Q.78 Read the following case study and answer the following questions Markets will distribute resources efficiently when both consumers and producers consider all the effects of their actions when exchanging goods. In some instances the benefit or cost of production or consumption of goods to society differs from the individual private benefit or cost. However, self-interested consumers and producers often only consider costs and benefits to themselves and not others. An externality is a cost or a benefit associated with one person‘s activity (i.e. the production or use of a good or service) that impacts others or society who did not choose to incur that cost or benefit. For example, the influenza vaccine provides private, individual benefit to the patient receiving it by protecting that patient from acquiring the infection, but also carries external benefits with reduced transmission to other susceptible people. The externality, or the difference between the individual benefit (cost) and the social benefit (cost), are not accounted for in market transactions. Externalities cause inefficient allocation of resources by markets because people in the market exchange goods based on their individual costs and benefits and not on the broader social benefits and costs. If a commodity or good produces positive effects to society beyond the individual supplier or consumer, the commodity or good will be under produced or utilized. To continue with the influenza example above, the external benefit of the influenza vaccine to society is usually not considered by individuals choosing whether to get vaccinated, and this may result in a socially less optimal level of influenza vaccine use and an overall welfare loss to society. Alternatively, if producers or consumers of commodities that result in negative effects beyond the individual to society do not bear the full costs of such effects, too much of the commodity will be produced. Antimicrobial use results in both positive and negative spillover effects. The positive effect to others and society associated with antimicrobial use is related to the decreased morbidity from sub-clinical infections that are treated accidently and decreased transmission of microbes to other susceptible patients. Antimicrobial resistance is a negative externality from the consumption of antimicrobials to produce health. Antimicrobial resistance has effects that are unlikely to be felt directly by either the patient using or physician providing the antimicrobial, but has adverse effects on future patients who may require antimicrobials and on health care systems more broadly thus impacting the overall welfare of society. Resistance imposes large costs on society in the form of increased hospitalizations, higher mortality rates, decreased effectiveness of antimicrobials for current and future generations, and the use of resources into the development of new more powerful antimicrobials which could be used for other medical needs. 1. Define externality. 2. Give example of negative externality of the influenza vaccine. 3. Complete the following statement: If a commodity or good produces positive effects to society beyond the individual supplier or consumer, the commodity or good will be ________ or _____________. 4. State whether the following statement is true or false: Externalities cause inefficient allocation of resources by markets because people in the market exchange goods based on their individual costs and benefits and not on the broader social benefits and costs.
Ans 1. An externality is a cost or a benefit associated with one person‘s activity (i.e. the production or use of a good or service) that impacts others or society who did not choose to incur that cost or benefit. Ans 2. Antimicrobial resistance is a negative externality from the consumption of antimicrobials to produce health. Antimicrobial resistance has effects that are unlikely to be felt directly by either the patient using or physician providing the antimicrobial, but has adverse effects on future patients who may require antimicrobials and on health care systems more broadly thus impacting the overall welfare of society Ans 3. Under produced or utilised. Ans 4. True Q.79 Read the following case study paragraph carefully and answer the questions on the basis of the same. The overall objective of political activities in democratic societies is to ensure the highest possible level of welfare for the country's citizens now and in the future. When politicians, macroeconomists and others discuss welfare and economic development, they often focus on the Gross Domestic Product (GDP). GDP is a measure of the economic prosperity of a country compiled as output or income. However, GDP is regularly criticised for not presenting a fair view of welfare. If GDP is a poor measure of welfare, focusing one-sidedly on increasing GDP may lead to misguided political decisions. For example, Nobel laureate Joseph Stiglitz has argued that the objective of the highest possible GDP growth will result in reduced welfare. The criticism of GDP is not new, and over the last 30-40 years, efforts have been made to put together alternative objectives. The debate has revived recently, partly as a result of the publication of a recent report concerning the limitations of GDP as a measure of economic performance and social progress. The report was written by the two Nobel laureates for economy, Joseph Stiglitz and AmartyaSen, among others. 