Ramesh Singh Test: Introduction To Economics - 1


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QUESTION: 1

Consider the following statements regarding the ‘distribution system’:

1. In the state model of the distribution system, the state takes the sole responsibility of supplying goods and services.

2. In the market model of the distribution system, goods and services are made available in the market and based on their demand and supply, their prices are determined in the open market and finally, they get distributed to the population 

Which of these statements is/are incorrect?

Solution:  
  • In the arena of the distribution network, we have three historically existing models-state, market, and state-market mix. 

  • In the first type of distribution system, the state (i.e., the government) takes the sole responsibility of supplying goods and services required by the population with no payments being done by the consumer- the former Soviet Union and Communist China being the best examples. 

  • In the second category comes the market model of distribution which functions based on the price mechanism. In this system, goods and services are made available in the market and based on their demand and supply, their prices are determined in the open market and finally, they get distributed to the population. This was the distribution system of the capitalist economies of the whole of Euro-America. 

  • The third and the most prevalent mode of distribution, the state market mix, developed out of the experiences of the former two systems.

QUESTION: 2

According to Keynes :

1. Price and wages are not flexible enough to employ all.

2. To employ all people the economy should be at its full potential.

Which of these statements is/are correct?

Solution:  
  • Keynes questioned the very principle 'laissez-faire' and the nature of the invisible hand'. 

  • He even opined that the invisible hand brings equilibrium to the economy but by 'strangulating the poor'. He suggested that prices and wages are not flexible enough to employ all. 

QUESTION: 3

Consider the following statements ‘Capitalist economies’:

1. In the capitalist economies of the time, all the basic goods and services were part of the market mechanism, i.e., being produced and supplied by the private sector.

2. Almost everything required by the people was supplied by private enterprises via the market.

3. It strengthens the purchasing power of the masses.

 Which of these statements is/are correct?

Solution:  
  • In the capitalist economies of the time, all the basic goods and services were part of the market mechanism, i.e., being produced and supplied by the private sector. 

  • It meant that almost everything the people required was supplied by the private enterprises via the market which was ultimately an un-dimensional movement of money and wealth (from the mass of people to the few who controlled the production and supply chain) and the masses were going through the process of pauperisation every day, thereby weakening their purchasing power.

QUESTION: 4

Consider the following statements regarding the Gross domestic product (GDP)? 

1. It is a quantitative concept whose volume/size indicates the internal strength of the economy. 

2. It does not say anything about the qualitative aspects of the goods and services produced. 

3. It is used by the IMF/World Bank. 

Which of these statements is/are correct?

Solution:  
  • When we use the term “a growing economy", it means that the economy is adding up its income, i.e., in quantitative terms. 

  • It (GDP) is a quantitative concept and its volume/size indicates the internal strength of the economy. But it does not say anything about the qualitative aspects of the goods and services produced. 

  • It is used by the IMF/WB in the comparative analyses of its member nations.

QUESTION: 5

Consider the following statements regarding NDP and GDP:

1. The NDP of an economy has to be always lower than its GDP for the given year.

2. There is no way to cut the depreciation to zero.

Which of these statements is/are incorrect?

Solution:

 

  • NDP = GDP - Depreciation. This way, the NDP of an economy has to be always lower than its GDP for the same year, since there is no way to cut the depreciation to zero. 

 

 

 

QUESTION: 6

Net Domestic Product can be used :

1. To understand the historical situation of the loss due to depreciation to the economy.

2. To show the achievements of the economy in the area of research and development.

3. To compare the economies of the world.

Which of these statements is/are correct?

Solution:  
  • NDP is not used in comparative economics, i.e., to compare the economies of the world. This is due to different rates of depreciation which is set by the different economies of the world. 

  • Depreciation and its rates are also used by modern governments as a tool of economic policymaking, which is the third way how depreciation is used in economics.

  • It is also used to show the achievements of the economy in the area of research and development.

QUESTION: 7

Which is the purest form of the income of a nation?

Solution:  
  • Net national product (NNP) is the monetary value of finished goods and services produced by a country's citizens, overseas and domestically, in a given period. 

  • It is the equivalent of the gross national product (GNP), the total value of a nation's annual output, minus the amount of GNP required to purchase new goods to maintain existing stock, otherwise known as depreciation.

QUESTION: 8

Consider the following statements Remittances: 

1. Private Remittances is the net outcome of the money which inflows and outflows on account of the 'private transfers' by Indian nationals working outside of India and the foreign nationals working in India.

2. On this front India has always been a gainer. 

Which of these statements is/are incorrect?

Solution:  
  • Private Remittances: the net outcome of the money which inflows and outflows on account of the 'private transfers' by Indian nationals working outside of India (to India) and the foreign nationals working in India (to their home countries). 

  • On this front India has always been a gainer- till the early 1990s from the Gulf region (which fell afterwards in the wake of the heavy country-bound movements of Indians working there due to the Gulf War) and afterwards from the USA and other European nations.

QUESTION: 9

Consider the following statements GDP of the country:

1. Gross national product is the GDP of a country added with its income from abroad.

2. GNP is always lower than its GDP.

3. In India, GNP is always higher than its GDP 

Which of these statements are correct?

Solution:  
  • The normal formula is GNP = GDP + Income from Abroad. 

  • But it becomes GNP = GDP + (- Income from Abroad), i.e., GDP – Income from Abroad, in the case of India. 

  • This means that India's GNP is always lower than its GDP.

QUESTION: 10

Which method is usually used for calculating the purchasing power parity by the IMF?

Solution:  
  • GNP is the 'national income' according to which the IMF ranks the nations of the world in terms of the volumes—at purchasing power parity (PPP). 

  • India is ranked as the 3rd largest economy of the world (after China and the USA), while as per the nominal/ prevailing exchange rate of the rupee, India is the 7th largest economy (IMF, April 2016). Now such comparisons are done using the GDP, too.