Test: Economy - 2 - UPSC MCQ

• Statement 1 is correct: When goods are exported to another country at a price which is less than what it is sold for in the home country or when the export price is less than the cost of production in the home country, then those goods have been dumped.

  • Home Market Price - Export Sales Price = Margin of dumping

• Statement 2 is not correct: The Department of Commerce in the Union Ministry of Commerce and Industry has a dedicated unit, called the Directorate General of Anti-Dumping & Allied Duties which investigates cases where the domestic industry (domestic producers) provide evidence that dumping has taken place by producers abroad. They also defend cases where allegations of dumping are brought against Indian exporters by foreign governments.

• There is a well-established process which is followed where questionnaires are sent to all stakeholders and evidence is collected in a time-bound fashion to either prove or disprove that dumping has taken place.

• If the good is alleged to be dumped from a non-market country ( a country where there are considerable distortions to the market through government subsidies ) then the Anti-dumping cell will calculate what the —normal” price of the product should be in the home market. The normal price will reflect the market price of the product had it been produced in the exporting country without these subsidies. If necessary, the price of such a commodity in a similar market (say a neighbouring country at the same level of development as the exporting country) will be considered as the normal price.

• If there is evidence of dumping then the Government of India will levy anti-dumping duty on that commodity.

• Viability Gap Funding (VGF) means a grant one-time or deferred, provided to support infrastructure projects that are economically justified but fall short of financial viability. Hence statement 1 is correct.

• The lack of financial viability usually arises from long gestation periods and the inability to increase user charges to commercial levels. Infrastructure projects also involve externalities that are not adequately captured in direct financial returns to the project sponsor. Through the provision of catalytic grant assistance of the capital costs, several projects may become bankable and help mobilize private investment in infrastructure.

• Government of India has notified a scheme for Viability Gap Funding to infrastructure projects that are to be undertaken through Public-Private Partnerships. It will be a Plan Scheme to be administered by the Ministry of Finance with suitable budgetary provisions to be made in the Annual Plans on a year-to-year basis. The quantum of VGF provided under this scheme is in the form of a capital grant at the stage of project construction. The amount of VGF will be equivalent to the lowest bid for a capital subsidy, but subject to a maximum of 20% of the total project cost. In case the sponsoring Ministry/State Government/ statutory entity proposes to provide any assistance over and above the said VGF, it will be restricted to a further 20% of the total project cost.

• Support under this scheme is available only for infrastructure projects where private sector sponsors are selected through a process of open competitive bidding. The project agreements must also adhere to best practices that would secure value for public money and safeguard user interests. Hence statement 2 is correct.

1. Government receipts are divided into two groups —Revenue Receipts and Capital Receipts.

2. Revenue receipts are divided into tax and non-tax revenues. Tax revenues consist of the proceeds of taxes and other duties levied by the central government. Tax revenues, an important component of revenue receipts, comprise of direct taxes - which fall directly on individuals (personal income tax) and firms (corporation tax), and indirect taxes like excise taxes (duties levied on goods produced within the country), customs duties (taxes imposed on goods imported into and exported out of India) and service tax.

3. Non-tax revenue of the central government mainly consists of

   1. interest receipts (on account of loans by the central government which constitutes the single largest item of non-tax revenue),

   2. dividends and profits on investments made by the government, fees and other receipts for services rendered by the government.

   3. Cash grants-in-aid from foreign countries and international organizations are also included.

4. Capital receipts refer to those receipts which either create a liability or cause a reduction in the assets of the government. Following are the components of Capital receipts.

   1. The recoveries are in respect of loans advanced to the State Government andUnion Territories with legislature

   2. Receipts on account of disinvestment of part of government equity in central Public sector Enterprises ( CPSEs), proceeds from strategic disinvestment and other such transactions. Hence only option 3 is not correct.

   3. Its market loans under the Scheme of Sale of Dated Government Securities and Treasury bills

   4. Securities against Small SavingsBorrowing from International institutions like IMF, WB etc.

1. Personal Income is the part of National Income which is received by households. To calculate personal income we have to consider the following factors:

   1. Undistributed Profits: It is a part of the profit which is earned by the firms and government enterprises and is not distributed among the factors of production. We have to deduct UP from NI to arrive at PI, since UP does not accrue to the households. Increasing it will reduce personal income. Hence option 2 is not correct.

