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Prelims-IAS –ECONOMICS MCQ Ans-04

1..Regarding the new methodology to calculate GDP, which of the following statements are correct?

  1. Industrial output data will now be sourced from Annual Survey of Industries.
  2. Having a broader base to collect industrial output makes GDP more prone to revisions.
  3. The GDP can now increase even if number of units produced remain the same.
  4. It has nominally increased the size of Indian economy (GDP) for the past 3 years.

Select the correct answer from the codes given below.
(a) 1 and 4 only
(b) 1, 2 and 4 only
(c) 2 and 3 only
(d) 1, 2, 3 and 4

  • ANS-C
  • The new series of GDP reports final value of Goods and Services produced in the country at nominal prices, with the base year as 2011-12.
  • The new industrial output data will be sourced from MCA-21 database of the Ministry of Corporate Affairs.
  • Earlier it was sourced from Annual Survey of Industries (ASI), conducted by the MoS&PI, which covered only the units registered under Factories Act.
  • The MCA- 21 database is much more comprehensive compendium of balance sheet data of about 5 Lakh units.
  • Now more economic activity, especially in the unorganised sector is better represented.
  • This is one part of the reason to explain higher GDP growth rates.
  • This captures value added by activities such as marketing and quality improvement.
  • Therefore, even if the output in number of units remains the same, the Gross Value Added can increase, implying an increase in GDP.
  • However, having a broader database makes it more vulnerable to periodic revisions.
  • This is because many of the unregistered companies (and also the registered ones) do not do timely and proper  disclosures.
  • There is a problem of under-reporting and over-reporting, especially amongst non-listed companies.
  • Therefore, when quarterly results of listed large companies are declared, there are high chances of mismatches.
  • This makes the new database prone to revisions due to inconsistency.
  • Earlier, a more integral survey conducted by RBI for 2,500 companies was used for this purpose.
  • The new method to calculate GDP has reduced the economy’s size by Rs 10,000 crore to Rs 113.45 lakh crore in 2013-14 against Rs 113.55 lakh crore in the old data series.
  • It is because the NSSO’s establishment survey of 2011-12 had overestimated the Gross Value Added. This is another part of the reasoning to explain higher GDP growth in subsequent year (because of a lower base).

2..Which of the following statements is/are correct?

  1. Real GDP can calculate the change in prices.
  2. GDP deflator does not include price of imported goods
  3. Subsidies are included in National Income

Select the correct answer from the codes given below.
(a) 1 and 2 only
(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

  • ANS-B
  • 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.

3..Consider the following statements regarding economic indicators:

  1. National Income is calculated by adding subsidies to market prices.
  2. Gross National Product (GNP) is a measure of the value of output produced by all Indian nationals anywhere in the world.
  3. Gross Domestic Product (GDP) shows how much is produced within the boundary of the country by the citizens of the country.

Which of the statements given above is/are correct?
(a) 2 only
(b) 1 and 2 only

(c) 1 and 3 only

(d) 1, 2 and 3 only

  • ANS-B

  • National Income is Net National Product (NNP) at factor cost=NNP at market prices – indirect taxes + subsidies.
  • GNP is a measure of the value of output produced by the ‘nationals’ of a country-both within the geographical boundaries and outside. I.e. both within India and all other countries.
  • Gross Domestic Product (GDP) shows how much is produced within the boundary of the country by both the citizens and the foreigners.

4..In the New Series (2011-12) estimates of the National Income, the relationship between GVA at factor cost, GVA, at basic prices, and GDP (at market prices) is given below:

  1. GVA at basic prices = GVA at factor cost – (production taxes less production subsidies)
  2. GVA at factor cost = GVA at basic prices – (production taxes less production subsidies)
  3. GDP = sum of GVA at basic prices + product taxes – product subsidies

Which of the statements given above is/are not true?
(a) 1 only
(b) 1 and 3 only

(c) 2 only
(d) 2 and 3 only
  • ANS-A

  • GVA at basic prices = GVA at factor cost + (production taxes less production subsidies)
  • Production taxes or production subsidies are paid or received with relation to production and are independent of the volume of actual production.
  • Some examples of production taxes are land revenues, stamps and registration fees and tax on profession.
  • Some production subsidies are subsidies to Railways, input subsidies to farmers, subsidies to village and small industries, administrative subsidies to corporations or cooperatives, etc.
  • Product taxes or subsidies are paid or received on per unit of product.
  • Some examples of product taxes are excise tax, sales tax, service tax and import and export duties. Product subsidies include food, petroleum and fertilizer subsidies, interest subsidies given to farmers, households, etc. through banks, and subsidies for providing insurance to households at lower rates.

5..Which among the following will not be taken into account while counting GDP of the country?

  1. Tyres purchased by the car company
  2. Household work done by women
  3. Sale of an old mobile phone
  4. New car purchased by a customer

Select the correct answer using the codes given below

(a) 1 and 3 only   (b) 2 and 4 only       (c) 1, 2 and 3 only         (d) 1, 2, 3 and 4

  • ANS-C
  • Gross Domestic Product (GDP) is the market value of all final goods and services produced in a country during a period of time.
  • GDP includes only the market value of final goods and value of intermediate goods is not included.
  • Final good is a good purchased by a final user.
  • Intermediate good is a good that is an input into another good or service.
  • Tyres purchased by the car company are intermediate goods and thus will not be included in GDP calculation.
  • The sale of old mobile is not included as only the value of final new goods is included in GDP calculation.
  • New car purchased by a customer will be considered in GDP calculation.
  • Household work done by women is not quantifiable in monetary terms and thus is not considered in the calculation of GDP.

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