CAIIB ABM Economic Terms: Key Definitions You Must Know

BP 18 June 2026 · 15 min read

#ABM #Advanced Bank Management #CAIIB #caiib syllabus #economic terms #fiscal policy #GDP #IIBF #Inflation #Monetary Policy

CAIIB ABM Economic Terms: Key Definitions You Must Know

The Advanced Bank Management (ABM) paper is one of the most conceptually demanding subjects in the CAIIB examination conducted by IIBF. A strong command of economic terminology is essential because many questions in the ABM exam test your ability to recall precise definitions and apply concepts in practical banking scenarios.

Economics Terms from ABM Papers of CAIIB

The following terms are drawn from the IIBF-prescribed syllabus for the CAIIB ABM paper. Read and understand each definition carefully as these have appeared frequently in past examinations.

1. Closed Economy – An economy having no economic relations with the rest of the world; it does not engage in trade. Financial, or investment relations with other countries.

2. Open Economy – An economy that has trade, financial, and investment relations with other countries.

3. National Income – The money value of all goods and services produced within the domestic territory of a country. Plus net factor income from abroad in a year.

4. Per Capita Income – The average income of a resident of a country, calculated by dividing the national income by the total population.

5. Gross Domestic Product (GDP) – The money value of all final goods and services produced in the domestic territory of a country in a year.

6. Net Domestic Product (NDP) – Obtained by reducing consumption of fixed capital (depreciation) from the GDP.

7. Gross National Product (GNP) – Calculated by adding net factor income from abroad (NFIA) to GDP.

8. Law of Demand – States that. Other things being equal, more of a commodity is demanded at a lower price and less of it at a higher price.

9. Elasticity of Demand – The responsiveness of demand to a change in any factor of demand.

10. Factors Affecting Elasticity of Demand – (a) Nature of Commodity (b) Availability of substitute goods (c) Share in total expenditure (d) Diverse uses of the commodity (e) Consumer behaviour.

11. Supply Curve – A graph showing the relationship between the price of a good and the quantity supplied at different prices.

12. Consumer Surplus – The difference between what a consumer would be willing to pay for a good or service and what that consumer actually pays.

13. Sunk Costs – Costs that have already been incurred and cannot be reversed.

14. Marginal Cost – The addition to total cost resulting from a unit increase in production.

15. Propensity to Consume – The relationship between change in income and the resultant change in consumption.

16. Fiscal Measures – Measures to correct excess or deficient demand through government budget proposals, including tax changes and changes in government expenditure.

17. Fiscal Policy – The part of government economic policy dealing with taxation, expenditure, borrowing, and the management of public debt.

18. Fiscal Deficit – The gap between the government's total spending and the sum of its revenue receipts and non-debt capital receipts; it represents the total amount of borrowings required by the government.

19. Budget Deficit – The difference between estimated public expenditure and public revenue; the government meets this deficit by printing new currency or by borrowing.

20. Primary Deficit – Fiscal Deficit minus Borrowings (interest payments).

21. Inflation – A situation of steady and sustained rise in general price levels; a state in which the value of money is falling.

22. Cost-Push Inflation – Inflation arising from an increase in production costs, caused by wage increases, rising profit margins, or heavy taxation.

23. Deflation – The reverse of inflation; a state of falling prices when output increases faster than the volume of money in the economy.

24. Recession – A period of slow or negative economic growth, usually accompanied by rising unemployment.

25. Stagnation – A prolonged recession, but not as severe as a depression.

26. Disinflation – A fall in the rate of inflation, meaning a slower increase in prices but not an actual fall in prices.

27. Depression – A prolonged and deep slump in economic activity, more severe than a recession.

28. Duopoly – A market structure in which two producers of a commodity compete with each other.

29. Monopoly – A market situation in which a product without close substitutes is produced and sold by a single seller.

30. Perfect Competition – A market with a very large number of buyers and sellers of homogeneous goods. Perfect knowledge, and free entry, so no single party can influence price.

31. Buyer's Market – A market in which supply is plentiful and prices are low; the opposite of a seller's market.

32. Tax Haven – A country or designated zone that has very low or no taxes.

33. Tax Avoidance – A legal action designed to reduce or eliminate taxes owed.

34. Tax Evasion – An illegal strategy to decrease tax burden by underreporting income, overstating deductions, or using illegal tax shelters.