   2. Corporate taxes: Similarly, Corporate Tax, which is imposed on the earnings made by the firms, will also have to be deducted from the NI, since it does not accrue to the households. Increasing it will reduce personal income. Hence option 3 is not correct.

   3. Net interest payments by the households: The households do receive interest payments from private firms or the government on past loans advanced by them. And households may have to pay interests to the firms and the government as well, in case they had borrowed money from either. So, we have to deduct the net interests paid by the households to the firms and government. Increasing it will reduce personal income.

2. Transfer payments: The households receive transfer payments from government and firms (pensions, scholarship, prizes, for example) which have to be added to calculate the Personal Income of the households. Increasing it will increase personal income.

   1. Thus, Personal Income (PI) = National Income- Undistributed profits - Net interest payments made by households - Corporate tax + Transfer payments to the households from the government and firms. Hence option 1 is correct.

1. There are two main accounts in the Balance of Payments - the current account and the capital account.

2. Current account

   1. It records exports and imports in goods and services and transfer payments. Trade in services denoted as invisible trade (because they are not seen to cross national borders) includes both factor income (payment for inputs-investment income, that is, the interest, profits and dividends on our assets abroad minus the income foreigners earn on assets they own in India) and non-factor income (shipping, banking, insurance, tourism, software services, etc.).

   2. Transfer payments are receipts which the residents of a country receive ‘for free’, without having to make any present or future payments in return. They consist of remittances, gifts and grants. They could be official or private.

3. Capital Account

   1. IIt includes sales of assets such as money, stocks, bonds, etc. The main components of the capital account include foreign investment, loans and banking capital. Foreign investment, comprising Foreign Direct Investment (FDI) and Portfolio Investment consisting of Foreign Institutional Investors (FIIs) investment, American Depository Receipts/Global Depository Receipts (ADRs/GDRs) represents non-debt liabilities, while loans (external assistance, external commercial borrowings and trade credit) and banking capital, including non-resident Indian (NRI) deposits are debt liabilities.

4. Hence, option (c) is the correct answer.

• Peer to peer (P2P) lending

  • It is a form of crowdfunding used to raise unsecured loans (i.e without collateral) which are re-paid with interest. Hence statement 1 is correct.

    • Crowdfunding refers to the financing of projects with small amounts of money raised from a large number of people, with a portal serving as an intermediary.

    • It utilizes an online P2P platform which serves as a link between borrowers and lenders.

• The interest rate is fixed by way of a mutual agreement between the borrower and lender. It is not fixed by the P2P platform. Hence statement 2 is correct.

• About P2P Platforms:

  • As per RBI’s Directions, P2P platforms are to act as intermediaries providing an online platform to the participants.

  • They are not allowed to:

    • raise deposits

    • provide loans

    • provide credit guarantee

    • permit any secured lending.

    • permit any international flow of funds.

A transfer payment is a one-way payment to a person who has given or exchanged no money, good, or service for it. It is a process used by governments as a way to redistribute money through programs such as old age or disability pensions, student grants, scholarships, prizes, unemployment compensation, etc.

• High-powered money

  • The total liability of the monetary authority of the RBI is called the monetary base or high powered money. It consists of currency (notes and coins in circulation with the public and vault cash of commercial banks) and deposits held by the Government of India and commercial banks with RBI.

  • It is also called as ‘reserve money’ or ‘monetary base’ as it acts as a basis for credit creation.

  • It is denoted by M0.

• Different measures of the money supply can be categorized as follows:

  • M1

    • It is also called narrow money.

    • It includes currency with public, demand deposit in all banks (e.g. current account, savings account) and Other deposits with RBI

  • M2 = M1 + Post office bank savings

  • M3 = M1 + Time deposits with commercial banks (Fixed deposits, Recurring deposits). o

  • M4= M3 + total post office deposits

• Know your customer (KYC) or Know Your Client:

• It is the process adopted by a business to verify the identity of its customers/clients. o It is done to assess the suitability and the potential risks associated in the business relationship.

• The KYC procedure is prescribed by the financial sector regulatory authorities in India such as o Securities and Exchange Board of India (SEBI) for share market activities

  • Reserve Bank of India (RBI) for banking activities

  • Insurance Regulatory Development Authority (IRDA) for insurance services o Pension Fund Regulatory Development Authority(PFRDA)) for pension-related services

• All financial sector intermediaries (banks, brokers, distributors, mutual funds, insurance companies etc.) are mandated to do KYC verifications of their clients as per a prescribed procedure.

