ROY’S INSTITUTE OF COMPETITIVE EXAMINATION

WBCS (EXE.) ETC. MAIN EXAMINATION

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♦ The term laissez faire was first coined by Adam Smith. Adam Smith himself called such system as “The System of
Natural Liberty”.
♦ In a capitalist economy production is done according to market demand but for a socialist economy production is done

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according to needs.
♦ On the eve of independence the nature of Indian economy : under developed, stagnant, semi-feudal etc.
♦ The Indian economy is characterized by: Predominance of agriculture, Labour surplus, Low Per Capita Income,

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Massive unemployment and underemployment, Low capital formation etc.
♦ The concept of ‘Mixed Economy’ was developed by J. M. Keynes.

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♦ Gross Domestic Product (GDP)
o It counts all of the output generated within the borders of a country. GDP is composed of Goods and service produced
for sale in the market and also include some non-market production, such as defence or education services provided
by the Govt.
o Not all productive activity is included in GDP. For example unpaid work (such as that performed in the home or by
volunters) and black market activites are not included because they are difficult to measure and value accurately.
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o It is a Quantitative Concept and its volume/size indicate the internal strength of the economy.
Gross National Product (GNP)
o It counts all the output of the resident of a country.
o In this case Trans-boundary economic activities of an economy is also taken into account.
o It indicate the internal as well the external strength of the economy.
o The normal formula is GNP = GDP + Income from abroad.
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♦ Moreover Gross domestic product takes no account of the ‘Wear and Tear’ on the machinery, building and so an that
are used in producing the output. If this depletion of the captial stock, called Depreciation is substracted from GDP, we
get Net domestic product.
Comparing GDPs of two countries
GDP is measured in the currency of the country in question. That requires adjustment when trying to compare the value
of output in two countries using different currencies. The usual method is to convert the value of GDP of each country
into U.S. dollars and then compare them. Conversion to dollars can be done either using market exchange rates-those
that prevail in the foreign exchange market-or Purchasing Power Parity (PPP) exchange rates. The PPP exchange rate
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is the rate at which the currency of one country would have to be converted into that of another to purchase the same
amount of goods and services in each country.
♦ The major use of PPPs is in making inter-country comparisons in real terms of GDP & its component expenditures.
By PPP, India’s global rank is third, behind the China & US.
♦ GDP is not a measure of the overall standard of living or well-being of a country. Changes in the output of goods and
services per person (GDP per capita) are often used as a measure of whether the average citizen in a country is better
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or worse off.
♦ Real GDP is the nominal GDP after adjusting for any price changes attributable to either inflation or deflation. Nominal
GDP or the GDP at current price can present a distorted picture of the actual growth in GDP owing to price changes.
♦ The true indicator of economic growth is real GDP growth.
♦ According to Economic Survey 2014-15, Headline growth rate will now be measured by GDP at constant market prices,
which will henceforth be referred to as’GDP’ as the practice internationally. Earlier growth was measured in terms of
growth rate in GDP at factor cost at constant prices.
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 WBCS MAIN ECONOMICS HANDOUT - 1 2
♦ While GDP is a good measure in comparative studies (comparing economics), GVA is a better measure to compare
different sector within the economy.
♦ GVA at basic prices = Compensation of employees (CE) + Operating Surplus (OS) / Mixed Income (MI) + Consumption
of Fixed Capital (CFC) + Production Taxes less Production subsidies.
♦ GVA at factor cost = GVA at basic prices – production taxes plus production subsidies.

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♦ GDP = ΣGVA at basic prices + Product Taxes – Product subsidies.
♦ Green GDP monetizes the loss of biodiversity, and accounts for costs caused by climate change.

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♦ Calculating green GDP requires that net natural capital consumption, including resource depletion, environmental
degradation, and protective and restorative environmental initiatives, be subtracted from traditional GDP.
♦ Green GNP — The net value after deducting consumption of natural resources and degradation of environment from

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GNP is called Green GNP.

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♦ Some Accounting Relations :
(i) GNPMP = GDPMP + Net factor income from abroad (v) NNPMP = GNPMP – Depreciation
(ii) GNPFC = GDPFC + Net factor income from abroad (vi) NNPFC = GNPFC – Depreciation
(iii) GNPFC = GNPMP – Net Indirect Taxes (vii) NDPMP = GDPMP – Depreciation
(iv) GDPFC = GDPMP – Net Indirect Taxes (viii) NDPFC = GDPFC – Depreciation
(ix) NNPFC = GDPMP + Net factor income from abroad – Net Indirect Taxes – Depreciation (or consumption of fixed
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capital)
(x) National Income = NNPFC

