Statutory Liquidity Ratio (SLR): Statutory liquidity ratio is the Indian government term for the reserve requirement that the commercial banks in India are required to maintain in the form of cash, gold reserves, government approved securities before providing credit to the customers.
Open Market Operation (OMO): Open market operations refer to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system.
Reserve Bank of India (RBI): The Reserve Bank of India is India’s central banking institution, which controls the monetary policy of the Indian rupee. It commenced its operations on 1 April 1935 in accordance with the Reserve Bank of India Act, 1934.
Cash Reserve Ratio (CRR): Cash Reserve Ratio is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the central bank (RBI). Cash Reserve Ratio is set according to the guidelines of the central bank of a country.
Average Propensity to Consume (APC): The average propensity to consume refers to the percentage of income spent on goods and services rather than on savings.
The average propensity to consume formula is calculated by dividing total consumption (what is spent on goods and services) by total income (what is earned) in a given period. Therefore, the equation for APC is:
APC = Consumption/Disposable Income.
For Example: John and Mary are concerned with their spending habits. They believe that they are spending more than they earn on a monthly basis. Therefore, they decide to calculate the average propensity to consume for different levels of income ranging from 2,000 to 12,000 and take appropriate measures.
To that end, they create a consumption table as follows:
| Income | Consumption | APC |
| 0 | 2,000 | 0.00 |
| 2,000 | 1,500 | 0.75 |
| 4,000 | 2,850 | 0.71 |
| 6,000 | 4,000 | 0.67 |
| 8,000 | 5,200 | 0.65 |
| 10,000 | 6,200 | 0.62 |
| 12,000 | 7,100 | 0.59 |
Once they divide consumption by the income, they derive a different APC per different level of income. As their income rises from $2,000 to $12,000, the APC decreases from 0.75 to 0.59, respectively. Therefore, although the growth rate of income is higher than the growth rate of consumption, as the income increases, the percentage of consumption decreases.
This makes sense because as consumers earn more money, their living expenses become a smaller percentage of their total income. Also, they typically begin to save more of it and spend a smaller percentage of it.
Marginal Propensity to Consume (MPC): The marginal propensity to consume is the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.
The marginal propensity to consume (MPC) measures the proportion of extra income that is spent on consumption.
For example, if an individual gain extra rupees 10, and spends rupees 7.50, then the marginal propensity to consume will be 7.5/10 = 0.75
The marginal propensity to consume measures the change in consumption/change in disposable income.
∆C = Change in Consumption
∆Y = Change in Income.
Average Propensity to Save (APS): The average propensity to save is an economic term that refers to the proportion of income that is saved rather than spent on goods and services.
APS = Total savings/Total Income
For example, if disposable income is Rs. 1,000 and consumption or expenditure is Rs. 750. Therefore, total saving is Rs. 250
APS=250/1000 = ¼ = 0.25 or 25%
Marginal Propensity to Save (MPS): A marginal propensity to save refers to the proportion of an aggregate raise in pay that a consumer spends on saving rather than on the consumption of goods and services.
MPS= ∆S/∆Y
∆S = Change in Savings
∆Y = Change in Income
For instance, when a person’s income goes up from Rs. 100 to Rs. 200, saving also goes up from zero to Rs. 30
In this case, MPS = ∆S/∆Y = 30/100 = 0.3 or 30%
Public Sector Undertakings (PSUs): The government-owned corporations are termed as Public-Sector Undertakings in India. In a PSU majority (51% or more) of the paid-up share capital is held by central government or by any state government or partly by the central governments and partly by one or more state governments.
For example, in a company the total capital is 1 crore, of which central or state Govt share is 51 lakhs. Then this company is termed as a public – sector undertaking or PSU
Balance of Payment (BOP): The balance of payments, also known as balance of international payments of a country is the record of all economic transactions between the residents of the country and of the world in a particular period.
Balance of Trade (BOT): The balance of trade, commercial balance, or net exports, is the difference between the monetary value of a nation’s exports and imports over a certain period.
Purchasing Power Parity (PPP): Purchasing power parity is an economic theory that states that the exchange rate between two countries is equal to the ratio of the currencies’ respective purchasing power.
Let’s see this by an example:
Let’s take case of exchange rate between US and India. 1USD = 50 INR.
Now let’s say an Apple iPhone costs $100 in US and 9,000 INR in India. (By present exchange rate $100 = 5,000 INR)
That means at present iPhone is cheaper in US.
Now because iPhone is cheaper in US and there are lot of Indians who travel to US, they decide that instead of buying phone in India they will buy it in US.
As a result more and more Indians go to embassy to convert INR into USD which will lead to increase in value of dollar.
Again as demand of iPhone in US increases retailers also increase its price.
In India retailers drop price as demand has reduced.
Now let’s say all this leads to change in exchange rate to 1USD=60, Price of iPhone in US increases to $125 and in India it decreases to 7,500 INR.
Now if you see. $125 = 7,500 and relative price of iPhone is same in both countries.
Nominal Effective Exchange Rate (NEER): The nominal effective exchange rate is an unadjusted weighted average rate at which one country’s currency exchanges for a basket of multiple foreign currencies. In economics, the NEER is an indicator of a country’s international competitiveness in terms of the foreign exchange (forex) market.
Foreign Direct Investment (FDI): A foreign direct investment is an investment in the form of a controlling ownership in a business in one country by an entity based in another country. It is thus distinguished from a foreign portfolio investment by a notion of direct control.
