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

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: (c)

Answer: (c)

CPI includes indirect taxes. So, when government increases the GST rate, it is captured in the CPI data.

But in the new series of WPI (2011-12), the government has excluded indirect taxes while measuring WPI. This is in consonance with international practices and will make the new WPI conceptually closer to the Producer Price Index (PPI).

Answer: (a)

Consider an example: If a country is exporting only apples and importing only oranges, then the terms of trade (TOT) are simply the ratio of the price of apples to the price of oranges. Suppose the price of an apple is Rs. 120/kg and Oranges is Rs. 40/kg

So, TOT = $\text"Export Price"/\text"Import Price" = 120/40$ = 3

This means if India is exporting apples and importing oranges then for one kg of apples exported, we can import 3kg of oranges. In other words, how many oranges can we import for a unit of export of apples?

So, TOT is a measure of how much imports an economy can get for a unit of exported goods. Since economies typically export and import many goods, measuring the TOT requires defining price indices for exported and imported goods and comparing the two.

A rise in the prices of exported goods in international markets would increase the TOT, while a rise in the prices of imported goods would decrease it. So, statements (i), (iii) & (iv) are true.

Answer: (a)