• Hence all the options are correct.

• Wholesale Price Index (WPI) measures the average change in the prices of commodities for bulk sale at the level of early stage of transactions. The index basket of the WPI covers commodities falling under the three major groups namely Primary Articles, Fuel and Power and Manufactured products. (The index basket of the present 2011-12 series has a total of 697 items including 117 items for Primary Articles, 16 items for Fuel & Power and 564 items for Manufactured Products.) The prices tracked are exfactory price for manufactured products, mandi price for agricultural commodities and ex-mines prices for minerals. Weights given to each commodity covered in the WPI basket is based on the value of production adjusted for net imports. WPI basket does not cover services. Hence statement 1 is not correct.

• In India WPI is also known as the headline inflation rate. In India, Office of Economic Advisor (OEA), Department of Industrial Policy and Promotion, Ministry of Commerce and Industry calculates the WPI.

• The Government periodically reviews and revises the base year of the WPI as a regular exercise to capture structural changes in the economy and improve the quality, coverage and representativeness of the indices. The Wholesale Price Index (WPI) series in India has undergone six revisions in 1952-53, 196162, 1970-71, 1981-82, 1993-94 and 2004-05 so far. The base year of All-India WPI has been revised from 2004-05 to 2011-12 on 12 May 2017 to align it with the base year of other macroeconomic indicators like the Gross Domestic Product (GDP) and Index of Industrial Production (IIP). The current series is the seventh revision.

• Wholesale price index calculated with 2011-12 base year does not include taxes in order to remove the impact of fiscal policy. This also brings the present WPI series closer to Producer Price Index, as is practised globally. A Producer Price Index reflects the change in average prices that producers get. The exclusion of indirect taxes would also ensure the continuity and compatibility of new WPI series with the GST. WPI is used as a deflator for nominal macroeconomic aggregates like GDP and IIP. Since the nominal estimates are computed at basic price which does not include product taxes, excluding indirect taxes from WPI makes it a compatible and appropriate deflator. Hence statement 2 is not correct.

• Priority Sector means those sectors which are considered as important for the development of the basic needs of the country and are to be given priority over other sectors.

• Priority sector lending (PSL) should constitute 40 percent of the Adjusted Net Bank Credit.

• Priority Sector includes the following categories: o Agriculture

  • Renewable Energy

  • Micro, Small and Medium Enterprises

  • Export Credit

  • Education Loans

  • Housing

  • Social Infrastructure

  • Advances to weaker sections

• Loans to minorities, women, scheduled caste and scheduled tribes, small and marginal farmers, self-help groups, cottage industries etc.

• Overdrafts upto ? 5,000/- under Pradhan Mantri Jan-Dhan Yojana (PMJDY) accounts, provided the borrower’s household annual income does not exceed ? 100,000/ - for rural areas and ? 1,60,000/- for non-rural areas,

• If there is any shortfall in the achievement of target, banks may be required to invest in:

• o Funds with NABARD or National Housing Bank (NHB) or Small Industries Development Bank of India (SIDBI) such as Rural Infrastructure Development Fund (RIDF) o Micro Units Development Refinance Agency Bank (MUDRA Ltd) o Priority sector lending certificates (PSLC)

• About Small Finance Bank (SFB)

  • It is a private financial institution intended to further the objective of financial inclusion.

  • They were created pursuant to the announcement in Union Budget 2014-2015

• Who can set up Small Finance Banks:

  • Resident individuals/professionals with 10 years of experience in banking and finance

  • Companies and societies owned and controlled by residents

  • Existing Non-Banking Finance Companies (NBFCs), Micro Finance Institutions (MFIs), and Local Area Banks (LABs) that are owned and controlled by residents can also opt for conversion into small finance banks.

• Eligibility Conditions:

  • The minimum capital for SFBs is prescribed at Rs. 100 crore.

  • Foreign Investment is permitted as in the case of other private sector commercial banks.

• Compliance Norms

  • They are subject to all prudential norms and regulations of RBI as applicable to existing commercial banks like maintenance of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).

  • Required to extend 75 percent of its Adjusted Net Bank Credit (ANBC) to the sectors eligible for classification as priority sector lending (PSL) by the Reserve Bank.

  • At least 50 percent of its loan portfolio should constitute loans and advances of upto Rs. 25 lakh.

