Economics-Part-2 Full-Book-Important Definitions

 

Full-Book-Important Definitions-Lahore-Board

National Income: Total market value of all the final goods and services produced in a country during one year.

Gross Domestic Product (GDP): GDP of a country for some years is the total value of goods and services, which it produces within its geographical boundaries. GDP=GNP - Net Factor Income from Abroad.

Gross National Product (GNP): GNP of a country is the annual sum of market values of all final goods and services produced by the nationals of the country. GNP= GDP + Net Factor Income from Abroad.

Net National Product (NNP): NNP is the measure of the national production of a country obtained by deducting the amount of depreciation from GNP. NNP= GNP – Depreciation.

National Income (at Factor Cost): National income is the total of all incomes earned by the factors of production in the form of wages, rent, interest, and profit. NI=NNP – Indirect Taxes + Subsidies.

Personal Income (PI):  The total income received by people from all sources. PI=NI- Social Security Contributions – Corporate Taxes – Undistributed Profits + Transfer Payments.

Disposable Income (DI): Disposable income is the total net amount left with the individuals when they have paid direct taxes. DI = PI – Direct Taxes.

Per Capita Income (PCI): It is the average income of people in a country, i.e. income per head of population. It is calculated when national income is divided by the population of a country. PCI = National Income / Population.

Circular Flow of Income: Circular flow of income means that income and expenditures in an economy are related to each other in a circular way.

Product Method for Measurement of NI: This method is based on the concept of national income as "total market value of all final goods and services produced in a country during one year."

Income Method for Measurement of NI: This method is based on the concept of national income as "sum of the incomes of all persons of a country during one year."

Expenditure Method for Measurement of NI: This method is based on the concept of national income as "the addition of the total expenditure done by the people and the government for one year."

National Accounting: The classification of national income under various concepts and the estimation of total income, total products, and their components are called national accounting.

Depreciation: It represents a fall in the value of a nation's stock of capital during the production of goods. For example an old car will certainly have less value than the value of a similar new car.

Consumption (C): The part of income spent on consumer goods for getting direct satisfaction is called consumption. Consumption is a function of income.

Average Propensity to Consume (APC): APC is the ratio of total consumption to total income. APC= C/Y.

Marginal Propensity to Consume (MPC): MPC is obtained by taking the ratio of change in consumption to change in income. MPC= ∆C/∆Y.

Savings (S): Saving is that part of income that is not consumed, or it is that part of income left after making expenditures. Savings = Income – Consumption.

Average Propensity to Save (APS): APS is the ratio of total savings to total income. APS= S/Y.

Marginal Propensity to Save (MPS):MPS is the ratio of change in savings to change in income. MPS= ∆S/∆Y.

Investment (I): The expenditure done by individuals, firms or countries to increase capital stock and their incomes is called investment.

Autonomous Investment: It is that investment which is not affected by changes in national income.

Aggregate Expenditure: Total expenditure for goods and services in a country during a period is called aggregate expenditure.

Equilibrium of National Income: It means a level of national income, which a country can achieve in a period and can maintain the same during next period.

Leakages: The part of national income not used by households for purchasing consumer goods. Leakages include saving, taxes etc.

Injections:Flow of funds into the domestic market. Injections include investment, exports etc.

Money: Money is any material which is commonly accepted and generally used as medium of exchange in any type of transaction.

Barter System: A system for exchange of goods without the use of money is called barter system.

Any 4 Difficulties of Barter: 1- Lack of double co-incidence of wants. 2- Lack of common measure of value. 3- Indivisibility of goods. 4- Difficulty in storing of value.

Currency: The money issued by the government as official medium of exchange is called currency. It is of two types: 1- Metallic Money, 2- Paper Money.

Metallic Money: Metallic money consists of coins such as five-rupee coin in Pakistan. Coins may be: 1- Token coins, 2- Full-Bodied coins.

Token Coins/Money: When the face value of a coin is greater than the value of metal is used it contains, it is called token money.

Full-Bodied Coins/Money: When the face value of a coin is equal to the value of the metal contained in the coin, it is called full-bodied coin.

Paper Money: Paper money includes currency notes issued by the Central Bank. In Pakistan paper money issued by the State Bank in the form of 5000, 1000, 500, 100, 50, 20, 10 – rupee notes.

