UPSC STATIC QUIZ – Economy : 11 March 2024

Solution: b)

An irony about middle income countries is that many of them are not moving up to the higher income category. This situation of falling at the middle-income level is called the middle-income trap by economists. The “middle-income trap” is the phenomenon of hitherto rapidly growing economies stagnating at middle-income levels (of per capita income) and failing to graduate into the ranks of high-income countries. At the same time, many other countries have made significant progress through industrialization. They were able to expand the national income and thus the per capita income.

Solution: b)

Statement 3 is incorrect.

Simon Kuznets, a Russian-American development economist and statistician, was awarded the 1971 Nobel Memorial Prize in Economics for his research on economic growth. He set the standard for national income accounting, enabling accurate estimates of gross national product to be calculated for the first time.

Key Takeaways

Simon Kuznets, a Russian-American economist, set the standard for national income accounting that helped advance ideas of Keynesian economics and the study of econometrics.

Kuznets is also known for the Kuznets curve, which hypothesizes that industrializing nations experience a rise and subsequent decline in income inequality.

The rise in inequality occurs after rural labor migrates to urban areas and becomes socially mobile. After a certain income level is reached, inequality declines as a welfare state takes hold.

A modification of the curve, known as environmental Kuznets curve, has become popular to chart the rise and decline of pollution in an industrializing nation’s economy.

Kuznets Curve

Kuznets’ work on economic growth and income distribution led him to hypothesize that industrializing nations experience a rise and subsequent decline in economic inequality, characterized as an inverted “U”—the “Kuznets curve.” Hence, statement 3 is incorrect.

He thought economic inequality would increase as rural labor migrated to the cities, keeping wages down as workers competed for jobs. But according to Kuznets, social mobility increases again once a certain level of income was reached in “modern” industrialized economies, as the welfare state takes hold.

However, since Kuznets postulated this theory in the 1970s, income inequality has increased in advanced developed countries—although inequality has declined in fast-growing East Asian countries.

Solution: b)

Statement 1 is incorrect.

GDP is the total market value of all goods and services produced in the economy during a particular year, inclusive of all taxes and subsidies on products. The market value taken at current prices is the nominal GDP. The value taken at constant prices — that is prices for all products taken at an unchanged base year — is the real GDP.

In simple terms, real GDP is nominal GDP stripped of inflation. Real GDP growth thus measures how much the production of goods and services in the economy has increased in actual physical terms during a year. Nominal GDP growth, on the other hand, is a measure of the increase in incomes resulting from rise in both production and prices.

Solution: a)

Real GDP, which is the GDP after taking away the effect of inflation, is a derived metric. All Budget calculations start with the nominal GDP.

Real GDP = Nominal GDP — Inflation Rate

However, from the perspective of the common people, real GDP is what matters. The difference between the real and nominal GDP shows the levels of inflation in the year.

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 (Eg: agriculture)