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Question 1 of 10
1. Question
2 points
Which of the following statements could be true for a high savings economy?
(i) Higher investment
(ii) Higher consumption
(iii) Higher exports
Select the correct answer using the code given below:
Correct
“Exports must form an integral part of the investment led growth model because higher savings preclude/prevents domestic consumption as the driver of final demand”.
[Ref: Economic Survey 2018-19, Vol – I, Page 1]
Incorrect
“Exports must form an integral part of the investment led growth model because higher savings preclude/prevents domestic consumption as the driver of final demand”.
[Ref: Economic Survey 2018-19, Vol – I, Page 1]
Question 2 of 10
2. Question
2 points
Which of the following statements are true regarding GDP at constant market prices in the last few quarters?
(i) Increasing
(ii) Growth rate increasing
(iii) Growth rate decreasing
(iv) Stagnant
Select the correct answer using the code given below:
Correct
Since last five/six quarters GDP growth is decreasing, while GDP is still increasing
Incorrect
Since last five/six quarters GDP growth is decreasing, while GDP is still increasing
Question 3 of 10
3. Question
2 points
Consider the following statements regarding Capital formation:
(i) Gold and valuable metals are part of Fixed Capital Formation
(ii) Intellectual properties are part of Fixed capital formation
(iii) Construction of buildings and other structures are part of Capital Formation
Select the correct answer using the code given below:
Correct
Answer –
Gross Capital Formation = Gross Fixed Capital Formation (machinery + equipment + building + cultivated biological resources + intellectual property) + Valuable Metals + Change in stock/inventory
Gross fixed Capital formation is around 30% and valuable metals and change in stock is one per cent each. So Gross Capital Formation or Gross Investment is around 32% . Mostly we use the gross fixed investment for all calculation and growth purpose.
Incorrect
Answer –
Gross Capital Formation = Gross Fixed Capital Formation (machinery + equipment + building + cultivated biological resources + intellectual property) + Valuable Metals + Change in stock/inventory
Gross fixed Capital formation is around 30% and valuable metals and change in stock is one per cent each. So Gross Capital Formation or Gross Investment is around 32% . Mostly we use the gross fixed investment for all calculation and growth purpose.
Question 4 of 10
4. Question
2 points
India is planning to become a $5 Trillion economy by 2024-25. Consider the following statements.
(i) It is in nominal terms
(ii) It is in PPP terms
(iii) It will require compounded annual real growth of around 8%, with 4% inflation
Select the correct answer using the code given below:
Correct
2018-19 2024-25
$2.7 Trillion $ 5 Trillion
(nominal GDP) (Nominal GDP)
So, it requires 85% growth in six years, which comes down to around 12% compounded annual growth. This 12% is nominal growth which can be achieved with real growth of around 8% and inflation of around 4%.
Incorrect
2018-19 2024-25
$2.7 Trillion $ 5 Trillion
(nominal GDP) (Nominal GDP)
So, it requires 85% growth in six years, which comes down to around 12% compounded annual growth. This 12% is nominal growth which can be achieved with real growth of around 8% and inflation of around 4%.
Question 5 of 10
5. Question
2 points
Despite being a high saving economy, capital formation may not result in significant increase in output due to:
Correct
First let us develop the general concept of (average) productivity and marginal productivity.
1 Acre land
5 Labourers
2 tonne production
If one acre of land produces 2 Tonnes of food grains, then;
Productivity of Land = Output 2 Tonne = 2 Tonne/acre
Input(land) 1 acre
Productivity of Labour = Output = 2 Tonne = 0.4 Tonne/labour Input (labour)
5 labourer
The above two are basically average productivity.
If by adding one extra labour, production increases by 0.2 tonne, then
Marginal productivity of labour = change in output/change in labour = 0.2 tonne/1 labour = 0.2 tonne/labour
In the same way, productivity of capital = Output/Capital
Higher is the productivity of capital, it is good for the economy. The inverse of “productivity of capital” is Capital/Output ratio.
Higher the capital/output ratio, it is bad for economy. If Capital/Output ratio is 3/1, that means Rs. 1 unit of output is produced from Rs. 3 units of capital. And if Capital/Output ratio is 4/1, that means to produce Rs. 1 unit of output, Rs. 4 units of capital is required. So, 3/1 is better than 4/1 for the economy.
Generally, if an economy has higher savings, higher capital formation happens. But if Capital/Output ratio in the economy is high, then that means the productivity of the capital is low, so output production may not increase much even if capital formation is high.
So, the answer is (d)
Incorrect
First let us develop the general concept of (average) productivity and marginal productivity.
1 Acre land
5 Labourers
2 tonne production
If one acre of land produces 2 Tonnes of food grains, then;
Productivity of Land = Output 2 Tonne = 2 Tonne/acre
Input(land) 1 acre
Productivity of Labour = Output = 2 Tonne = 0.4 Tonne/labour Input (labour)
5 labourer
The above two are basically average productivity.
If by adding one extra labour, production increases by 0.2 tonne, then
Marginal productivity of labour = change in output/change in labour = 0.2 tonne/1 labour = 0.2 tonne/labour
In the same way, productivity of capital = Output/Capital
Higher is the productivity of capital, it is good for the economy. The inverse of “productivity of capital” is Capital/Output ratio.
Higher the capital/output ratio, it is bad for economy. If Capital/Output ratio is 3/1, that means Rs. 1 unit of output is produced from Rs. 3 units of capital. And if Capital/Output ratio is 4/1, that means to produce Rs. 1 unit of output, Rs. 4 units of capital is required. So, 3/1 is better than 4/1 for the economy.