(xi) Per Capita Income

♦ GDP deflator (Implicit price deflator for GDP) is a measure of the level of prices of all domestically produced final
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goods and services in an economy in a particular period of time. This is calculated to find the overall rise in the level
of price.
♦ Sustainable development means development without environmental degradation or it seeks to meet the needs and
aspirations of the present generation, without compromising the ability of future generations to meet their own needs.
Modern concept of sustainable development is derived from the 1987’s Brundtland Report. The objective of Brundtland
Commission is to unite countries to pursue sustainable development together.
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♦ Incremental Capital Output Ratio (ICOR) – It means additional amount of capital required to produce one additional
product. It helps to calculate the amount of capital investment required to achieve a Target Growth Rate.
Capital Investment
Growth rate =
ICOR
For example, if the ICOR is 4 and Targetted Growth Rate is 8%, the required investment is 32%.
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♦ Social overhead capital — It is also called social infrastructure. It can be defined as all man-made means of production
which are used directly or indirectly in the process of production. It provides a foundation for economic growth. The
SOC includes educational institution, dams, bridges, electricity generation plants, road, railway etc.
♦ Inclusive growth — It means economic growth that creates employment opportunities and helps in reducing poverty.
It means having access to essential services in health and education by the poor. All groups of people have participated
in growth & have benefitted equitably from it.
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♦ Different Phases of Business Cycle
Phases of Business cycle

Peak

Economic activity
Steady
growth line

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Exp

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Trough

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In the expansion phase, there is increase in economic activity such as production, employment, output, wages, profits,

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demand and supply of product and sales.

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The economy then reaches peak, where the maximum limit of growth is attained and economic indicators do not grow
further. This stage marks the reversal in trend of economic growth.
In the recession phase, the demand for goods and services starts declining rapidly. Prices tend to fall and economic
indicators such as income, output and wages start to decline.
The growth in the economy continues to decline and there is rise of unemployment in the depression phase. Demand
and Supply of Goods and Services and their prices reach their lowest level in the trough phase.
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In the recovery phase, there is a turnaround from the bottom and the economy starts recovering from the negative growth
rate. Demand and supply pick up and there is a positive attitude towards investment and employment.
♦ Human Development Report — 2020 (Published in December, 2020)–covers 189 countries
HDI Rank HDI Value (2019)
1. Norway 0.957
52. Russia 0.824
72. Sri Lanka 0.782
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84. Brazil 0.765

85. China 0.761
114. South Africa 0.709
131. India 0.645
India’s life expectancy at birth 69.7 years; Expected years of schooling — 12.2 years; Mean years of
schooling — 6.5 years; Gross National Income Per Capita — $6681 (2011 PPP)
129. Bhutan 0.654
133. Bangladesh 0.632
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142. Nepal 0.602

147. Myanmar 0.583
154. Pakistan 0.557
169. Afghanistan 0.511
189. Niger 0.394
♦ In 2010, the geometric mean was introduced to compute HDI.
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♦ INFLATION
Inflation is a persistent rise in the general price level over a period of time. Inflation is a situation of ‘‘to much
money chasing too few goods.’’
♦ DEFLATION
The opposite of inflation is deflation. It is ‘‘a state in which the value of money is rising, i.e. prices are falling.’’
Deflation means persistent fall in the general price level over a period of time compared to base year price level.

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It is usually associated with falling activity and employment. Sometimes, deflation is confused with disinflation.
Deflation is a situation when prices fall along with reduction in output and employment. Disinflation, on the
other hand, is a situation when prices are reduced deliberately but output and employment remain unaffected.

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The rate of change of price index is negative in case of deflation.

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o 4 Disinflation
f 3 Inflation
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c –1 Apr May Jun Jul Aug Sep Oct Nov
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Deflation
–3 Reflation
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–5 Deflation
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Reflation : Reflation means deliberate action of government to increase rate of inflation to stimulate the economy.

It is usually done to redeem the economy from deflationary situation.
Disinflation : The rate of inflation at a slower rate is called disinflation. For example, if the inflation of last

month was 6% and rate of inflation in the current month is 5% it is termed as disinflation.
♦ CAUSES OF INFLATION
The following factors lead to inflation : increase in money supply, cheap monetary policy, deficit financing, increase
in disposable income, increase in public expenditure, increase in consumer spending, black money, increase in exports,
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shortage of factors of production, natural calamities, increase in cost of production, artificial scarcities etc.
♦ CAUSES OF DEFLATION
The following factors lead to deflation : decrease in money supply, dear monetary policy, decrease in disposable
income, decrease in public expenditure, decrease in consumer spending etc.
♦ MEASURES TO CONTROL INFLATION
The various methods are usually grouped under monetary measures, fiscal measures and other measures.
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One of the important monetary measures is credit control. The central bank of a country adopts a number of
methods to control the quantity of credit. For this purpose, it raises the bank rate, repo rate, reverse repo rate ;
selles securities in the open market ; raises the reserve ratio ; and adopts a number of selective credit control
measures, such as raising margin requirements and regulating consumer credit etc.
Monetary policy alone is incapable of controlling inflation. It should, therefore, be supplemented by fiscal measures
which include : increase in tax rate, reduction in unnecessary government expenditure, increase in savings, control
or give up deficit financing etc.

