macro fundamentals, GDP, investment & growth section 3 Practice Questions Answers Test with Solutions & More Shortcuts

Answer: (d)

GDP is the total final value of goods and services produced within the domestic territory of a country in a specified time period (generally a financial year).

The concept of domestic territory (economic territory) is different from the geographical or political territory of a country.

The domestic territory of a country includes the following:

1. Political frontiers of the country including its territorial waters.
2. Ships, and aircrafts operated by the residents of the country between two or more countries, for example, Air India’s services between different countries.
3. Fishing vessels, oil and natural gas rigs and floating platforms operated by the residents of the country in the international waters or engaged in extraction in areas where the country has exclusive rights of operation.
4. Embassies, consulates and military establishments of the country located in other countries, for example, the Indian embassy in the U.S.A., Japan etc. It excludes all embassies, consulates and military establishments of other countries and offices of international organisations located in India.

Thus, the domestic territory may be defined as the political frontiers of the country including its territorial waters, ships, aircraft, fishing vessels operated by the residents of the country, embassies and consulates located abroad etc.

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.

Answer: (b)

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)