1______ (Real GDP/Nominal GDP) is considered as a better measure of economic growth of an economy. Ans Real GDP 2. GDP is not considered as a better measure of development. Which of the following reasons could be accounted for the same? (a) Externalities (b) Non-marketable services (c) Production of harmful goods (d) All of these Ans (d)All 3. A course of action by one economic agent which has an adverse impact on other economic agent without cost sharing, is known as _______(positive/negative) externality. Ans Negative
4. Which of the following measures of GDP considers base year's price for calculation of gross income? (a) Green GDP (b) Nominal GDP (c) GDP deflator (d) Real GDP Ans (d) Real GDP Q.80 Government to give cash vouchers to staff in lieu of LTC this year: Finance Minister As part of a stimulus package to boost consumption in an economy hit hard by the Covid-19 pandemic, the government announced an LTC cash voucher scheme for its employees. Central government employees will be able to opt for cash equivalents of their unused leave travel concession (LTC) for the 2018-21 period, according to a special cash package announced by the finance ministry on Monday. Aimed at boosting consumption expenditure, the scheme requires employees to spend up to three times the amount they are entitled to by March 31, 2021, in order to avail the tax benefits accompanying LTC. ―With a view to compensate and incentivise consumption by central government employees thereby giving a boost to consumption expenditure, it has been decided that cash equivalent of LTC, comprising leave encashment and LTC fare of the entitled LTC may be paid by way of reimbursement, if an employee opts for this in lieu of one LTC in the block of 2018-21,‖ said a finance ministry office memorandum. The package, which came into force on Monday, requires employees to opt for the cash equivalent of both leave encashment and travel fare. Employees will be entitled to reimbursement of the full leave encashment if the entire amount is spent via digital mode on items that attract goods and services tax (GST) of 12% or higher only from GST registered vendors. Answer the following questions after reading the above information: Q1. The cash package being announced is a _____________ (fiscal policy/monetary policy) measure. Q2. Leave Travel Concessions (LTC) is : a. Compensation of employees is kind b. Compensation of employees is cash c. Employer‘s contribution to social security scheme d. Employee‘s contribution to social security scheme Q3. Which component of the expenditure method of calculating GDP has been emphasized here as a measure to revive economy? Q4. Name any two areas which are going to be benefited most from this measure? Answer: A1. Fiscal policy since it increases government expenditure. A2. Option (b) A3. Private Final Consumption Expenditure A4. (i) Digitalisation (ii) Contribution to GST
Q.81 Finance Minister Ms Sitharaman said, ‖ as we move towards digital transactions we expect that the temptations for dealing with cash will be brought down and if each of these transactions is brought in to monitorable network, the GDP calculation can be much closer to the actual strength of the Indian economy‖. ---At the National conference of All India federation of Tax practitioners –The Economic Times 1There are many transactions called non-monetary exchanges .Are these included in the calculation of GDP? Clarify. 2.The digital payments have increased ------------- for goods & services and this will lead to a situation of excess----------- in the economy 3 All payments which add to GDP contribute to welfare .-----defend or refute with a valid reason. Answers: 1.No. Such transactions are difficult to measure. 2. aggregate demand & demand. 3. refute. Eg of purchases which do not lead to welfare may be taken to explain. Q.82 Read the following hypothetical Case study, carefully and answer the below question on the basis of the same. In 2010 the Greek government had to inform the European Commission on how it would control its budget deficit and improve the performance of its economy. The government‘s debt is so high that agencies assessing the creditworthiness of the government downgraded it (which would mean more interest has to be paid to raise finance). Proposals were likely to include a 10% cut in government spending. Q1: If the Greek economy is in recession what would you expect to be the effect on: a) Inflation? b) Unemployment? c) Imports? Q2: Outline two possible economic objectives of the Greek government. Q3: What actions can the government take to increase national income growth in Greece? Q4: What would the effect on aggregate demand be if the government cut public spending by 10% Q1- Option (C) Q2- a) Inflation will be increased b) Unemployment will also be increased c) Imports will be decreased Q2- 2 -> economic stability Steady and sustained economic growth Q3- Devaluation of domestic currency Q4 – AD will be fall