Convertible Paper Money: The government promises to change this currency into gold, if demanded. All currency notes are convertible paper money.

Inconvertible Paper Money: Against such money, the government has no promise to give gold if demanded.

Deposit Money: Demand deposits in the banks are called deposit money. This money is used through cheques and drafts. This money is also called credit money.

Legal Tender Money: The money which a person must legally accept for large payment of dues, it is called legal tender. In Pakistan all currency notes are legal tender.

Unlimited Legal Tender: There is no maximum limit to which such money can be legally used. All currency notes are unlimited legal tender.

Limited Legal Tender: This money can only be used up to a certain limit. One rupee and two rupee coins are limited legal tender.

Near Money: Deposits of banks which are not operated through cheques e.g. fixed deposits, the government bonds and Defence Saving Certificates are called near money.

Electronic Money: Use of internet and online transactions for buying or selling of goods, transfer of money and use of credit/debit cards may be called electronic money.

Any-4 Functions of Money: 1- Medium of exchange, 2- Store of value, 3- Measure of value and 4- Medium of government payments.

Supply of Money: Supply of money means the total stock of money held by the government, the people and the banking system in the country.

Demand for Money: The quantity of money which people wants to hold in their hands at a given time period is known as demand for money.

Transaction Demand for Money: It means people need money to make payments for goods and services. Transaction demand for money is directly related to level of income.

Speculative Demand for Money: It is the demand for financial assets such as securities, money and foreign currency etc. it is indirectly related to rate of interest.

Precautionary Demand for Money: People hold cash for unexpected expenditure which may become necessary e.g. in case of accident, diseases etc.

Promissory Note: It is a written promise on a stamp paper by a buyer that he would pay the specified amount to the seller, after a certain period of time.

Cheque: A cheque is an order by a depositor to a bank for paying the amount stated in the cheque.

Bearer Cheque: It is a cheque against which the bank accepts for payment without determining the identity of the person who presents it to bank.

Order Cheque: It is a cheque against which only that person can receive payment in whose favour the cheque has been written.

Crossed Cheque: The word bearer is deleted and two lines in left top corner have been drawn. Cash cannot be obtained against this cheque. This can only be deposited in the account of that person in whose favour the cheque is drawn.

Bill of Exchange: A bill of exchange is a written promise by the buyer of goods to pay the seller a sum of money at a specified time in future.

Sight Bill: This is a bill for which payment is to be made when it is presented to the buyer of the goods usually at the time of delivery of goods.

Time Bill: In this kind of bill, instead of immediate payment, the amount is cleared after a specified period of time.

Foreign Bill of Exchange: This bill of exchange can also be used for import or export of goods.

Security: Security means anything which is offered to the borrower by the lender for getting a loan. For example treasury bill etc.

Value of Money: Value of money means purchasing power of money. Value of money has inverse relation with general price level. Value = 1 / p, where p is general price level.

Quantity Theory of Money: Taussig – Double the quantity of money and other things being equal, prices will be twice as high as before, and the value of money one half. Half the quantity of money and other things being equal, prices will be one half and the value of money will be doubled.

Fisher’s Equation of Exchange: P=MV/T where P= general price level, M= quantity of money, V= velocity of money, T= no. of goods bought and sold.

Inflation: Inflation means a situation in which there is a continuous rise in general price level.

Types of Inflation: 1- Demand-Pull Inflation, 2- Cost-Push Inflation.

Monetary Policy: Monetary policy is used by Central Bank to control the supply of money in the country and to control inflation or deflation.

Fiscal Policy: Fiscal policy refers to the government policy of public expenditures and taxes. It can be used as an anti-inflationary measure.

Deflation: Deflation means a situation in which there is a continuous fall in general price level.

Demand-Pull Inflation: When inflation is the result of rise aggregate demand for goods, then it is known as demand-pull inflation.

Cost-Push Inflation: Cost-push inflation occurs when due to some reason supply of goods fall short.

Hyperinflation: Hyperinflation occurs when prices are rising too fast, e.g. prices may be doubling every month.

Bank: Bank is a financial institution which deals in other people’s money.

Central Bank: The Central Bank is the leader, the supervisor, and the head of the all banking and the monetary system of a country. Its main function is to issue currency notes and control the money supply.

