[Mission 2023] STATIC QUIZ, 13 June 2023 – Economy

Solution: b)

Statement 1 is incorrect.

Current Account Deficit or CAD is the shortfall between the money flowing in on exports, and the money flowing out on imports. Current Account Deficit (or Surplus) measures the gap between the money received into and sent out of the country on the trade of goods and services and also the transfer of money from domestically-owned factors of production abroad.

The current account constitutes net income, interest and dividends and transfers such as foreign aid, remittances, donations among others.

A country with rising CAD shows that it has become uncompetitive, and investors are not willing to invest there. They may withdraw their investments.

Current Account Deficit may be a positive or negative indicator for an economy depending upon why it is running a deficit. Foreign capital is seen to have been used to finance investments in many economies. Current Account Deficit may help a debtor nation in the short-term, but it may worry in the long-term as investors begin raising concerns over adequate return on their investments.

High software receipts and private transfers can lower current account deficit.

Solution: b)

When the aggregate demand in an economy strongly outweighs the aggregate supply, prices go up. Economists describe demand-pull inflation as a result of too many dollars chasing too few goods.

If a government reduces taxes, households are left with more disposable income in their pockets. This, in turn, leads to increased consumer spending, thus increasing aggregate demand and eventually causing demand-pull inflation.

Cost-push inflation is when prices go up.

Solution: a)

Gross Domestic Product (GDP) includes the production within a country by all producers i.e. citizens as well as foreign multi national corporations.

Gross National Product (GNP) captures all that is produced by the citizens of the country, whether it is within the geography of the country or abroad.

GNP is GDP + net factor income from abroad.

In the age of globalisation, one country’s GDP is another country’s GNP.

If it’s a highly globalised and competitive economy and many of its MNCs are operating in other countries, its GNP tends to be more.

Solution: c)

Tax buoyancy explains this relationship between the changes in government’s tax revenue growth and the changes in GDP. It refers to the responsiveness of tax revenue growth to changes in GDP. When a tax is buoyant, its revenue increases without increasing the tax rate.

If the output grows and the tax buoyancy is not commensurate it means one of the following or both: There is tax evasion or growth in the non-taxed part of GDP.

Solution: a)

Only statement 1 is correct.

In calculating GDP, only newly produced goods are counted. Transactions in existing goods like second-hand cars are not included, as these do not involve the production of new goods. But the services provided by the agents while selling second-hand cars are counted. The agents make some money through commission which adds to the service economy.

There are imputed values as part of GDP. All houses are assumed to be rented as it is not possible for the government to check which one is owner occupied and which one is rented. Thus, rental value of all houses is part of GDP.

Transfer payments like scholarships, pensions and universal basic income that the government gives do not fetch any direct returns in terms of addition to GDP and thus are not included in the GDP.