macro fundamentals, GDP, investment & growth section 3 MCQ Questions & Answers Detailed Explanation

Answer: (a)

Answer: (c)

Answer: (a)

Answer: (d)

First, let us develop the general concept of (average) productivity and marginal productivity.

1. 1 Acre Land
2. 5 Labourers
3. 2 Tonne production

If one acre of land produces 2 Tonnes of food grains, then; Productivity of Land = $\text"Output"/\text"Input(land)"$ ${2\text"Tonne"}/{1 \text"acre"}$ = 2 Tonne/acre

Productivity of Labour =$\text"Output"/\text"Input(labour)" = {2\text"Tonne"}/{5\text"labourer"}$ = 0.4 Tonne/labour

The above two are basically average productivity.

If by adding one extra labour, production increases by 0.2 tonne, then

Marginal productivity of labour = $\text"change in output"/\text"Change in labour" = {0.2\text"tonne"}/{1 \text"labour"}$ = 0.2 tonne/labour

In the same way, productivity of capital = $\text"Output"/\text" Capital"$ Higher is the productivity of capital, it is good for the economy. The inverse of “productivity of capital” is Capital/Output ratio.

A higher capital/output ratio is bad for the economy. If the Capital/Output ratio is 3/1, that means Rs. 1 unit of output is produced from Rs. 3 units of capital. And if the 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 the 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)

Answer: (b)

Answer: (c)

Higher economic growth comes from

additional investment, or

increase in capacity utilization of the capital stock (factory)

When economic growth comes from new investment then generally more jobs are created but when economic growth comes from better utilization of the existing capacity (which was earlier not utilized properly) then jobs may not get created in the economy.