35. Monetary Policy – The regulation of the money supply and interest rates by a central bank to control inflation and stabilise currency.

36. HDI (Human Development Index) – A composite index measuring average achievement in three basic dimensions of human life: a long and healthy life. Knowledge, and a decent standard of living.

37. Engel's Law – Formulated by Ernst Engel; states that as income increases, the proportion of income spent on food diminishes.

38. Giffen Goods – Goods with a positive relationship between price and quantity demanded; their demand curve slopes upward from left to right.

39. Gresham's Law – Bad money, if not limited in quantity, drives good money out of circulation.

40. Laffer Curve – Represents the relationship between total tax revenue and corresponding tax rates.

41. Lorenz Curve – A graphical representation showing the degree of income or wealth inequality in a distribution.

42. Pareto Efficiency – A situation in which nobody can be made better off without making somebody else worse off.

43. Pigou Effect – A fall in the price level increases the real value of people's savings. Making them feel wealthier and causing them to spend more, potentially increasing employment.

44. Okun's Law – A relationship between an economy's GDP gap and the unemployment rate; a 2.5% increase in real GDP above trend leads to a 1% decrease in unemployment.

45. Phillips Curve – Represents the inverse relationship between inflation and unemployment; economic growth brings inflation, which leads to more jobs.

46. Say's Law – Supply creates its own demand.

47. Real Exchange Rate – An exchange rate adjusted to account for differences in inflation rates between two countries.

48. Real Interest Rate – The nominal interest rate less the rate of inflation.

49. Tobin Tax – A proposal to reduce speculative cross-border capital flows by levying a small tax on foreign exchange transactions.

50. Predatory Pricing – Charging very low prices now to eliminate competition and charge much higher prices later.

51. PPP (Purchasing Power Parity) – The exchange rate that equates the price of a basket of identical traded goods and services in two countries.

52. Crowding Out – When excessive government borrowing discourages private-sector borrowing and investment by driving up interest rates.

53. Currency Board – A monetary arrangement where a country commits to converting its domestic currency on demand at a fixed exchange rate. Defending against speculative attack.

54. Currency Peg – When a government fixes the exchange rate of its currency against another currency or currencies.

55. Dumping – Selling goods for less than the cost of producing them, often in foreign markets.

56. Fiscal Drag – The tendency of tax revenue to rise as a share of GDP in a growing economy.

57. Fiscal Neutrality – When the net effect of taxation and public spending is neutral, neither stimulating nor dampening aggregate demand.

58. Hard Currency – A currency expected to retain its value or appreciate against softer currencies.

Glossary of Economic Terms as per CAIIB ABM Syllabus

59. Aggregate Demand – The sum of all demand in an economy, computed by adding expenditure on consumer goods and services, investment, and net exports.

60. Aggregate Supply – The total value of goods and services produced in a country, plus value of imports less value of exports.

61. Base Year – In index construction. The year from which weights assigned to components are drawn; the index value is set to 100 in the base year.

62. Boom – A state of economic prosperity.

63. Broad Sectors of an Economy – In India: Primary Sector (Agriculture), Secondary Sector (Industry), Tertiary Sector (Services).

64. Capitalism – An economic system featuring private ownership of the means of production, commodity production, and profit as the primary motivation.

65. Competition – A market phenomenon indicating rivalry among buyers and sellers, classified as perfect or imperfect competition.

66. Cost-Push Inflation – A rise in general prices driven by increases in production costs (wages or profit margins) exceeding productivity gains.

67. Centrally Planned Economy – An economic system in which production. Pricing, and distribution are determined by the government rather than market forces; also called a command or non-market economy.

68. Demand-Pull Inflation – Rising prices brought about by an increase in aggregate demand in the face of limited supply.

69. Depression – A phase of the business cycle characterised by low economic activity, high unemployment, low prices, profits, and investment.

70. Economic Development – The process of improving human life quality through increasing per capita income, reducing poverty, and enhancing individual economic opportunities.

71. Economic Growth – The rate of increase of an economy's real income over time, expressed in terms of GNP or NNP per capita.

72. Economic Policy – A statement of government objectives and the instruments used to achieve them. Such as maintaining full employment, promoting growth, and ensuring price stability.

