Economics Test - 34

The correct option is 'Net National Product at Factor Cost'.

Key Points

• Net National Product at Market Price
  • This statement refers to the net value of all goods and services produced within a country at market prices, after adjusting for depreciation. While it is a measure of national income, it does not accurately reflect the income at factor cost.
• Gross National Product at Factor Cost
  • This is the total value of goods and services produced by the residents of a country, plus any product taxes (less subsidies) not included in the valuation of output, at factor cost. However, it does not adjust for the depreciation of assets like the Net National Product does.
• Net National Product at Factor Cost
  • This is the correct definition of National Income. It represents the net value of all goods and services produced within a country (after adjusting for depreciation), measured at factor cost, which means it reflects the incomes earned by factors of production like labor and capital.
  • Since it adjusts for depreciation (netting out the loss in value of assets over time) and measures income at factor cost (the cost of inputs used in production), it provides a clear picture of the country's economic performance and the income generated from its production activities.
• Gross National Product at Market Price
  • This measure accounts for the total value of all goods and services produced within a country at market prices, including net income from abroad. However, it does not subtract the depreciation of assets, making it a gross measure rather than a net measure.

Therefore, the statement that Net National Product at Factor Cost can also be called National Income is correct. Hence, Option 3 is the correct answer.

The correct option is 'A - IV, B - I, C - II, D - III'.

Key Points

• Trade includes export and import of goods is related to the Current Account.
  • The current account of a country's balance of payments includes the trade of goods and services, wherein export and import of goods are a primary component.
  • This account reflects the net amount of a country's income if it is in surplus, or spending if it is in deficit, on international trade.
• Foreign Direct Investment falls under the Capital Account.
  • Foreign Direct Investment (FDI) is an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country.
  • FDI is a part of the capital account, which records the net change in ownership of national assets.
• Net sale of service products like banking and tourism is categorized as Invisible Trade.
  • Invisible trade refers to the trade of services, as opposed to the trade of tangible goods. This includes services such as banking, insurance, and tourism.
  • It is a part of the current account, contributing to the balance of payments in ways other than the physical transfer of goods.
• The Receipts of payment without providing goods and services are known as Transfer Payment.
  • Transfer payments refer to payments made in which no goods or services are being paid for, such as welfare, financial aid, and grants.
  • These are unilateral payments made without a direct return in goods or services, but they affect the balance of payments.

Therefore the correct pairing is:

A - IV: Trade includes export and import of goods - Current Account
B - I: Foreign Direct Investment - Capital Account
C - II: Net sale of service products like banking and tourism - Invisible Trade
D - III: The Receipts of payment without providing goods and services - Transfer Payment

The correct option is '3) 5'.

Key Points

• The concept of Money Multiplier reflects the maximum extent to which the money supply can increase based on an initial deposit in the banking system.
• The Cash Reserve Ratio (CRR) is the percentage of deposits that banks are required to keep with the central bank. A CRR of 20% means that for every 100 units of currency deposited, banks must keep 20 units with the central bank and can lend out the remaining 80 units.
• Money creation or the money multiplier effect occurs when banks lend out their excess reserves. The initial deposit leads to a series of loans and deposits, creating more money in the economy than was initially deposited.
• The formula for calculating the money multiplier is 1/CRR. Therefore, with a CRR of 20% (or 0.20), the money multiplier is calculated as 1/0.20 = 5.
• This means that for every unit of currency deposited, the banking system can increase the money supply by up to 5 units through the process of lending and depositing, assuming there are no other leakages in the system.
• In the context of this question, with an initial deposit of Rs. 1000 and a money multiplier of 5, the total money creation in the economy could be up to Rs. 5000, illustrating the significant impact of the banking system on the money supply.

The passage defines the three linkages in an open economy as the output market, financial market, and labor market.

Answer: B

Explanation: The passage states, "The exchange rate is the price of one currency in terms of another, which facilitates international trade," clearly indicating that the exchange rate's role is to enable international trade by setting currency prices.

Answer: D

Explanation: The passage specifies, "The labor market allows workers and firms to engage across borders, though immigration laws often limit labor movement," highlighting immigration laws as a key limitation on the labor market.

The passage mentions how imports and exports influence aggregate demand by acting as leaks or injections into the economy.

The passage mentions that the exchange rate facilitates international trade, implying that international trade is a factor influencing exchange rates. It does not mention domestic market activities, inflation rates, or government monetary policies as factors affecting the exchange rate. Therefore, domestic market activities (Option B) is not mentioned in the passage.

• (A) Large number of buyers and sellers: Ensures no single buyer or seller can affect the market price (price takers). Matches with (III).
• (B) Homogeneous products: Goods are identical across firms, with no differentiation (e.g., wheat). Matches with (IV).
• (C) Free entry and exit: Firms can freely enter or leave the market without restrictions. Matches with (I).
• (D) Perfect information: All participants have complete knowledge of prices and products. Matches with (II).

The correct pairing is (A) - (III), (B) - (IV), (C) - (I), (D) - (II), which corresponds to option (a).

(A) Total Revenue (TR): The total income from selling all units (TR = Price × Quantity). Matches with (III).

(B) Average Revenue (AR): Revenue per unit sold (AR = TR ÷ Quantity); in perfect competition, AR equals price. Matches with (I).

(C) Marginal Revenue (MR): The additional revenue from selling one more unit (MR = ΔTR ÷ ΔQ); in perfect competition, MR = Price. Matches with (II).

(D) Price Line: In perfect competition, the demand curve faced by a firm is horizontal (AR = MR = Price). Matches with (IV).

The correct pairing is (A) - (III), (B) - (I), (C) - (II), (D) - (IV), which corresponds to option (b).