  • At least 25 percent of its branches shall be in unbanked rural centers.

• Functions:

  • Acceptance of deposits

  • Lending activities with special focus on small business units, small and marginal farmers, micro and small industries and unorganized sector entities.

  • Priority sector lending

  • Distribution of mutual fund units, insurance products, pension products o Foreign exchange business

• Hence all the options are correct.

• The Bretton Woods Conference, formally known as the United Nations Monetary and Financial Conference, was the gathering of 730 delegates from all the 44 allied nations at Bretton Woods, New Hampshire, United States. It was aimed at regulating the international monetary and financial order after the conclusion of World War II.

• It led to the setting up of International Monetary Fund (IMF) and the World Bank. It reestablished a system of fixed exchange rates. This was different from the international gold standard in the choice of the asset in which national currencies would be convertible.

• A two-tier system of convertibility was established at the centre of which was the dollar. The US monetary authorities guaranteed the convertibility of the dollar into gold at the fixed price of $35 per ounce of gold. The second-tier of the system was the commitment of monetary authority of each IMF member participating in the system to convert their currency into dollars at a fixed price. The latter was called the official exchange rate.

• Hence option (a) is the correct answer.

• World Trade Organisation.

  • It was established in 1995 after the Uruguay Round negotiations (1986-94).

  • It is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world‘s trading nations and ratified in their parliaments. The goal is to ensure that trade flows as smoothly, predictably and freely as possible.

1. The term “marginal productivity” refers to the extra output gained by adding one unit of labor; all other inputs are held constant.

2. Disguised Unemployment is a kind of unemployment in which there are people who are visibly employed but are actually unemployed. Disguised unemployment exists where part of the labor force is either left without work or is working in a redundant manner where additional worker's productivity is essentially zero. It is unemployment that does not affect aggregate output. An economy demonstrates disguised unemployment when productivity is low and too many workers are filling too few jobs. Hence option (a) is the correct answer.

3. Suppose a farmer has four acres of land and he actually needs only two workers and himself to carry out various operations on his farm in a year, but if he employs five workers and his family members such as his wife and children, this situation is known as disguised unemployment.

• The Phillips curve is an economic concept developed by A. W. Phillips stating that inflation and unemployment have a stable and inverse relationship. The theory claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. Hence option a is the correct answer.
• The concept behind the Phillips curve states the change in unemployment within an economy has a predictable effect on price inflation. The inverse relationship between unemployment and inflation is depicted as a downward sloping, concave curve, with inflation on the Y-axis and unemployment on the Xaxis. Increasing inflation decreases unemployment, and vice versa. Alternatively, a focus on decreasing unemployment also increases inflation, and vice versa.
• The long-run Phillips curve is a vertical line that illustrates that there is no permanent trade-off between inflation and unemployment in the long run. However, in the short-run Phillips curve is roughly L-shaped to reflect the initial inverse relationship between the two variables. As unemployment rates increase, inflation decreases; as unemployment rates decrease, inflation increases.
• Kuznets curve is used to demonstrate the hypothesis that economic growth initially leads to greater inequality, followed later by the reduction of inequality. The idea was first proposed by American economist Simon Kuznets. As economic growth comes from the creation of better products, it usually boosts the income of workers and investors who participate in the first wave of innovation. The industrialisation of an agrarian economy is a common example. This inequality, however, tends to be temporary as workers and investors who were initially left behind soon catch up by helping offer either the same or better products. This improves their incomes.
• Laffer Curve is a graphic representation of the relationship between rates of taxation and the resulting levels of government revenue. The theory tries to arrive at an optimal tax rate beyond which tax revenues for an economy tend to fall.The Laffer curve was developed in 1979 by economist Arthur Laffer. According to Laffer‘s theory, tax revenues are almost zero at extreme rates. At zero tax rate, particularly the income-tax, it is natural that tax revenues are zero. But at an extreme of a 100 per cent tax rate, the government theoretically collects zero revenue because the assumption is that taxpayers have no incentive to work as they would be left with nothing to spend at such high or they find a way to avoid paying taxes.The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments.
• Lorenz curve is a graphical representation that shows degree of inequality in income and wealth in a given population or an economy. In this method personal incomes in an economy are arranged in increasing order, the cumulative share of total income is then plotted against the cumulative shar of population. The curve‘s slope is thus proportional to per capita income at each point of the population distribution. In case of complete equality of income, the Lorenz curve will be a straight line and with greater curvature the inequality rises proportionally- the Gini coefficient measures this inequality.