Commercial Bank: Commercial banks are the institutions which performs general banking functions. They receive deposits, advance loans and create credit.

SME Bank: SME bank will concentrate on small and medium enterprises only. This is meant to accelerate the growth of small and medium scale industry.

Demand Deposits: On demand deposits, the banks pay no interest. The deposits can be withdrawn at anytime in full or in part. These are also known as current accounts.

Fixed Deposits: Those who want to invest their surplus money for longer period prefer fixed deposits (Time Deposits). The rate of interest on fixed deposit is higher.

Causes of Inflation: 1- Population, 2- Hoardings, 3- Political Instability, 4- Climate factors, 5- Increase in Taxes.

Measures to Control Inflation: 1- Increase in Output, 2- Population Control, 3- Price Control, 4- Fiscal and Monetary Measures, 5- Saving Schemes.

Functions of Commercial Banks: 1- Receiving deposits, 2- Advancing loans, 3- Transfer of money, 4- Safe custody of valuables, 5- Advisory functions.

Credit Creation: Creation of credit means that banks increase the supply of money through creation of new deposits in the name of borrowers. Formula: Total Deposits = Original Deposit / Reserve Ratio.

Interest / Riba: Interest is the fixed amount of money for the use of money lent. In Islamic terminology interest is called Riba.

Profit & Loss Account: Pakistani banks maintain PLS accounts instead of getting interest, the depositors share profit or losses with the banks.

Mudarabah: A form of partnership where one party provides the funds while other provides services and management. Profit is shared on a pre-agreed basis while loss is borne by the provider of capital.

Musharakah: Musharakah is a contract for some joint business in which the Islamic bank and some other party jointly provides funds and share profits and losses.

PTC (Participation Term Certificate): This certificate is issued by a company to meet its medium and long term needs or funds.

Mark up: In this method of loans a bank purchases goods from a client and after some period sells the same goods back to the client at a higher agreed price.

Qarz-e-Hasna: These loans are provided free of any interest or service charges. The borrower pays the loans when he is able to repay.

BAI Salam: It means a contract in which payment is made in advance for goods to be delivered later on.

SUKUK: It is a kind of bond and is interest free Islamic investment bond.

E-commerce: E-Commerce or electronic commerce is the exchange of goods and services by means of the internet or other computer networks.

Functions of Central Bank: 1- Note Issuing Agency, 2- Banker to the government, 3- Bankers’ Bank, 4- Lender of last resort, 5- Clearing House.

Fixed Fiduciary System: Under this system the central bank can issue notes up to a certain limit without keeping any reserve. But if the bank intends to issue currency over this limit, it has to keep 100% reserve against every note issued.

Proportional Reserve System: Under this system the central bank keeps reserves in the form of gold, silver or foreign currencies in a fixed proportion against issuing of notes.

Open Market Operations (OMO): Open Market Operations is a tool in the hands of central bank to regulate the currency circulation of the other banks by selling and purchasing government securities in the open market.

Objectives of Credit Control: 1- To control money supply, 2- To control price level, 3- To increase investment, 4- To increase employment.

Bank/Discount Rate Policy: Discount rate is the rate of interest at which a central bank provides loans to commercial banks. This policy is adopted to control inflation and deflation in the country. 

Public Finance: It is a branch of economics which studies how the state collects revenue and how it makes expenditure to perform its various functions.

Public Revenue: In public revenue, we examine the nature of taxes, their classification and distribution of the burden of taxes.

Public Expenditures: It studies the principles on which public funds are allocated among various uses.

Private Finance: Private finance is the management of one’s income to make various kinds of personal and private expenditures.

Sources of Revenue of a Govt: 1-Taxes, 2-Fees & Fines, 3-Prices, 4-Grants & Gifts, 5-Sale of govt. property.

Taxes: A tax is a compulsory contribution by the people to govt. treasury to meet the expenditure of the government.

Fee: A fee is a compulsory payment made by those who get a particular government service.

Heads of Govt. Expenditures: 1-Defence 2-Police, 3-Education, 4-Health, 5-Transportation, 6-Communication.

Canons of Taxation- Adam Smith: 1- Principle of Equality. 2- Principle of Certainty. 3- Principle of Convenience. 4- Principle of Economy.

