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

Answer: (a)

Answer: (c)

% change in GDP = $\text"Investment %"/\text" Incremental Capital Output Ratio (ICOR)"$

So, for higher growth rate, we require more investment and less ICOR

Answer: (c)

Real GDP growth measures growth in quantity only and nominal GDP measures growth in value (which includes quantity as well as price).

Now, suppose an economy produces wheat and rice. The quantities produced and the market price is given in the following table.

The base year for the calculation of GDP is 2011-12. So, if we want to calculate India's Real GDP for 2014-15 then we will have to take the quantities produced in 2014-15 and the prices of 2011-12 (base year). And if we want to calculate the Nominal GDP of 2014-15 then we will have to take the quantities produced in 2014-15 and the market prices of the same year i.e. 2014-15.

In India, economic growth is measured by the change in real GDP i.e. GDP at constant Market Prices as per the global best practices. 

So, Real GDP is steadily/consistently increasing from 2011-12 to 2014-15 but "change in real GDP" is decreasing from 11.2% to 4.6% and change in nominal GDP is also decreasing from 2011-12 to 2014-15.

The above is a case of economic growth as real GDP is increasing. But since the rate of change of real GDP is decreasing (but not negative), we say that economic growth is slowing down. When the "real GDP" decreases or "change in real GDP" is negative then it is a case of recession.

And if the prices are decreasing more but the production quantity is increasing then the nominal GDP may decrease but Real GDP may increase. So, in case of economic growth, nominal GDP may decrease.

Q.No.9, only (i) statement is the required criteria. Because even if (iii) statement is not true (as in the above example), a country may experience economic growth.

Answer: (a)

Answer: (c)

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)