• Mumbai Inter-Bank Bid Rate (MIBID) is the benchmark rate at which banks would like to borrow money from each other. The bid is the price at which the market would buy. It reflects the short term funding costs of major banks. Hence, option (b) is the correct answer.

• It is also used as a benchmark rate for the majority of deals struck for Interest Rate Swaps (IRS), Forward Rate Agreements (FRA), Floating Rate Debentures and Term Deposits.

• Mumbai Inter-Bank Offer Rate (MIBOR)

  • It is the benchmark rates at which banks lend each other.

  • It is the Indian version of the London Interbank Offer Rate (LIBOR). It is fixed for overnight to 3 month long funds and these rates are published every day at a designated time. Of the above tenures, the overnight MIBOR is the most widely used one which is used for pricing and settlement of Overnight Index Swaps (OIS).

• An open economy is one that trades with other nations in goods and services and, most often, also in financial assets. Indians, for instance, enjoy using products produced around the world and some of our production is exported to foreign countries. Foreign trade, therefore, influences Indian aggregate demand in two ways.

• First, when Indians buy foreign goods, this spending escapes as a leakage from the circular flow of income decreasing aggregate demand. Second, our exports to foreigners enter as an injection into the circular flow of the domestic economy. This increase in the circular flow of money in the domestic economy can lead to an increase in demand for all finished goods and services produced in the domestic economy. Consequently, this can lead to an increase in aggregate demand for domestically produced goods as well as imported goods. Hence, statement 2 is correct.

• Total foreign trade (exports + imports) as a proportion of GDP is a common measure of the degree of openness of an economy. In 2015, this was close to 45% and 38.9% in 2004-2005. This is substantially higher than a total of 16 percent that prevailed in 1985-86. However, in comparison to other countries, India is relatively less open. There are several countries whose foreign trade proportions are above 50 percent of GDP. Hence, statement 1 is correct.

• Among the major sources of income of banks, interest earned on loans or credits is one of them. So in order to maximize its earnings, banks generally have a tendency to maximize the loan and advances.

• However, RBI has imposed certain restrictions on credit creation by banks. The RBI decides a certain percentage of deposits which every bank must keep as reserves. This is done to ensure that no bank is ‘over lending‘. · This is a legal requirement and is binding on the banks. This is called as ‘Cash Reserve Ratio’ (CRR).

  • It is the percentage of deposits which a bank must keep as cash reserves (not in any other liquid form such as gold, securities, etc) with itself. Hence statement 1 is not correct.

  • CRR is also called as ‗Required Reserve Ratio‘ or the ‘Reserve Ratio‘.

  • Higher is the CRR, lower will be the liquidity available with the bank for lending out. Hence lower is the credit or money creation in the economy and vice versa. Hence statement 2 is correct.

• Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called the Statutory Liquidity Ratio or SLR. It can be kept in the form of cash, gold and securities specified by the government.

• Double coincidence of wants is a situation where two economic agents have complementary demand for each others‘ surplus production. It refers to the simultaneous fulfilment of mutual wants of buyers and sellers. For example, a person with a particular good has to find a person who has the goods of his wants and he should also possess the wanted good of the other person. Hence option (b) is the correct answer.

• The law of supply: It is the microeconomic law that states that all other factors being equal, as the price of a good or service increases, the quantity of goods or services that suppliers offer will increase, and vice versa.

• The law of demand: It is a fundamental principle of microeconomics which states that at higher price consumers will demand a lower quantity of a good.

• The presentation of separate Railway budget started in the year 1924, and has continued after independence as a convention rather than under Constitutional provisions. The presentation of a unified budget will bring the affairs of the Railways to centre stage and present a holistic picture of the financial position of the Government. The merger is also expected to reduce the procedural requirements and instead bring into focus, the aspects of delivery and good governance. Consequent to the merger, the appropriations for Railways will form part of the main Appropriation Bill. There will be no dividend liability for Railways form 2017-18 and Ministry of Railways will get Gross Budgetary support. Hence option (a) is the correct answer.

• The advancement of budget presentation by a month and completion of Budget related legislative business before 31st March would pave the way for early completion of Budget cycle and enable Ministries and Departments to ensure better planning and execution of schemes from the beginning of the financial year and utilization of the full working seasons including the first quarter. This will also preclude the need for seeking appropriation through ‗Vote on Account‘ and enable implementation of the legislative changes in tax laws for new taxation measures from the beginning of the financial year (now most taxes get implemented by June).