Direct Tax: A direct tax is that in which the final burden and initial money burden is on the same person. For example income tax.

Indirect Tax: An indirect tax is that in which the final burden is on one person and initial money burden is on some other person. For example sales tax.

Proportional Tax: A proportional tax is one in which the rate of tax remains the same for all sizes of incomes. In Pakistan, custom duties are mostly proportional taxes.

Progressive Tax: A progressive tax is one in which the rate rises with the increase of income. In Pakistan, income tax and wealth tax are mostly progressive taxes.

VAT (Value Added Tax): It means that tax should be collected at various stages of production. Instead of a single tax on a shirt, the tax will be collected in parts from cotton grower, textile mill and final seller of the shirt.

International Trade: The exchange or trade of goods and services between different countries is called international trade.

Domestic Trade: The trade between various reigns of the same country is called domestic or inter-regional trade.

Absolute Advantage Theory: According to this principle, trade between two countries (A and B) will take place when one country (A) can produce some commodity at a lower cost than other country (B).

Comparative Cost/Advantage Theory: It benefits a country to specialize in the production of that commodity in which it has greatest comparative advantage or the least comparative disadvantage.

Barter Term of Trade (TOT): Barter terms of trade refer to the ratio of export prices to import prices (Px / Py).

Free Trade: When the government put no restriction on the movement of goods between various countries, that trade is known as free trade.

Protection: Protection refers to a policy in which domestic industries are protected from foreign competition.

WTO (World Trade Organization): It is situated in Geneva, Switzerland. It is a place for government to discuss trade agreements and to settle trade disputes.

Globalization: The term “globalization” refers to the increasing interconnectedness of nations and peoples around the world through trade, investment, travel, culture etc.

Balance of Payments (BOP): The balance of payments is a comprehensive record of both visible (which can be seen) and invisible items of exports and imports.

Balance of Trade (BOT): Balance of trade refers only to the record of visible (which can seen) items of exports and imports.

Visible Items: These consist of various kinds of goods imported or exported in normal routine by the government. For example rice, garments, cloth and carpets.

Invisible Items: These consist of different kinds of services which involve payments or receipt of foreign exchange. For example travel, education, remittances etc.

Foreign Exchange Rate: Exchange rate is the rate at which one country’s currency is exchanged for another. For example an exchange rate of Rs.104 = $1 means that one dollar is exchanged for Rs.104.

Devaluation:  The reduction in the exchange value of a currency by the government.

Depreciation: Depreciation is a fall in the price of the currency of one country in terms of the currency of another country.

Appreciation: Appreciation is a rise in the price of the currency of one country in terms of the currency of another country.

Capital Account: The account in which transactions of all international purchases and sales of assets are recorded.

Capital Market: It is a market in which long-term financial instruments (Bonds, Shares) which usually mature in more than one year are traded.

Stock Exchange: Stock Exchange is a market where shares, bonds, securities and debentures are bought and sold.

Insurance Companies: Insurance companies are the institutions, which provide security and compensate the loss of life and property of the people.

Difficulties in measurement of NI: 1-Unpaid services. 2- Barter transactions. 3-Lack of trained staff. 4- Illiteracy. 5-Hoardings.

Causes of low Per Capita Income: 1-Scarcity of natural resources. 2- Shortage of capital. 3- High Population. 4- Social evils. 5- Low efficiency of labor.

Steps to increase PCI & NI: 1- Population Control. 2- Education & Training. 3- Agricultural Development. 4- Industrial Development. 5- Good Planning.

Foreign Direct Investment (FDI): A foreign direct investment is a controlling ownership of a business in a country other than its own country.

Economic Development: According to Meier & Baldwin: Economic development is a process whereby an economy’s real national income increases over a long period of time.

Human Development Index (HDI): It is a measure which helps to understand that how to enlarge people’s choices and brings them out of deprivation (lack of basic needs).

Capital Accumulation: Capital accumulation means increase in the real stock of capital, i.e. material, machines, equipment, vehicles, buildings roads, power houses, canals and telephone line etc, over a particular time period.

Underdeveloped Countries/ LDC/ Third World Countries: Least developed countries are those in which per capita income is low as compared to developed countries (USA, Canada, and Australia).

Economic Planning: Economic planning is a system in which the government organizes market mechanism to produce a more desirable pattern of production and consumption.

