income = personal income − direct taxes − miscellaneous fees, fines and non-tax payments to government. It is the base on which the consumption function is drawn.

Real GDP = (Nominal GDP ÷ price index) × 100, and GDP deflator = (Nominal GDP ÷ Real GDP) × 100. Real GDP is the correct measure for comparing output across years because base-year prices are held constant.

Precautions: exclude intermediate goods, second-hand sales, transfer payments, and transactions in financial assets, since these do not add to current production.

Primary functions of money: medium of exchange and measure of value. Secondary functions: store of value, standard of deferred payment, and transfer of value.

M1 = currency with the public + demand deposits with banks + other deposits with the RBI (most liquid). M2 = M1 + savings deposits with post office savings banks. M3 = M1 + net time deposits with banks. M4 = M3 + total post office deposits.

Money supply is determined by the monetary base (reserve money) and the money multiplier; the multiplier rises when banks hold fewer excess reserves and the public holds less currency relative to deposits.

Credit creation by a bank per unit of new primary deposit ≈ 1 ÷ required reserve ratio, but the actual expansion is smaller because of excess reserves and currency leakage.

CRR is the share of net demand and time liabilities that banks keep as cash with the RBI; SLR is the share held by the bank itself in approved liquid assets (cash, gold, approved securities).

RBI functions: monopoly of note issue under the minimum reserve system, banker and adviser to the government, banker's bank and lender of last resort, custodian of foreign exchange reserves, and controller of credit.

Quantitative tools of monetary policy: repo rate, reverse repo rate, CRR, SLR and open market operations. Qualitative tools: margin requirements, moral suasion, credit rationing and selective credit controls.

Repo: RBI lends short-term funds to banks against government securities. Reverse repo: RBI absorbs liquidity by borrowing from banks. Raising the repo rate is contractionary.

Expansionary policy (cut repo, cut CRR/SLR, buy securities) is used against deficient demand; contractionary policy (raise rates, sell securities) is used against excess demand and inflation.

Aggregate demand AD = C + I + G + (X − M); aggregate supply AS = Y. Equilibrium income occurs where AD = AS, which in a two-sector economy is equivalent to saving = investment.

Consumption function: C = a + bY, where a is autonomous consumption, b = MPC = ΔC ÷ ΔY, and 0 < b < 1. APC = C ÷ Y and falls as income rises.

Saving function: S = −a + (1 − b)Y. MPS = 1 − MPC, and MPC + MPS = 1.

Investment multiplier k = 1 ÷ (1 − MPC) = 1 ÷ MPS = ΔY ÷ ΔI. A larger MPC gives a larger multiplier and a steeper AD schedule.

With a proportional income tax at rate t, the multiplier becomes 1 ÷ [1 − b(1 − t)]; adding imports with propensity m gives 1 ÷ [1 − b(1 − t) + m].

Balanced budget multiplier equals 1 when an equal increase in government spending and lump-sum tax is financed by the tax; the tax multiplier is −b ÷ (1 − b).

Excess demand: AD exceeds AS at the full-employment level of output, creating an inflationary gap. Deficient demand: AD falls short of full-employment output, creating a deflationary gap and unemployment.

Policy response to deficient demand: raise government expenditure, cut taxes, raise transfer payments, or use expansionary monetary policy. Excess demand calls for the opposite mix.

Paradox of thrift: an attempt by all households to save more at a given income lowers AD, reduces equilibrium income, and may leave aggregate saving unchanged or lower.

Revenue receipts are receipts that neither create a liability nor reduce an asset: tax revenue (income tax, corporation tax, GST, customs, excise) and non-tax revenue (interest, dividends, fees, fines).

Capital receipts create a liability or reduce an asset: borrowings, recoveries of loans and advances, and disinvestment proceeds.

Revenue expenditure does not create assets or reduce liabilities (salaries, interest payments, subsidies, pensions). Capital expenditure creates assets or reduces liabilities (roads, machines, repayment of loans).

Revenue deficit = revenue expenditure − revenue receipts. It measures borrowing used to finance current consumption.

Fiscal deficit = total expenditure − total receipts excluding borrowings. It indicates the total borrowing requirement of the government in a year.

Primary deficit = fiscal deficit − interest payments. It isolates current-year borrowing from the burden of past debt.

Monetised deficit (deficit financing) occurs when the RBI subscribes to fresh government securities, expanding reserve money and raising the risk of inflation.

Fiscal policy objectives: allocation of resources to public goods, redistribution of income through progressive taxes and transfers, economic stabilisation, and promotion of growth and full employment.

Expansionary fiscal policy (higher government spending, lower taxes) counters recession but may crowd out private investment and widen the deficit; contractionary policy fights inflation.

The FRBM Act, 2003 made the government set targets for fiscal deficit and revenue deficit as percentages of GDP and required periodic fiscal policy statements.

Balance of payments = current account + capital account + errors and omissions. In the accounting sense the BoP always balances; the balance of payments problem refers to a deficit on one account.

Current account: merchandise trade (goods), services (software, tourism, shipping), primary income (investment income, compensation of employees) and secondary income (remittances, grants).

Capital account: foreign direct investment, portfolio investment, external commercial borrowings, banking capital, and changes in official reserves.

A current account deficit must be financed by a capital account surplus or by drawing down foreign exchange reserves; a persistent CAD raises external debt and exchange-rate risk.

