UPSC Mains Answer PYQ 2022: Economics Optional Paper 1 (Part- 2) | Economics Optional Notes for UPSC PDF Download

Q5(e): With appropriate examples, discuss the difference between the flow and the stock concept of renewable resources. Can the availability of one of these two resources be less for the consumption of future generations ? Justify your answer.
Ans: Stock refers to any quantity that is measured at a particular point in time, while flow is referred to as the quantity that can be measured over a period of time.
Stock resources:
These resources have taken millions of years to form and so they are finite (can be exhausted). Examples of stock resources include fossil fuels (coal, oil, gas) as well as minerals such as gold, copper, tin, uranium etc. These resources take time to develop. Thus, with increasing consumption its availability will be reduced for the future generation.
Flow resources:
In contrast to stock resources, flow resources are renewed within a short timescale, either through natural physical systems or biotic reproduction. Examples of flow resources include fish stocks, forests, fresh water, wind, solar energy and tidal range. These resources have faster reproductive ability. Thus, its availability for the future generation will not change much. However, some flow resources require careful management by human society in order to ensure their continuous availability, such as fish stocks or forests. These are known as critical flow resources. If its consumption is more than production it will also be reduced for the future generation.

Q6(a): What do you mean by the warranted rate of growth ? Explain the knife edge instability problem in Harrod’s growth model.
Ans:
Harrod wanted to find out unique growth rate at which investment and income must grow such that full employment level is maintained for longer time.
In Harrod’s model warranted growth rate is growth rate which induces enough investment to match planned saving. It is given by s/vr where s is MPS and vr is warranted capital output ratio.
Knief Edge in Harrod’s growth model
According to Harrod Domar mode, actual growth is given as
g = s/V
where s is saving rate and V is capital output ratio and warranted growth rate (gw) which induces enough investment to match planned savings is given by
gw =  s/Vr
where s is saving rate and V is warranted capital output ratio
Natural growth rate is given by gn.
The equality of all growth rates is called the balanced growth equilibrium or the growth rate. If gw > gn there will be a tendency for chronic depression (since gy = gn in long run) and the actual growth rate will never be sufficient to stimulate investment demand to match the amount of planned savings.
If gw < gn then there will be a tendency for chronic inflation. Actual growth rate will tend to exceed the warranted rate and there will be excess investment compared to savings.
It occurs because production function is assumed as fixed coefficients production. Because of it labor can not be substituted for capital. It brings rigidity to Vr. Also MPS is constant. Thus there is no way to achieve equilibrium but at gn = gw = g

Q6(b): Following Arthur Lewis, briefly state the sources of unlimited supply of labour and explain the mechanism of development of a dual economy of a less developed country.
Ans:
Lewis model is dual sector model. It explains the growth of a developing economy in terms of a labor transition between the capitalist sector and the subsistence sector.
Assumptions:

1. Two sector dual economy. Agriculture is primitive with disguised unemployment and industry is modern.
2. Huge surplus of labor in agricultural sector. It ensures wages don’t goes up in industry.
3. Easy mobility of labor.
4. Wages in industrial sector are higher than subsistence wages.

Sources of Unlimited Supply of Labor:
In Lewis model agriculture is source of unlimited supply of labor. A huge population is employed in the agricultural sector such that the marginal product of labour is zero. So, if a few workers are removed from agriculture, the total product remains unchanged.
Model

OS are subsistence wages and OW are industry wages. Lets say initially Oa labor are employed. Thus OWQ1a are paid as wages and WN1Q1 is surplus of capitalist. When this surplus is reinvested by capitalist marginal product curve is shifted outward. It increases wages as well as capitalist surplus. Thus there will be more reinvestment than period before.As a result of growth in industrial sector no surplus labor will remain in the agricultural sector. At this point both agriculture and industry will be competing for labor. At this point agriculture is said to be commercialized.