Generally, if an economy has higher savings, higher capital formation happens. But if Capital/Output ratio in the economy is high, then that means the productivity of the capital is low, so output production may not increase much even if capital formation is high.
So, the answer is (d)
Question 6 of 10
6. Question
2 points
Consider the following statements regarding Incremental Capital Output Ratio (ICOR):
(i) It shows how efficiently capital is being used to produce output
(ii) It is the extra unit of capital required to produce one additional unit of output
(iii) It is the extra unit of output produced from one additional unit of capital
(iv) It is the ratio of change in capital to change in output
Select the correct answer using the code given below:
Correct
Incremental Capital Output Ratio (ICOR) is defined as:-
ICOR = change in capital = (change in capital/output) = investment % in GDP change in output output (change in output/output) % change in GDP
ICOR represents how much extra unit of capital is required to produce one additional unit of output. It basically represents the (inverse of) efficiency of the new capital. Hence, statement (iii) is false.
“Basically, capital/output ratio represents (average) productivity and ICOR represents (marginal) productivity.”
So, if ICOR of India = 5 or (5/1), then India requires Rs. 5 of additional capital goods to produce Rs. 1 of extra output.
If our ICOR is 5 and we want a growth of 8% in GDP then we will have to do 40% investment.
Incorrect
Incremental Capital Output Ratio (ICOR) is defined as:-
ICOR = change in capital = (change in capital/output) = investment % in GDP change in output output (change in output/output) % change in GDP
ICOR represents how much extra unit of capital is required to produce one additional unit of output. It basically represents the (inverse of) efficiency of the new capital. Hence, statement (iii) is false.
“Basically, capital/output ratio represents (average) productivity and ICOR represents (marginal) productivity.”
So, if ICOR of India = 5 or (5/1), then India requires Rs. 5 of additional capital goods to produce Rs. 1 of extra output.
If our ICOR is 5 and we want a growth of 8% in GDP then we will have to do 40% investment.
Question 7 of 10
7. Question
2 points
Capital formation in a country will necessarily lead to which of the following:
(i) Increase in ICOR
(ii) Decrease in ICOR
(iii) Economic growth
Select the correct answer using the code given below:
Correct
Capital formation means production of capital goods.
Production of capital goods leads to future production of goods and services and hence economic growth. So, statement (iii) is true
Production of capital goods increases the capital stock in the economy but does not tell whether there is any increase in efficiency of that capital. Efficiency is measured as how much output is produced from how much of inputs. So, we can’t say that ICOR will increase or decrease with capital formation.
Basically, if you increase the number of hours you study, still you cannot say that the “number of pages per hour” that you study will increase or decrease.
Incorrect
Capital formation means production of capital goods.
Production of capital goods leads to future production of goods and services and hence economic growth. So, statement (iii) is true
Production of capital goods increases the capital stock in the economy but does not tell whether there is any increase in efficiency of that capital. Efficiency is measured as how much output is produced from how much of inputs. So, we can’t say that ICOR will increase or decrease with capital formation.
Basically, if you increase the number of hours you study, still you cannot say that the “number of pages per hour” that you study will increase or decrease.
Question 8 of 10
8. Question
2 points
Consider the following statements:
(i) Investment in the economy increases with decrease in capital output ratio
(ii) Economic output increases with decrease in capital output ratio
Select the correct answer using the code given below:
Correct
Capital/Output ratio represents (inverse of) productivity of capital. If capital/output ratio is decreasing, that means capital is becoming more productive. But you cannot say that investment will increase.
Incorrect
Capital/Output ratio represents (inverse of) productivity of capital. If capital/output ratio is decreasing, that means capital is becoming more productive. But you cannot say that investment will increase.
Question 9 of 10
9. Question
2 points
Consider the following statements:
(i) Decrease in investments will lead to depletion of capital stock in the economy
(ii) Decrease in investments will lead to increase in incremental capital output ratio
(iii) Decrease in investments will lead to decrease in the production of goods and services
Select the correct answer using the code given below:
Correct
If investments are decreasing that means there is less production of capital goods in the economy but that does not mean that the existing capital stock will decrease. Existing capital stock will keep on increasing even if investments are decreasing.
So, (i) statement is false.
And since existing capital stock will keep on increasing, therefore production of goods and services i.e. GDP will keep on increasing.
So, (iii) statement is false.
If investments are decreasing, that means production of capital goods is decreasing. Then you can’t say anything about productivity of capital i.e. ICOR.
So, (ii) statement is also false.
Incorrect
If investments are decreasing that means there is less production of capital goods in the economy but that does not mean that the existing capital stock will decrease. Existing capital stock will keep on increasing even if investments are decreasing.
So, (i) statement is false.
And since existing capital stock will keep on increasing, therefore production of goods and services i.e. GDP will keep on increasing.
So, (iii) statement is false.
If investments are decreasing, that means production of capital goods is decreasing. Then you can’t say anything about productivity of capital i.e. ICOR.
So, (ii) statement is also false.
Question 10 of 10
10. Question
2 points
For a sustained high growth, which of the following statements will be true:
Correct
Answer –
% change in GDP = Investment %
Incremental Capital Output Ratio (ICOR)
So, for higher growth rate, we require more investment and less ICOR
Incorrect
Answer –
% change in GDP = Investment %
Incremental Capital Output Ratio (ICOR)
So, for higher growth rate, we require more investment and less ICOR