Q.83 Mr. Ramlal is running a factory. He wants to calculate change in Inventory ‘ and 'Closing stock‘ to update the books of the firm as he has to plan the strategy for next year's output So he called his manager and inquired about the stork. His manager informed him that He had an Inventory of Rs. 80000 at the beginning of the Year. During the year he had produced goods of worth rupees 500000 and sold goods of worth Rs. 400000. Answer the following questions on the basis of above case study 1 Closing inventory for the year is. ......... (choose the correct alternative) a.100000 c.80000 b.180000 d 280000 2 Change in inventory is a ……………(stock/ flow ) concept. (choose the correct alternative) 3 Inventory is a……………( stock / flow ) concept. (choose the correct alternative) 4 Value of change in stock is……………….. (choose the correct alternative) a.100000 c.80000 b.180000 d 280000 ANSWERS 1 180000 2 Flow 3 Stock 4 100000 Q.84 Read, the following case study from Trading Economics carefully and answer the below 4 question on the basis of the same. India GDP Shrinks Less than Expected in Q3 The Indian economy shrank 7.5% yoy in Q3 2020, less than expectations of an 8.8% drop, amid easing of lockdown restrictions from June, higher demand during festival season and a rebound in manufacturing and utilities. It follows a record 23.9% plunge in Q2, bringing the economy into recession for the first time on record. On the demand side, smaller decreases were recorded for private spending (-11.3% vs -26.7%); investment (-7.3% vs -47.1%), exports (-1.5% vs -19.8%) and imports (-17.2% vs -40.4%). On the production side, manufacturing (0.6% vs -39.3%) and utilities (4.4% vs -7%) rebounded and mining (-9.1% vs -23.3%); construction (-8.6% vs -50.3%); and trade, hotels (-15.6% vs -47%) fell less while finance, real
estate and professional activities shrank faster (-8.1% vs -5.3%). The GDP is still seen contracting in Q4 as the pandemic is far from controlled and the government announced a $10 billion stimulus package in mid-October only. a. The decline in India‘s GDP from Q2 to Q3 amid the pandemic Covid 19 is __________. b. Why did the government announce a $10 billion stimulus package? c. The demand for goods and services in the economy __________________ due to eased lockdown restrictions and festival season. d. _________________ plays a major role in placing the economy on the path of recovery. (Private consumption/Government consumption) Q.85 National income of a country is taken as an indicator of economic growth and generally people refer to domestic income (GDP) as an indicator of growth. But we need to understand the difference between GDP at current prices (Market prices) and GDP at constant prices. If national income of a country increases than this increase is due to two factors: 1. The real increase in production of goods and services, expansion of productive capacity of the nation, and 2. Increase in the general price level of the economy. If the increase in national income is due to the first factor then it will lead to real growth because it indicates the growth in goods and services available to the people. If the increase is due to the second factor then it means that it is merely showing unreal inflation. So as a result of this, to measure the actual growth, national income figures are deflated at constant prices. So now, after deflating national income it is used to compare with income of other countries. Later to eliminate the effect of population, we calculate per capita income. Questions: 1. While using the expenditure approach to GDP consumption: (a) includes consumer durables, semi durables, nondurable goods but excludes services (b) includes houses and services (c) includes houses and all purchases by business firms (d) includes consumer spending on durable goods and nondurable goods and services Answer (d) 2. Real GDP is obtained by : (a) nominal GDP x price level (b) nominal GDP / GDP deflator (c) nominal GDP - GDP deflator
(d) nominal GDP / price level Answer (b) 3. One of the problems in calculating the national income in India correctly is (a) under employment (b) low savings (c) non monetised consumption (d) Inflation Answer (c) 4. Real national income growth refers to (a) National Income growth adjusted for inflation (b) National Income growth adjusted for population growth (c) National Income growth adjusted for depreciation rate (d) National Income growth adjusted for savings growth Answer (a)
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