Q6(c): Distinguish between Gender Development Index (GDI) and Gender Empowerment Measure (GEM) in terms of their components and constructions.
Ans:
UNDP introduced  Gender-related Development Index (GDI) and a Gender Empowerment Measure (GEM) as a tool to measure gender-sensitive development.
The Gender-related Development Index adjusts the average achievements in the three dimensions that are captured in the HDI (Health, Education and ), to account for the inequalities between men and women.
Gender Development Index (GDI)

The Gender Empowerment Measure focuses on opportunities and captures gender inequality in three key areas: ‘Political participation and decision-making power’, as measured by women’s and men’s percentage shares of parliamentary seats; ‘Economic participation and decision-making power’, as measured by two indicators – women’s and men’s percentage shares of positions as legislators, senior officials and managers and women’s and men’s percentage shares of professional and technical positions; and ‘Power over economic resources’, as measured by women’s and men’s estimated earned income (PPP US$).
The GEM was intended to measure women’s and men’s abilities to participate actively in economic and political life and their command over economic resources.

Q7(a): Examine whether in Ricardian model, the theory of comparative advantage actually becomes a doctrine of comparative costs.
Ans:According to Ricardo, even if one nation has absolute disadvantage with respect to other nation in the production of both commodities there is still basis for mutual beneficial trade. In comparative advantage theory, every country will completely specialize in commodity of respective comparative advantage.
Ricardian Model and Doctrine of Comparative cost

Assumptions:

1. Perfect competition exists both in the commodity and factor markets.
2. Factors supplies, techniques of production and tastes and preferences are given and constant.
3. Labour is the only factor of production and the cost of producing a commodity is expressed in labour units.
4. Full employment
5. Transport cost is zero

Model:
Even if one country has absolute advantage in all goods than the other, both countries will still gain by trading with each other, as long as they specialized in the commodity with relative advantage.
In the above case country A has advantage in both commodity X and Y. But in above case country A has comparative cost advantage in the production of X and B has comparative advantage in Y. If A specialize in X & B in Y then overall output will increase.
Thus, Ricardo’s theory of comparative advantage actually becomes a doctrine of comparative costs.

Q7(b): Distinguish between nominal and effective rates of protection in Standard Trade Model. Supposenominal tariff on imported good j is 40%,tariff rate on input i is 40%,cost share of imported input i in the total cost of production of commodity j is 0.5%.
Determine the effective rate of protection and show that in this case nominal tariff rate is equal to the effective rate of protection.
Ans: Nominal tariff is the tariff that is imposed on the final imported goods of the country so as to protect the domestic industry. It was a notion that Higher the rate of nominal tariff, it was assured, higher would be the degree of protection and vice-versa.
On other hand the effective rate of tariff establishes a relationship between the tariff and the domestic value added. Under the usual assumptions of international -immobility of labour and capital, the effective rate of duty will indicate the degree of protection of the value added in the manufacturing process.
The rate of effective protection is usually calculated by the following formula
g = (t − ai*ti) / (1 − ai)
where,
g = the rate of effective protection to producers of the final commodity
t = the nominal tariff rate on consumers of the final commodity
ai = the ratio of the cost of the imported input to the price of the final commodity in the absence of tariffs
ti = the nominal tariff rate on the imported input

Solution to numerical
In the given numerical
t = 0.4
ti = 0.4
ai = 0.5
g = (0.4 – 0.4*0.5)/(1-0.5)
g = 0.4
Here the effective rate of protection is 0.4. Thus it is equal to the nominal tariff rate.

Q7(c): Illustrate Jagadish Bhagwati’s doctrine of immiserizing growth
Ans: Immiserizing growth is a theoretical situation first proposed by Jagdish Bhagwati, in 1958, where economic growth could result in a country being worse off than before the growth.
With the growth in export biased commodity there are two effects two work. One is term of trade effect and other is wealth effect. Gain by growth is decided by net effect of these effects.
Tot effect – With the growth in export led commodity of a nation ToT for that nation declines.
Wealth effect – It refers to the increase in per capita output as result of growth. Growth has positive wealth effect.
Net effect – It is given by sum of ToT effect and wealth effect.
Export biased growth is favorable for large nation till the wealth effect dominates ToT effect.

Initially, country was producing at point B and consuming at point E. After growth country is producing at point C and consuming at point G. Thus. country is worse off after growth.With the export-biased growth, Tot effect dominates the positive wealth effect, thus a large nation will loose by export led growth. It is usually seen for the developing countries which are exporting agricultural commodities.

Q8(a): State the functions of United Nations Conference on Trade and Development (UNCTAD). Do you think that UNCTAD has been successful in extending economic cooperation among the developing countries ? Justify your answer.
Ans:The United Nations Conference on Trade and Development is an intergovernmental organization within the United Nations Secretariat that promotes the interests of developing countries in world trade.

