IIMs and other top B schools have started their WAT and personal interview round at various centres. The topics related to economy need an understanding of economic terms required to be used in expansion of these topics and answering certain questions based on them. Since Written Ability Test - WAT is the preferred part of final admission process and consists of spot writing of an essay on the topic not known earlier, knowing a few economic terms will be a great help in WAT and PI.
Frequently used economic terms
Following are a few explained economic terms which may be needed in expansion of WAT topics in IIMs and other B schools
1. Deficit Financing
When government goes for more public borrowing or borrowing from RBI to make up the huge gap between less revenues and more expenditure. Government may need to take this step to meet out the expenditure on its expansionary policies; developmental plans; welfare schemes. It resorts to expansion of money supply. If the desired development, economic growth takes place, the inflationary effects are consumed in the economy and nullified else the currency loses its purchasing power. The example is the period of economic stability from 1994 to 2005 when more economic development could be seen and value of currency was stable despite the use of the tool of deficit financing.
2. Fiscal Policy
Government is the Fiscal authority. Policies related to taxation, government expenditure, Revenue are the examples of fiscal policy.
3. Fiscal Deficit
The difference between the higher government expenditure and lower revenue in a fiscal year excluding the money it has borrowed is the fiscal deficit. This is denoted usually as a percentage of its GDP.
4. Budgetary Deficit
Less than planned revenue in budget is the budgetary deficit. It includes Fiscal Deficit plus past debts before this fiscal year.
5. Difference between Fiscal and Budget Deficit
The major difference is of time period. Fiscal deficit accounts for a fiscal year were not enough money is available due to higher expenditure. Budget deficit is fiscal deficit plus past debts over the Government net sum of all past fiscal deficits, before this fiscal year. It means there is less receipt of revenue as planned in budget including the past ones.
6. Monetary Policy
Central Bank of the country (Reserve Bank of India in our case) is the monetary authority of India. Expansion or contraction of money supply according to the need; controlling the money market; keeping the value of rupee stable and the tools to be used to implement these policies are the major roles to be played by the Reserve Bank of India effectively.
7. Cash Reserve Ratio (CRR)
It is a quantitative measure adopted by Reserve Bank of India to regulate the money supply. Higher CRR will leave less disposable money with the banks and lower CRR with more disposable money to be circulated in the market. During the inflation period CRR is increased and during deflation it is reduced.
8. Bank Rate
It is another important quantitative measure to regulate the money supply. The rate at which Reserve Bank of India discounts the securities of scheduled commercial banks is called Bank rate. Higher the rate lesser will be the supply of money in the market and interest rate will rise leaving banks with less disposable funds.
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9. Trade Cycles
When the economy fluctuates from inflation to boom and then dips to deflation and depression or slump, the entire period of this cycle is called Trade cycle. Theoretically, an inflation or boom is bound to be followed by deflation, depression. It will again recover and will begin moving to inflation. Ideologically, if the market is left free for adjustment these cycles will recur automatically but with the government invention or intervention by any other agency the periodicity may change. The example is Global IT boom began in last decade of 20th century followed by depression of 2007 which crashed the industrial expansion and employment.
10. Inflation
When currency begins losing its value and market becomes expensive, inflationary trends set in. If the economy is expansionary it may digest all the falling value trends of the currency and will improve the economic conditions else the it will be infested with disguised unemployment and falling value of the currency without any improvement in standard of living.
11. Deflation
It is opposite to Inflation but more dangerous than it. Although prices remain steady, currency may not lose value but the economy is deprived of money since employment generation doesn’t happen because of which demand doesn’t pick up which in turn causes more industries to shut down causing more unemployment. The economy is ultimately is engulfed in a vicious circle. It is said that despite all the evils inflation is still better than deflation.
12. Balance of Payment
It is an annual account of a country’s all monetary transactions with the rest of the world. Items in these transactions include payments for the country’s exports and imports of goods and services; financial transfers; grants in aid. The BOP accounts summarize international transactions and are prepared in a single currency, typically the domestic currency for the country concerned. Receipts are recorded as positive or surplus items. Outflow of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.
13. Balance of payment always balances
The sum of all the included components should be zero with no surplus or deficit. For example, if a country is importing more than it exports, although its trade balance will be in deficit, but the deficit will have to be counterbalanced by funds earned either from its foreign investments, by running down central bank reserves or by receiving loans from other countries. The Balance of Payment account should therefore always balance. Imbalances are possible on individual elements of the BOP, such as the current or capital account.
14. Balance of Trade
It is a part of Balance of payment Account. All the exports and imports and other custom verifiable items are included in the annual Balance of trade account of a country. if a country has more exports than imports, its Balance of trade will be in surplus and in case of more imports than exports, it will be in deficit.
15. GDP
Gross Domestic Product is the sum total of the market value of finished goods and services produced in a given year in a country. There are three approaches to measure GDP vis. production (or output) approach; income approach; expenditure approach. Production approach is the most direct of the three as it sums the outputs of every class of enterprise to arrive at the total.
16. Upvaluation/devaluation of home currency and how does it affect the flow of international trade
When the foreign currency like US Dollar, GBP, Euro, becomes costlier in terms of Home currency(Rupee for India), the home currency is devalued; when it becomes cheaper, the home currency is upvalued. For example- if you can exchange 1 US dollar for Rs.50 on some particular day and after a month can purchase the same 1 US dollar for Rs.60- the rupee is devalued in terms of dollar and lost its value by 20%.
An exporter would like to export more as he will get more Indian currency against the same volume of exports and an importer will try to import less since he will have to part with more Indian currency for the same amount of foreign currency. The exports based on imported raw material suffer more in this situation.
IIMs WAT Process: Final Tip
Although MBAUniverse.com will publish solved topics related to economics, candidates are advised to understand these terms as they are likely to be used on various topics in WAT sessions of top rated B schools. They will equip the students to excel in WAT and PI.
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