Economic Concepts and Theories MCQ Quiz - Objective Question with Answer for Economic Concepts and Theories - Download Free PDF

The correct answer is Gross Domestic Product (GDP).

Key Points

• Gross Domestic Product
  • GDP measures the monetary value of final goods and services—that is, those that are bought by the final user—produced in a country in a given period of time (say a quarter or a year).
  • It counts all of the output generated within the borders of a country.

Additional Information 

• Gross margin
  • Gross margin equates to net sales minus the cost of goods sold.
  • The gross margin shows the amount of profit made before deducting selling, general, and administrative (SG&A) costs.
  • Gross margin can also be called gross profit margin, which is gross profit divided by net sales
• Net national produc
  • Net national product refers to gross national product, i.e. the total market value of all final goods and services produced by the factors of production of a country or other polity during a given time period, minus depreciation. 
• Gross National Product 
  • Gross National Product (GNP) is the total value of all finished goods and services produced by a country's citizens in a given financial year, irrespective of their location.
  • GNP also measures the output generated by a country's businesses located domestically or abroad.

The correct answer is Option 1.

Key Points

Inflation:

• Inflation is a persistent rise in the price levels of goods and services leading to a fall in the currency’s purchasing power. Therefore, The value of money during inflation decreases. Hence, Statement 2 is not correct and Statement 1 is correct.
• Inflation measures the change in prices of a basket of goods and services over a year.
• It occurs as a result of a mismatch between the supply and demand for money, changes in production and distribution costs, or an increase in product taxes.
• Inflation is measured by the Consumer Price Index (CPI) in India.
• The Impact of Inflation is that it reduces households' purchasing power due to an increase in prices. Hence, Statement 3 is not correct.
• The impact of inflation is felt across different sectors of the economy which are favourable to some and unfavourable to others. This price uncertainty may discourage investment and savings for the future.

Additional Information

Positive Impacts

• Increased Profits for Producers: Hence, Statement 4 is not correct.
  • In most cases, inflation benefits the producers of goods. They make more money because they can sell their products at higher prices.
• Increased Investment Returns
  • During periods of inflation, investors and entrepreneurs are given additional incentives to invest in productive activities. As a result, they benefit from higher returns.
• Increase in production output
  • When producers receive the appropriate investment, they produce more goods and services. As a result, inflation causes an increase in product/service production.
• Increased Employment and Earnings
  • As output rises, so does the demand for various production factors, including labour. As a result, employment and income rise in response to inflation.
• Shareholders income increases
  • If a company's profits increase as a result of inflation, it can pay dividends to its shareholders. As a result, during inflationary periods, shareholders' dividend income may increase.
• Borrowers' Advantages
  • Inflation reduces the purchasing power of money. As a result, if the borrower pays an interest rate lower than the inflation rate, he benefits from the process. This is because the real value of the money returned by the borrower is less than the value of the money borrowed.
• Governments' tax revenue improves

The correct answer is the Foreign Portfolio Investment.

Key Points

• Hot money is the flow of funds from one country to another in order to earn a short-term profit on interest rate differences.
• A global depositary receipt (GDR) is a bank certificate issued in more than one country for shares in a foreign company.
• Foreign direct investment is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
• Foreign portfolio investment is the entry of funds into a country where foreigners deposit money in a country's bank or make purchases in the country's stock and bond markets. In FPI, the investor does not have direct control over the securities or businesses.
• Hot money is generally referred to as FPI.

The correct answer is None of the above.

Key Points

• GDP:
  • GDP’s full form is Gross Domestic Product is evaluated regularly to account for changing production structure, relative prices, and better recording of economic activities.
  • Gross Domestic Product (GDP) is the total money value of final goods and services produced in the economic territories of a country in a given year. Hence, statement 1 is not correct.
  • Non-monetary goods and services (e.g. cooking by housewife) are not included in GDP calculation. Hence, statement 2 is not correct.
  • Economic transactions virtually include everything economic in the country. For e.g., if a stockbroker sells and purchases the same stock worth Rs. 1000 five times in a day, it does not increase the GDP of the country by Rs. 5000.
  • Economic transactions may also include buying and selling of bonds, FII inflows, and outflows, etc. Hence, statement 3 is not correct.
  • GDP includes the value of all goods and services produced within a country within a year.
• Source Link- https://ncert.nic.in/ncerts/l/leec102.pdf

The correct answer is neither exports nor imports take place.

Key Points

• Closed economy :
  • A closed economy is one that has no trading activity with outside economies.
  • The closed economy is therefore entirely self-sufficient, which means no imports come into the country and no exports leave the country.
  • The goal of a closed economy is to provide domestic consumers with everything they need from within the country's borders.
  • The need for raw materials produced elsewhere that play a vital role as inputs to final goods makes closed economies inefficient.
  • A government may close off a specific industry from international competition through the use of quotas, subsidies, and tariffs.
  • In reality, there are no nations that have economies that are completely closed.