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 WBCS MAIN ECONOMICS HANDOUT - 1 5
Other measures to control inflation include rationing, price control, increase in production, rational wage policy
etc.
♦ MEASURES TO CONTROL DEFLATION
Deflation can be controlled by adopting monetary and fiscal measures in just the opposite manner to control
inflation.

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♦ EFFECTS OF INFLATION
Inflation affects different people differently. When price rises or the value of money falls, some groups of the
society gain, some lose and some stand in-between. There are two economic groups in every society, the fixed

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income group and the flexible income group. People belonging to the first group lose and those belonging to the
second group gain.
Gainers as a result of inflation : Debtors, Equity holders, Businessman etc.

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Losers as a result of inflation : Creditors; Salaried persons, Recipients of transfer payments such as pensions,
social security, unemployment allowance ; Bond holder etc.

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♦ EFFECTS OF DEFLATION
Deflation affects different groups differently. Persons with fixed incomes gain because the value of money rises
with falling prices. On the other hand, businessman, industrialists, traders, real estate holders, and others with
variable incomes lose.
♦ STAGFLATION
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The word ‘‘Stagflation’’ is the combination of stag plus flation, taking ‘stag’ from stagnation and ‘flation’ from
inflation. Thus it is paradoxical situation where the economy experiences stagnation or unemployment along with
a high rate of inflation. It is, therefore, also called inflationary recession.
♦ DEMAND-PULL INFLATION AND COST-PUSH INFLATION
Demand-pull inflation takes place when aggregate demand is rising while the available supply of goods is
becoming less. Cost-push inflation takes place due to increase in cost of production. It is caused by wage-push
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and profit-push to prices.

♦ HEADLINE INFLATION
Headline inflation is a measure of the total inflation within an economy, including commodities such as food and
energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes.
♦ CORE INFLATION
An inflation measure which excludes transitory or temporary price volatility as in the case of some commodities
such as food items, energy products etc.
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♦ BASE EFFECT
The consequence of abnormally high or low levels of inflation in a previous month/year distorting headline
inflation numbers for the most recent month/year. A base effect can make it difficult to accurately assess inflation
levels over time. It wears off over time if inflation levels are relatively constant.
♦ SKEW FLATION
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It means the skewness of Inflation among different sectors of the economy—some sectors are facing huge inflation,
some none and some deflation.

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 WBCS MAIN ECONOMICS HANDOUT - 1 6

MULTIPLE CHOICE QUESTIONS

1. GNP=GDP+X-M
Where M means
a) Income earned and received by national within the boundaries of foreign country.
b) Income received by foreign national from within the country.

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c) Volume of commodities and received produced during the accounting year.
d) Indirect taxes and subsidies
2. GDP( at market price) – NIT=?

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a) NNP( at market price) b) GNP( at factor price) c) NDP ( at market price) d) NNP( at factor cost)
3. Who is the author of the book “ poverty and un- British Rule in india”?
a) Dadabhai Naoroji. b) Amartya Sen. c) Pranab Mukherjee. d) Amit Mitra.

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4. In the composition of national income in india the contributed of the________ The highest.

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a) Primary sector. b) Secondary sector c) Service sector d) Social sector.
5. National Income calculated at current price in india has shown a tendency to rise at a faster rate than National income
at constant prices because
a) General price level has been rising fast. b) India’ s population has been rising.
c) Base year chosen is abnormal. d) none of the above.
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6. Which of the following sectors does not come under the service sector in india
a) Real Estate. b) Transport.
c) Restaurant and hotels. d) formation of electronic television.
7. GDP at factor cost is
a) GDP minus indirect taxes plus subsidies. b) GNP minus depreciation allowance.
c) NNP plus depreciation allowance. d) GDP minus subsidies.
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8. In india GDP is higher than GNP because

a) Import is higher than export. b) Capital inflow is higher than capital inflow.
c) Net factor income is negative. d) Govt. Expenditure is more than income.
9. National income of india is compiled by
a) Finance Commission b) indian statistical institute. c) NDC d) National Statistical Office.
10. The contribution of agricultural to india’ s economy is
a) constant. b) increasing. c) decreasing d) None of the above.
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11. Contribution of Agriculture to GNP is approximately

a) 14% b) 15% c) 16.5% d) 17.5%
12. What is the mainstay of Indian economy?
a) Manufacturing. b) Business c) public sector. d) Agriculture.
13. In which sector, the public sector is most dominant in india?
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a) transport b) commercial banking.

c) steel production. d) organized term lending financial institutions.
14. In india , inflation is measured by
a) wholesale price index number. b) CPI- UNME.
c) NNP at market price. d) GNP at market price.