73. Equilibrium Price – The price at which market supply equals demand; the intersection of supply and demand curves.

74. Equilibrium Quantity – The quantity at which demand equals supply in the market.

75. Hyperinflation – A situation of sharply rising general prices with little or no increase in output; also called runaway or galloping inflation.

76. Inflation – A rise in the general average price level; consequently a decline in the purchasing power of money.

77. Indirect Tax – A tax not paid directly by the consumer but passed on through increased prices of goods or services (e.g., fuel tax).

78. Macroeconomics – The branch of economics that studies relationships among broad economic aggregates such as national income, saving, investment, employment, and money supply.

79. Market Mechanism – The system whereby prices freely rise or fall in response to changes in buyer demand or seller supply.

80. Microeconomics – The branch of economics concerned with individual decision units (firms and households) and how their interactions determine relative prices.

81. Money Supply – The total stock of money in the economy; currency held by the public plus deposits in banks. Measured as M1, M2, M3, etc.

82. Market Economy – An economic system in which the central questions of what. How, and for whom are decided by free market forces of supply and demand.

83. Mixed Economy – An economy in which both the state and private sector coexist; resource allocation decisions are made partly by the market and partly by the government.

84. Money – Anything accepted in an economy as a medium of exchange, measure of value, standard for deferred payments, and store of value.

85. Open Economy – An economy that encourages foreign trade and has extensive financial and non-financial contacts with the rest of the world.

86. Planned Economy – An economic system in which basic decisions are made according to a central plan.

87. Price – The value of a commodity expressed in terms of money.

88. Real Income – The purchasing power of money income; the quantity of real goods and services that money income can buy.

89. Recession – A downswing of business activity in which income, prices, profits, and employment all fall.

90. Closed Economy (restatement) – An economy in which there are no foreign trade transactions or any other form of economic contact with the rest of the world.

91. Direct Tax – A tax whose burden cannot be shifted; it is borne by the person on whom it is initially levied (e.g.. Personal income tax, death tax).

Key Points Summary

GDP measures domestic production, while GNP adds net factor income from abroad to GDP.
Fiscal policy uses government spending and taxation, while monetary policy uses money supply and interest rates.
Inflation reduces the purchasing power of money; deflation is the reverse situation where prices fall.
The Phillips Curve shows an inverse relationship between inflation and unemployment in the short run.
Important named laws in ABM: Say's Law, Gresham's Law, Engel's Law, Okun's Law, and the Laffer Curve.

Frequently Asked Questions (FAQ)

Q1. What is the difference between GDP and GNP?

GDP (Gross Domestic Product) measures the value of all goods and services produced within a country's domestic territory, regardless of the nationality of the producers. GNP (Gross National Product) adds net factor income from abroad (earnings by residents abroad minus earnings by foreigners in the country) to the GDP figure.

Q2. What is the difference between fiscal policy and monetary policy?

Fiscal policy refers to the government's use of taxation and public expenditure to influence the economy. Monetary policy refers to the central bank's control of the money supply and interest rates to manage inflation and stabilise currency. Both are tools of macroeconomic management but are operated by different authorities.

Q3. What are Giffen Goods and how do they differ from normal goods?

Giffen Goods are inferior goods for which demand increases when the price rises, violating the normal law of demand. This occurs because the income effect of a price rise outweighs the substitution effect. Normal goods follow the standard law of demand, where higher prices lead to lower demand.

Q4. What does the Lorenz Curve indicate?

The Lorenz Curve graphically shows the distribution of income or wealth in an economy. A perfectly equal distribution would appear as a straight diagonal line (the line of perfect equality). The further the actual Lorenz Curve bows away from this line, the greater the inequality in the economy.

Q5. How is the Philips Curve relevant to banking and monetary policy?

The Phillips Curve is directly relevant to central banking decisions. It suggests that policymakers face a trade-off: attempts to reduce unemployment through expansionary policy may cause higher inflation. While tightening policy to control inflation may lead to higher unemployment. The Reserve Bank of India considers this relationship when setting monetary policy.

Conclusion

Mastering these economic terms is fundamental to success in the CAIIB ABM examination. These concepts not only appear directly in objective questions but also form the foundation for case-study-based questions that require analytical application. For the latest CAIIB ABM exam schedule, visit iibf.org.in.

For more on caiib abm economic terms, see the official IIBF circulars and our chapter-wise free notes on iibf.store.