Functions of UNCTAD:

• Comprehend options to address macro-level development challenges
• Achieve beneficial integration into the international trading system
• Diversify economies to make them less dependent on commodities
• Limit their exposure to financial volatility and debt
• Attract investment and make it more development friendly
• Increase access to digital technologies
• Promote entrepreneurship and innovation
• Help local firms move up value chains
• Speed up the flow of goods across borders
• Protect consumers from abuse
• Curb regulations that stifle competition
• Adapt to climate change and use natural resources more effectively

Success of UNCTAD:
One of UNCTAD’s earliest and most notable accomplishments was the formulation and implementation of GSP, which offered special tariff concessions to exports of manufactured goods by developing countries. UNCTAD also releases various reports like World Investment Report 2020. which help countries to learn from each other.
However, UNCTAD has largely failed to protect poor countries against rich countries. It has failed to reduce gap between rich and poor countries. The failure of UNCTAD is often attributed to the “group system” (whereby the arguments advanced are those of groups of countries and not those of individual countries) and to the inefficiency of the UNCTAD secretariat.

Q8(b): Why do developing countries rely on specifying a permissible level of pollution and impose it uniformly across all polluting units of the same kind ? What are the problems associated with such a control method ?
Ans: The permissible level of pollution decided the permitted level of pollution in a country. The permissible level of a pollutant to which a healthy person is exposed for eight hours in a day is called as threshold value.
Most of the developing countries rely on specifying a permissible level of pollution and impose it uniformly across all polluting units. India also has similar standards eg. National Ambient Air Quality Standards.
Such standards are easy to implement. Having such a standards make it easier for measuring the pollution level. Measurement of pollution level can help developing countries to control it. These standards also enables countries to adopt market mechanisms like pollution permit trades. Thus, developing countries prefer to adopt such standards.

Problems Associated with Control Methods

1. There is potential for hiding pollution levels or shifting production to other countries, with looser environmental standards.
2. Putting it uniformly across the different units is not a desirable and efficient way.
3. There are administration costs of implementing the scheme and measuring pollution levels.
4. Controlling pollution is a difficult exercise. Industries may get away by just paying fine.
5. Many countries sets very low standards thus, defeating the purpose of scheme
6. Rich countries have sufficient income level to implement environmental friendly technologies and production methods. Imposing it on developing countries will affect development of these countries.

In controlling environmental degradation and pollution, lifestyle change can play a crucial role. In this sense India’s LiFE mission can be a guiding light for world.

Q8(c): What are the major achievements and failures of COP (Conference of Parties) 26 ?
Ans: The Glasgow Climate Pact (COP 26)  was adopted recently. Its major achievements and failures are as follow.
Major Achievements:

• There is a clear consensus on a target of keeping global temperature rise down to 1.5 degrees Celsius.
• It is the first clear recognition of the need to transition away from fossil fuels by phasing down the use of coal
• Methane is a significant greenhouse gas with 28 to 34 times higher temperature forcing quality than carbon but stays in the atmosphere for a shorter duration.
• An agreement is signed among 100 countries to cut methane emissions by 30 % by 2030.
• A group of 100 countries has agreed to begin to reverse deforestation by 2030.
• It implies that both the countries are moving towards a less confrontational and more cooperative relationship overall.
• The commitment to achieve net-zero carbon by 2070 and of enhanced targets for renewable energy were welcomed.
• There is greater clarity on how bilateral carbon trades can proceed and the creation of a centralised hub that replaces Kyoto Protocol’s Clean Development Mechanism.

Major Failures:

• India introduced an amendment to the original draft to replace the phrase “phase out” with “phase down” playing negatively with both the advanced as well as a large constituency of developing countries.
• India had earlier said that principles of equity meant all fossil sources: coal, oil and gas be reduced but the US and other countries refused as they were critical to their own economies.
• Doubling the current finance available for adaptation to developing countries will be around $ 30 billion which is grossly inadequate.
• The compensation for loss and damage for developing countries who have suffered as a result of climate change for which they have not been responsible has not met.
• India did not join the Global Methane Pledge despite methane being the second-most abundant greenhouse gas in the atmosphere after carbon dioxide.
• India refused to join the group due to concerns over a clause on possible trade measures related to forest products.

Thus, the Glasgow Climate Pact (of COP 26) is a mixed bag of modest achievements and disappointed expectations.