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15. India opted for “ mixed economy “ in—
a) framing of the constitution. b) industrial policy ofv1948.
c) second five year plan d) none of these
16. HDI is a composition three indicators such as
a) longevity , educational attainment. b) longevity , poverty and change in output.

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c) Growth, poverty and educational attainment. d) poverty, standard of living and educational attainment.
17. The average rate of domestic savings for the indian economy is currently estimated to be in the range of –
a) 15% to 20% b) 20% to 25% c) 25% to 30% d) 30% to 35%

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18. The most important source of capital formation in india Has seen-
a) household savings. b) public sector savings. c) Govt. revenue surpluses d) corporate savings.
19. Consider the following statements:

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1. India’s GDP is more than its GNP.
2. Net Factor Income From Abroad ( NFIA) is positive for india.

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Which of the statement given above is / a correct?
a) Only 1 b) Only 2 c) Both 1 and 2 d) Neither 1 nor 2
20. Which state has the highest percentage capita income in india?
a) Delhi b) Punjab c) Bihar d) West Bengal
21. Which of the following indicate economic growth through five year plans?
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a) Rise in national income and per capita income. b) development of railways and roadways.
c) development of education and health service. d) development of industrial towns and industrial estate.
22. One of the problems in calculating the national income in india correctly is
a) under employment. b) inflation
c) non- monetized consumption. d) low saving.
23. Which of the following are the main causes of slow rate of growth of Per capia income in india ?
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1. High capital- output ratio.

2. High rate of growth of population.
3. High rate of capital formation.
4. High level of fiscal deficit.
a) 1, 2 b) 2,3,4 c) 1,4 d) All of the above.
24. Which one of the following is/ are a/ an indicator of the financial health of a country?
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i) GDP ii) PPP iii) FDI in a year.

a) Only I. b) Only ii c) Only iii d) All I, ii , iii
25. India’s wage policy is based on
a) cost of living . b) standard of living c) productivity d) none of the above.
26. Which is not added in the calculation of national income of india ?
a) The value of goods and services. b) The sold value of the old fridge.
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c) services rendered by the housewives. d) Both (b) and (c)

27. Which of the following benefits from inflation?
a) Lender b) Borrower c) Both d) none of the above.
28. Factors responsible for current inflation are-
a) circulation of black money. b) govt. Expenditure on subsidy.
c) excess of demand over supply of goods d) All of the above.
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29. Economic growth in india will happen necessarily if there is
a) population growth. b) capital formation
c) Technical progress in the global economy. d) All of the above.
30. The important source of capital formation in india Has been
a) Household savings. b) public sector savings. c) govt. Revenue surpluses. d) corporate savings.

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31. Which of the following is not
True about indian economy.
a) The contribution of the primary sector in the GDP is increasing regularly.

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b) The share of its tertiary sector increased.
c) The share of the secondary sector never crossed 40%.
d) It is an agrarian economy directly shifting towards service economy.

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32. Contribution of Agriculture sector to indian gross domestic product is

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a) more than its % share in total employment. b) less than its percentage share in total employment.
c) Both shares are fairly equal. d) none applies.
33. A closed economy is in which
a) money supply is fully controlled. b) deficit financing takes place
c) only export is there . d) Neither export nor import takes place .
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34. Inflation economy can be controlled by
a) surplus budget. b) increase in taxation
c) reduction in public expenditure. d) All of the above.
35. Trickle down process in india
Has become
a) Successful highly in generating all round growth. b) Not at all Successful
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c) Partly Successful d) Uncertain

36. D.A is paid on the basis of
a) standard of living. b) per capita income c) consumer price index. d) National income
37. Index “ Residex” is associated with
a) share price. b) Mutual fund price c) inflation index d) land prices
38. Inclusive growth is an important objective of the development process. In this context, which of the amount to inclusive
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growth?
1. Poverty reduction 2. Disinvestment 3. Good governance 4. Skill building
Select the correct answer :
a) Only 1, 2 & 3 b) Only 2, 3 & 4 c) Only 1, 3 & 4 d) All 1, 2, 3 & 4
39. Which of the following is not a factor of demand-pull inflation in India?
a) Mounting Govt. expenditure b) Role of black money
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c) Hike in oil prices d) Rapid population growth

40. While estimate green GDP, we always consider the–
a) Agriculture b) Industry
c) Environmental degradation d) All of these

__________

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