Problems of Agriculture: 1- Poor irrigation system. 2- Plant diseases. 3- Poverty & low income. 4- Lack of capital. 5- Floods.

Solutions of Agricultural Problems: 1- Price stability. 2- Research. 3- Farm management. 4- Raise incomes of farmers. 5- Credit facilities.

Problems of Industrial Sector: 1-Weak Infrastructure. 2- Shortage of raw material. 3- High cost of production. 4- Low quality. 5- Lack of capital.

Solutions of Industrial Problems: 1- Education and training. 2- Industrial research. 3- Easy Credit. 4- Quality control. 5- Protection.

Infrastructure / Social Overheads: The essential investments on which economic development depends, particularly for transport, communication and power supply. Telephone lines, drainage all are included in infrastructure.

Human Resources: Human resources of a country include the total labour supply along with their education, training, experience, discipline and motivation for work.

Labour: Labour means physical or mental work undertaken for monetary reward.

Productivity or Efficiency of Labour: Efficiency of labour refers to the productive capacity of worker / labour.

Causes of Low Productivity of Labour: 1- Lack of education. 2- Less use of capital. 3- Poverty. 4- Low level of wages. 5- Poor work environment.

Mobility of Labour: Mobility of labour refers to the ability and capacity of a labour to change over new job, new position or shift to a different place of work without much difficulty.

Factors of Mobility: 1- Wage differences. 2- Condition of work. 3- Peace & Security. 4- Education.

Causes of Low Mobility of Labour: 1- Love for home & family. 2- Language barrier. 3- Difference in climate. 4- Difference in customs. 5- War & Government restrictions.

Population Problems: 1- Shortage of food. 2- Shortage of housing facilities. 3- Overcrowding in cities. 4- Unemployment. 5- Low savings.

Labour Force: Total size of working population of a country is called its labour force.

Unemployment: Unemployment is a situation when a labour has job not matching with his education or he has only part-time job.

Types of Unemployment: 1- Seasonal unemployment. 2-Frictional Unemployment. 3-Structural Unemployment. 4-Cyclical Unemployment.

Seasonal Unemployment: Growing of crops and construction of houses is affected by change in seasons.

Frictional Unemployment: Unemployment arises due to change of job, i.e. from previous to new job is called frictional unemployment.

Cyclical Unemployment: Unemployment caused by downturn (recession) of economy is called cyclical unemployment.

Structural Unemployment: With economic development and introduction of new technologies or products, some jobs in old industries are lost. Such type of unemployment is known as structural unemployment.

Budget: The budget is the statement showing income and expenditure position of a government in a particular financial year.

Surplus Budget: If the estimated income during the year exceeds the expenditure, the budget is called surplus budget.

Deficit Budget: If the estimated expenditure during the year exceeds the income of government, the budget is called deficit budget.

Revenue Receipts: It contains all details of revenue from tax and non-tax sources of Federal Government.

Tax Culture: Tax culture of a country means all the institutions connected with the national tax system and its practical execution (درآمد عمل ).

Usher: Usher means one tenth. Usher is the compulsory deduction made from agricultural produce at the time of harvest (فصل).

Major Exports of Pakistan: 1- Cotton, 2- Rice, 3- Leather Goods, 4- Carpets, 5- Fish & Sports.

Major Imports of Pakistan: 1- Petroleum Products, 2- Machinery, 3- Tea, 4- Chemicals, 5- Steel & Iron Products, 6- Electronics.

Transnational Corporations (TNC) / Multinational Companies: Transnational corporations are those corporations that operate in more than one country or nation at a time. For example Nestle, Shezan, Honda etc.

Economic Systems: An economic system is a system of production and consumption of goods and services as well as allocation (مقرر, متعین) of resources in a society.

Capitalism: Capitalism is the economic system based on the principle of private ownership of economic resources and individual freedom in all economic matters.

Socialism: Socialism is a system under which all capital and natural resources are owned by the state and all decisions about the production of goods and services are taken by the government.

Islamic Economic System: Islamic economic system is that part of the way of life as revealed (نازل کیا) by Allah in the Holy Quran and clarified and exemplified by the Messenger (PBUH) through His Sunnah.

Mixed Economy: Mixed economy is an economic system which is a combination of the principle of capitalism and socialism.