Demand for foreign currency arises from imports, outbound tourism and investment abroad; supply comes from exports, remittances and capital inflows. The intersection determines the free-market rate.

Fixed exchange rate: the central bank pegs the rate and defends it by buying or selling reserves, surrendering independent monetary policy. Flexible rate: the market clears without intervention.

Managed floating (dirty float): the market broadly determines the rate, with the RBI intervening to smooth volatility rather than to fix a level. India has followed this since the 1993 liberalised exchange rate system.

Depreciation is a market fall in a floating currency; devaluation is an official cut in a fixed parity. Appreciation raises the foreign price of exports and lowers the domestic price of imports.

Real exchange rate = nominal rate adjusted for relative price levels; NEER and REER are trade-weighted averages of bilateral rates, with REER deflated by relative inflation.

Planning began with the Planning Commission in 1950. The First Five Year Plan (1951–56), based on the Harrod–Domar model, concentrated on agriculture, irrigation and power after the food crisis of 1947–51.

The Second Plan (1956–61) adopted the Mahalanobis strategy of heavy and capital goods industries, financed by import substitution, tariffs and quotas under a public-sector-led mixed economy.

The Industrial Policy Resolution 1956 classified industries into Schedule A (state monopoly), Schedule B (state-led with private participation) and Schedule C (private sector). The Industries (Development and Regulation) Act 1951 introduced industrial licensing.

Key interventions: the Green Revolution with HYV wheat and rice, Operation Flood in dairy, nationalisation of major banks in 1969, the MRTP Act 1969 and FERA 1973.

The 1991 crisis combined low foreign exchange reserves (about one billion dollars), high inflation, a large fiscal deficit and a sharp fall in export competitiveness, leading to IMF-supported adjustment.

New Economic Policy, July 1991: liberalisation (delicensing, dereservation, abolition of MRTP thresholds, FERA replaced later by FEMA), privatisation (disinvestment of PSEs), and globalisation (tariff cuts, current account convertibility in 1994).

Immediate stabilisation measures in 1991 included devaluation of the rupee in two steps in July, the Liberalised Exchange Rate Management System (LERMS), and later the unified market-determined rate in 1993.

India joined the WTO in 1995 as a founder member of the GATT successor, accepting TRIPS (patents), TRIMS (investment measures) and the Agreement on Agriculture (tariffication and subsidy discipline).

Navratna and Maharatna status gave selected public enterprises greater financial autonomy; the disinvestment programme raised resources without transferring management control in most cases.

Poverty lines are estimated from consumption expenditure data; the Tendulkar committee put the 2011–12 poverty ratio near 22 percent. The World Bank's international line is USD 2.15 per person per day at 2017 PPP.

The National Multidimensional Poverty Index measures deprivation in health, education and living standards; NITI Aayog reported a substantial fall in multidimensional poverty after 2013–14.

Human capital formation covers education, health and on-the-job training. Public spending on education has remained near 3 percent of GDP, well below the 6 percent target of the education policy.

MGNREGA (2005) guarantees 100 days of unskilled wage employment per rural household per year and creates durable rural assets; it is a demand-driven legal entitlement rather than a discretionary scheme.

Rural development tools include the Pradhan Mantri Gram Sadak Yojana for rural roads, NABARD-refinanced rural credit, self-help group–bank linkage for microfinance, and the National Rural Livelihoods Mission.

Employment structure: agriculture still engages roughly 45 percent of the workforce while contributing under one-fifth of GVA, so productivity per worker is low and disguised unemployment is widespread.

Informalisation: over 90 percent of workers are in the informal sector and a large majority of workers are informal even within formal enterprises, without written contracts, social security or job protection.

Sustainable development means meeting present needs without compromising the ability of future generations to meet theirs; India's SDG framework covers 17 goals including renewable energy, clean water and responsible consumption.

Demographic dividend: India's median age is near 28 with the working-age share around two-thirds. The window runs roughly to the mid-2050s and yields a dividend only if those workers are skilled and productively employed.

China began reforms in 1978 under Deng Xiaoping with decollectivisation of agriculture, the household responsibility system, special economic zones and dual-track pricing, well before India's 1991 reforms.

China's township and village enterprises absorbed surplus rural labour and produced consumer goods, so industry and exports grew while India's early strategy stayed domestically focused on heavy industry.

China's one-child policy (1979–2015) slowed population growth and raised per capita income, but it has produced rapid ageing and a shrinking labour force; China's population peaked in 2022 and India became the most populous country in 2023.

Pakistan followed a mixed economy with a strong role for the military and bureaucracy, relied heavily on remittances and cotton-based exports, and has repeatedly needed IMF programmes to correct external deficits.

Sectoral composition: China's industry is around 38–40 percent of GDP and agriculture below 10 percent; India's services are about half of GDP with agriculture near 15–18 percent; Pakistan's agriculture is near a quarter of GDP but employs around 40 percent of workers.

Average growth of about 9–10 percent made China the fastest-growing large economy for three decades, compared with around 6 percent for India and about 4 percent for Pakistan over comparable periods.

Human Development Index ranking: China stands well ahead of India, which stands ahead of Pakistan; China leads on life expectancy, literacy and per capita income PPP.

On development indicators China's infant mortality and maternal mortality are much lower than India's and Pakistan's, reflecting earlier and larger public investment in health and female education.