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Gross capital formation will increase if:
  1. gross domestic savings increases
  2. gross domestic consumption increases
  3. GDP increases
Select the correct answer using the codes given below.
  • a)
    1 only 
  • b)
    1 and 2 only 
  • c)
    1 and 3 only 
  • d)
    None
Correct answer is option 'D'. Can you explain this answer?
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Most Upvoted Answer
Gross capital formation will increase if: gross domestic savings incre...
Explanation:
Gross capital formation refers to the total amount of investment made in the economy. It includes investments in fixed assets, such as machinery, buildings, and infrastructure. The options given in the question are:

1. Gross domestic savings increases:
When gross domestic savings increase, it means that people are saving a larger portion of their income, which can be used for investment purposes. This can lead to an increase in gross capital formation.

2. Gross domestic consumption increases:
When gross domestic consumption increases, it means that people are spending more and saving less. This can lead to a decrease in gross capital formation as there is less money available for investment.

3. GDP increases:
When GDP increases, it means that the economy is growing, and there is more money available for investment. This can lead to an increase in gross capital formation.

Based on the above explanations, it can be seen that only option 1 can lead to an increase in gross capital formation. Therefore, the correct answer is option D, none of the above.
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In a poor country like India, as income rises people first concentrate on increasing their consumption of what they regard as basic or more essential consumer goods. For the poor, these goods would primarily include cereals and for people at successive levels of higher income protective foods, simple non-food consumer goods, more modern, better quality non-food consumer goods and simple consumer durables, better quality consumer goods, and so on. When the demand for basic and more essential consumer goods is more or less met, demand for the next higher level of consumer goods begins to impinge on consumer decision making and their consumption increases. There is thus a hierarchy of income levels and a hierarchy of consumer goods. As incomes rise and one approaches the turning point referred to, there is an upward movement along the hierarchy in the demand for consumer goods which exhibits itself in a relative increase in the demand for these goods. If one examines the past consumption behaviour of households in India, one finds confirmation of the proposition just made. Until the mid seventies one notices a rise in the proportion of consumption expenditure on cereals, and thereafter, a steady decline reflecting a progressive increase in the relative expenditure on non-cereal or protective foods. About the same time the rising trend in the share of food in total consumption expenditure also begins to decline, raising the proportion of expenditure on non-food consumer goods. Simultaneously one also notices a sharper rise in the proportion of expenditure on consumer durables. Thus, what one sees is an upward movement in consumer demand along the hierarchy of consumer goods which amounts to a major change in consumer behaviour.Whenever there is a decline in the proportion of consumption expenditure on cereals

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Gross capital formation will increase if: gross domestic savings increases gross domestic consumption increases GDP increasesSelect the correct answer using the codes given below.a)1 onlyb)1 and 2 onlyc)1 and 3 onlyd)NoneCorrect answer is option 'D'. Can you explain this answer?
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