Important Points

• Why There Are No Real Closed Economies? 
  • Maintaining a closed economy is difficult in modern society because raw materials, such as crude oil, play a vital role as inputs to final goods.
  • Many countries do not have raw materials naturally and are forced to import these resources.
  • Closed economies are counterintuitive to modern, liberal economic theory, which promotes the opening of domestic markets to international markets to capitalize on comparative advantages and trade.

Additional Information

• Example of a Closed Economy :
  • In practice, there are no completely closed economies.
  • Brazil imports the least amount of goods—when measured as a portion of the gross domestic product (GDP)—in the world and is the world's most closed economy.
  • Brazilian companies face challenges in terms of competitiveness, including exchange rate appreciation and defensive trade policies.
  • In Brazil, only the largest and most efficient companies with significant economies of scale can overcome barriers to export.

The correct answer is None of the above.

Key Points

• GDP:
  • GDP’s full form is Gross Domestic Product is evaluated regularly to account for changing production structure, relative prices, and better recording of economic activities.
  • Gross Domestic Product (GDP) is the total money value of final goods and services produced in the economic territories of a country in a given year. Hence, statement 1 is not correct.
  • Non-monetary goods and services (e.g. cooking by housewife) are not included in GDP calculation. Hence, statement 2 is not correct.
  • Economic transactions virtually include everything economic in the country. For e.g., if a stockbroker sells and purchases the same stock worth Rs. 1000 five times in a day, it does not increase the GDP of the country by Rs. 5000.
  • Economic transactions may also include buying and selling of bonds, FII inflows, and outflows, etc. Hence, statement 3 is not correct.
  • GDP includes the value of all goods and services produced within a country within a year.
• Source Link- https://ncert.nic.in/ncerts/l/leec102.pdf

The correct answer is Gross National Product.

Key Points

• Net National Product (NNP):
  • NNP is obtained by subtracting depreciation value (i.e. capital stock consumption) from GNP.
  • Net National Product (NNP) = Gross National Product − Depreciation.

Additional Information

• Gross Domestic Product (GDP):
  • It is the total money value of all final goods and services produced within the geographical boundaries of the country during a given period of time.
  • GDP = C + G + I
    • C = Consumption expenditure
    • G = Government expenditure
    • I = Investment expenditure
• Gross National Product (GNP):
  • It refers to the money value of the total output of production of final goods and services produced by the nationals of a country during a given period of time, generally a year.
• National Income (NI):
  • When NNP is calculated at factor cost (FC) it is called National Income.
  • The measure is calculated by deducting indirect taxes and adding subsidies in NNP at Market Price (MP).
  • In India, the Wholesale Price Index (WPI) is the weighted average price of 676 items with the base year 2011-12.

The correct answer is the Co-existence of the public and private sectors.

Key Points

• A mixed economy is an economy organized with some free-market elements and some socialistic elements, which lies on a continuum somewhere between pure capitalism and pure socialism.
  • It refers to a type of economy where the public and private sectors coexist.
  • Mixed economies typically maintain private ownership and control of most of the means of production, but often under government regulation.
  • Mixed economies socialize select industries that are deemed essential or that produce public goods.
  • The public sector works alongside the private sector but may compete for the same limited resources.
  • Mixed economic systems do not block the private sector from profit-seeking, but do regulate business and may nationalize industries that provide a public good.

Important Points

• India is a mixed economy.
• In fact, all known historical and modern economies fall somewhere on the continuum of mixed economies.

The correct answer is Decreases.

The value of money during inflation decreases.

Key Points

Inflation:

• Inflation is a persistent rise in the price levels of goods and services leading to a fall in the currency’s purchasing power.
• Causes of Inflation:
  • Printing too much money.
  • Increase in production cost.
  • Tax rises.
  • A decline in exchange rates.
  • War or other events causing instability.
  • Increase in money supply in the economy
• Measures to Control Inflation:
  • Increasing the bank interest rates.
  • Regulating fixed exchange rates of the domestic currency.
  • Controlling prices and wages.
  • Providing cost of living allowances to citizens.
  • Regulating black and speculative market.

The correct answer is Dadabhai Naoroji.

