UPSC Static Quiz – Economy : 25 November 2024

Solution: c)

Factor Price is total cost of all factors of production (such as labour, capital, land etc) used in producing goods or services. It is the price of the commodity from the producer’s side.

When a commodity is produced, it is sold in the market.

Market Price – It is the price at which a product is sold in the market. It includes the cost of production in the form of wages, rent, interest, input prices, profit etc. It also includes the taxes imposed by the government. It excludes Government subsidy.

Thus, relationship between Factor price and Market price is

Market Price = Factor Price + Indirect Taxes – Subsidies

Solution: b)

Statement 3 is incorrect.

What is gross value added?
Put simply, it is a measure of total output and income in the economy. It provides the rupee value for the amount of goods and services produced in an economy after deducting the cost of inputs and raw materials that have gone into the production of those goods and services. It also gives sector-specific picture like what is the growth in an area, industry or sector of an economy.

GVA is sector specific while GDP is calculated by summation of GVA of all sectors of economy with taxes

added and subsidies are deducted.

While GVA gives a picture of the state of economic activity from the producers’ side or supply side, the GDP gives the picture from the consumers’ side or demand perspective. Both measures need not match because of the difference in treatment of net taxes.

A sector-wise breakdown provided by the GVA measure can better help the policymakers to decide which sectors need incentives/stimulus or vice versa.

Solution: a)

GDP is the sum total of value of goods and services created within the geographical boundary of a country in a particular year. We may be tempted to treat higher level of GDP of a country as an index of greater well-being of the people of that country. But there are reasons why this may not be correct.

• If the GDP of the country is rising, the welfare may not rise as a consequence. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms.

Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges. But since money is not being used here, these exchanges are not registered as part of economic activity.

Solution: d)

Personal income refers to all income collectively received by all individuals or households in a country.

Personal income includes compensation from a number of sources, including salaries, wages, and bonuses received from employment or self-employment, dividends and distributions received from investments, rental receipts from real estate investments, and profit sharing from businesses.

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.

Solution: c)

In order to compare the GDP figures (and other macroeconomic variables) of different countries or to compare the GDP figures of the same country at different points of time, we cannot rely on GDPs evaluated at current market prices. For comparison we take the help of real GDP. Real GDP is calculated in a way such that the goods and services are evaluated at some constant set of prices (or constant prices).

Since these prices remain fixed, if the Real GDP changes, we can be sure that it is the volume of production which is undergoing changes. Nominal GDP, on the other hand, is simply the value of GDP at the current prevailing prices.