• Fiscal Responsibility and Budget Management (FRBM) became an Act in 2003. The objective of the Act is to ensure inter-generational equity in fiscal management, long run macroeconomic stability, better coordination between fiscal and monetary policy, and transparency in fiscal operation of the Government.

• It requires for the presentation of the following documents before the Parliament - the Medium Term Expenditure Framework Statement (MTEF), Medium-Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macroeconomic Framework Statement.

• The introduction of Outcome Budget is an executive action by the government. From the year 2017-18 onwards, it has been decided that the output and outcomes of the schemes of 68 Ministries and Departments will be available along with the financial outlays as a part of the Budget documents, so that clearly defined objectives and goals for each scheme can be seen by all.

• Hence, option (b) is the correct answer.

• Statement 1 is not correct: Deemed Exports refers to those transactions in which goods supplied do not leave the country, and payment for such supplies is received either in Indian rupees or in foreign exchange.

• Deemed benefit export scheme has been in operation for more than two decades. The benefits under the scheme include a rebate on duty chargeable on imports or excisable material used in the manufacture of goods which are supplied to the eligible projects.

• Statement 2 is not correct: The policy aims to create a level playing field for the domestic industry vis-avis direct import by providing duty-free inputs or exemption/refund of duty paid on goods manufactured in India. Thus, it is an instrument for import substitution. It helps in creating manufacturing capability, value addition and employment opportunities in the country.

• Statement 3 is correct: Deemed Export Benefit Scheme benefits are availed of by units in Power, Petroleum refinery, fertilizer, and Nuclear Power Projects. They are also availed by the supply of goods to projects financed by multilateral or bilateral agencies.

• The Triffin dilemma or Triffin paradox is the conflict of economic interests that arises between short-term domestic and long-term international objectives for countries whose currencies serve as global reserve currencies.

• In the post-World War II scenario, countries devastated by the war needed enormous resources for reconstruction. Imports went up and their deficits were financed by drawing down their reserves. At that time, the US dollar was the main component in the currency reserves of the rest of the world, and those reserves had been expanding as a consequence of the US running a continued balance of payments deficit (other countries were willing to hold those dollars as a reserve asset because they were committed to maintaining convertibility between their currency and the dollar).

• The problem was that if the short-run dollar liabilities of the US continued to increase in relation to its holdings of gold, then the belief in the credibility of the US commitment to convert dollars into gold at the fixed price would be eroded. The central banks would thus have an overwhelming incentive to convert the existing dollar holdings into gold, and that would, in turn, force the US to give up its commitment. This was the Triffin Dilemma after Robert Triffin.

• Hence option (d) is the correct answer.

• Factor cost includes only the payment to factors of production, it does not include any tax. In order to arrive at the market prices, we have to add to the factor cost the total indirect taxes less total subsidies.

• The basic prices lie in between: they include the production taxes (less production subsidies) but not product taxes (less product subsidies). Therefore in order to arrive at market prices, we have to add product taxes (less product subsidies) to the basic prices, not the production taxes or production subsidies.

• GVA at factor costs + Production taxes- Production subsidies = GVA at basic prices

• GVA at basic prices + Product taxes - Product subsidies = GVA at market prices

• So, the interplay between product taxes and product subsidies would determine if GVA at Basic Prices would be less than or more than GVA at market prices.

• A proportional tax is an income tax system where the same percentage of tax is levied on all taxpayers, regardless of their income. A proportional tax applies the same tax rate across low, middle, and high-income taxpayers. Whereas, in progressive taxation is based on the taxable amount of an individual's income. They follow an accelerating schedule, so high-income earners pay more than low income earners. Tax rate, along with tax liability, increases as an individual's wealth increases. The overall outcome is that higher earners pay a higher percentage of taxes and more money in taxes than do lower-income earners. Hence statement 1 is correct.

• The proportional income tax acts as an automatic stabiliser – a shock absorber because it makes disposable income, and thus consumer spending, less sensitive to fluctuations in GDP as compared to progressive taxation. When GDP rises, disposable income also rises but by less than the rise in GDP because a part of it is siphoned off as taxes. This helps limit the upward fluctuation in consumption spending. Hence statement 2 is correct.