• Dadabhai Naoroji, fondly called the Grand Old Man of India, was the pioneer in this field.
  • He prepared the first estimates of National income in 1876.
  • He estimated the national income by first estimating the value of agricultural production and then adding a certain percentage as non-agricultural production.
• Key Points
• The first person to adopt a scientific procedure in estimating national income was Dr.V.K.R.V.Rao In 1931.
  • He divided the Indian economy into two parts.
  • He used the Product method to calculate national income in the agricultural sector and the income method to calculate national income in the corporate sector. Finally, net income earned from abroad was added to obtain national income.
• The first official attempt was made by Prof.P.C.Mahalnobis.
• The Government of India appointed the “National Income Committee” in 1949 under the chairmanship of Prof P C Mahalanobis, and other members were Prof D R Gadgil and Dr V K R V Rao.
• The first report of the committee was presented in 1951 according to which India’s national income for the year 1948-49 was Rs 8,710 crores and per capita income was Rs 225/-.

Additional Information

• Since 1955 the national income estimates are being prepared by the “Central Statistical Organisation” [CSO].
• It is divided into three sectors:-
  • ​Primary sectors including agriculture, forestry, mining, and quarrying.
  • Secondary sector including manufacturing, power generation, gas, and water supply.
  • Tertiary sector including transport, communication and trade, banking, insurance, public administration, defense, and external trade.

The correct answer is Estate duty.

Key Points

The citizens of India cannot shy away from paying taxes. The Government of India imposes two types of taxes on its citizens – direct and indirect taxes.

• Direct tax is charged on income, salary or profits of an individual or corporates. In the case of direct tax, the burden can’t be shifted by the taxpayer to someone else. These are largely taxes on income or wealth. Income-tax, corporation tax, estate duty,  property tax, inheritance tax and gift tax are examples of direct tax.
• Indirect tax is a levy where the incidence and impact of taxation do not fall on the same entity. The burden of tax can be shifted by the taxpayer to someone else. Indirect tax has the effect to raising prices of products on which they are imposed. Customs duty, import duty, central excise, service tax and value-added tax are examples of indirect tax. Excise duties on fuel, liquor, and cigarette taxes are all considered examples of indirect taxes.

NOTE- 

Sales taxes can be direct or indirect. If they are imposed only on the final supply to a consumer, they are direct. If they are imposed as value-added taxes along the production process, then they are indirect.

What is GST?
GST, or goods and services tax, is an indirect tax. The Goods and Services Tax Act was passed by Parliament on March 29, 2017. It is levied on the supply of goods and services. This law has replaced many indirect taxes that previously existed in India.

The correct answer is "Salaries of government employees".

Key Points

• Revenue expenditures include things like employee salaries, interest payments on debt from the past, subsidies, pensions, etc. that neither increase assets nor decrease liabilities.
• Profits from sales are used to pay for them.
• According to a general definition, a revenue expenditure is any outlay that has no net impact on liabilities or assets.

Additional Information

• Revenue expenditures include things like salaries, wages, pensions, subsidies, and interest payments.
• In order to cover its operating needs, the government incurs income expenses.
• Every year, the Indian government releases a budget that includes both a revenue budget and a capital budget, as well as the total number of revenue expenditures.

The correct answer is stagflation.

Key Points

• An economy that is suffering both rising inflation and stagnant economic output is said to be in stagflation.
• Stagflation was initially identified in the 1970s when an oil shock caused high unemployment and rapid inflation in many industrialised nations.
• Slow economic development and relatively high unemployment, sometimes known as economic stagnation, are the hallmarks of stagflation, which is also characterised by rising prices (i.e., inflation).
• An alternative definition of stagflation is a time when there is both inflation and a fall in the GDP. 

Important Points

• A needed return's inflation risk compensation is represented by the inflation premium component.
• The difference between the actual gross domestic product (GDP) at the present and the GDP that would be present if an economy were experiencing full employment is known as the inflationary gap, a macroeconomic concept.
• Policies to boost the economy and fight deflation are referred to as reflation. 

Correct answer Pat Mullins.

Key Points

The correct answer is service sector.

Key Points

• 60% of Indian GDP is contributed by the service sector.
• India's services sector covers a wide variety of activities such as trade, hotel and restaurants, transport, storage and communication, financing, insurance, real estate, business services, community, social and personal services, and services associated with construction.
• The services sector is not only the dominant sector in India’s GDP but has also attracted significant foreign investment, has contributed significantly to export, and has provided large-scale employment.
• The current growth of the service sector in India is based mainly on labor market arbitrage.
• Moving forward, India can no longer rely on ‘low cost’ for ‘low value added’ services. Therefore, the solutions that address the following:
  • Boosting the manufacturing sector with both direct and indirect spin-off benefits for the growth of the service sector in India.
  • Moving up the value chain, especially in the IT/ ITeS sector.
  • Broad - basing the Indian Services offering platform into sectors beyond the traditional IT/ ITeS by identifying the global demand for such services, and meeting these demands based on the natural competencies and comparative advantages.