Economics

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Growth and Development Economics
8.1 ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT
Economic Growth refers to the rise in the value of everything produced in the economy. It implies
the yearly increase in the country's GDP or GNP, in percentage terms. It alludes to considerable rise in
per-capita national product, over a period, i.e. the growth rate of increase in total output, must be greater
than the population growth rate.
Economic Growth is defined as the rise in the money value of goods and services produced by
all the sectors of the economy per head during a period. It is a quantitative measure that shows the
increase in the number of commercial transactions in an economy.
Indicators of Economic Growth
1. National Income
2. Per Capita Income
3. Per Capita Consumption
Economic Development is defined as the process of increase volume of production along with
the improvement in technology, a rise in the level of living, institutional changes, etc. In short, it is the
progress in the socio-economic structure of the economy.
Indicators of Economic Development
1. Increase in Literacy level
2. Low growth of population
3. Decrease in inequality of income
4. Increase in importance of service sector
Key Differences Between Economic Growth and Economic Development
The fundamental differences between economic growth and development are explained in the
points given below:
1. Economic growth is the positive change in the real output of the country in a span of time
economy. Economic Development involves a rise in the level of production in an economy
along with the advancement of technology, improvement in living standards and so on.
2. Economic growth is one of the features of economic development.
3. Economic growth is an automatic process. Unlike economic development, which is the
outcome of planned and result-oriented activities.
4. Economic growth enables an increase in the indicators like GDP, per capita income, etc.
On the other hand, economic development enables improvement in the life expectancy
rate, infant mortality rate, literacy rate and poverty rates.
5. Economic growth can be measured when there is a positive change in the national
income, while economic development can be seen when there is an increase in real
national income.
6. Economic growth is a short-term process which considers yearly growth of the economy.
But if we talk about economic development it is a long-term process.
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Economics (Growth and Development Economics)
7. Economic Growth applies to developed economies to gauge the quality of life, but as it
is an essential condition for the development, it applies to developing countries also. In
contrast to, economic development applies to developing countries to measure progress.
8. Economic Growth results in quantitative changes, but economic development brings both
quantitative and qualitative changes.
9. Economic growth can be measured in a period. As opposed to economic development is
a continuous process so that it can be seen in the long run.

8.2 THEORIES OF ECONOMIC DEVELOPMENT
Adam Smith's Theory of Economic Development

Adam Smith is regarded as the foremost classical economist. His monumental work, An Enquiry
into the nature and Cause of Wealth of nations published in 1776, was primarily concerned with the
problem of Economics of Development. Though he did not expound and systematic growth theory, yet
a coherent theory has been constructed by later day economists.
Adam Smith recognized three factors of production namely labour, capital, and land i.e.
Y = f (K, L, N)
K = Stock of Capital
L = Labour force
N = Land
Since the growth is a function of capital, labour, land and technology and land being passive
element is least important. The production function does not conceive the possibility of diminishing
marginal productivity. It is subject to law of increasing returns to scale. Smith argued that real cost of
production shall tend to diminish with the passage of time, as a result the existence of internal and
external economies occurring out of the increases in market size.
Assumptions of the theory
(a) Population growth, in the traditional manner of the time, was endogenous. It depended on
the sustenance available to accommodate the increasing workforce.
(b) Investment was also endogenous; determined by the rate of savings (mostly by capitalists);
(c) Land growth was dependent on conquest of new lands (e.g. colonisation) or technological
improvements of fertility of old lands.
(d) Technological progress could also increase growth overall; Smith's famous thesis that the
division of labour or specialisation improves growth was a fundamental argument.
(e) Smith also saw improvements in machinery and international trade as engines of growth
as they facilitated further specialisation.
(f) He also assumed the existence of perfect competition.
Features of the theory
Natural law – lassiez-faire and self-interest leads to Development – Adam Smith believed in the
doctrine of 'Natural law' in economics affairs. He regarded every person as the best judge of his own
interest who should be left to pursue it to her own advantage. In furthering her own self-interest, she/he
would also further the common good. In pursuance of this, each individual was led by an 'invisible hand'.
"It is not to the benevolence of the baker but to his self-interest that we owe our bread", said Smith. Since
every individual if left free will seek to maximise his own wealth, therefore all individuals, if left free, will
maximise aggregate wealth. Smith was naturally opposed to any government interventions in industry
and commerce. He was a staunch supporter of free trade and advocated the policy of laissez-faire in
economics affairs. The "invisible hand" – the automatic equilibrating mechanism of the perfectly competitive
market tended to maximise national wealth.
Division of Labour
Division of labour increases productivity which depends upon the size of the market. – Division
of labour is the starting point of Smith's theory of economic growth. It is division of labour that results
in the greatest improvement in the productive powers of labour. The attributes of this increase in productivity
are (i) the increase in the dexterity of every worker; (ii) the saving in time to produce goods; and (iii) to
the inventions of large number of labour-saving machines. The last cause to increase in productivity
stems not from labour but from capital. Therefore, in Smith's scheme; it is improved technology that
leads to division of labour which, however, depends on the size of the market.
Capital Accumulation
It is the pivot around which the theory of economic development revolves. The growth is functionally
related to rate of investment. According to Smith, "any increase in capital stock in a country generally
leads to more than proportionate increase in output on account of continually growing division of labour".
Capital stock consists of:
(a) Goods for the maintenance of productive workers.
(b) Goods for helping the workers in their productive activities.
Adam Smith distinguished between non capital, circulating capital and fixed capital goods. Non
capital goods refer to those which are useful directly and immediately to their owner. Fixed capital refers
to those goods which are directly used in production processes, without changing hands. Fixed capital
consists of all the means of production.
Agents of Growth
Smith has observed that farmers, producers and businessmen are the important agents of
economic growth. It was the free trade, enterprise and competition that led farmers, producers, and
businessmen to expand the market and which, in turn, made the economic development inter-related.
The development of agriculture leads to increase in construction works and commerce. When agricultural
surplus arises as a result of economic development, the demand for commercial services and
manufactured articles arises.
Criticisms of the theory
(1) Rigid division of Society: Smith's theory is based on the socio-economic environment
prevailing is Great Britain and certain parts of Europe. It assumes the existence of a rigid
division of society between capitalists (Including land lords) and labourers. But the middle
class occupies an important place in modern society. Thus, this theory neglects the role
of middle class.
(2) One sided saving base: According to Smith, Capitalists, landlords and money lenders
save. This is, however, a one-sided base of saving because it did not occur to him that
the major source of savings in our advance society was the income receivers and not the
capitalists and landlords.
(3) Unrealistic assumption of perfect competition: Smith's whole model is based upon
the unrealistic assumption of perfect competition. The laissez-faire policy of perfect
competition is not to be found in any economy. Rather, a number of restrictions are
imposed on the private sector, and on internal and international trade in every country of
the world.
(4) Neglect of Entrepreneur: Smith neglects the role of entrepreneur is development. This
is a serious defect as his theory. The entrepreneur is the focal point of development, as
pointed out by Schumpeter. It is the entrepreneur who organizes and brings about
innovations there by leading to capital formation.
(5) Unrealistic Assumption of Stationery State: Smith is of the view that the end result of
a capitalist economy is the stationery state. It implies that there is change in such an
economy but around a point of equilibrium. There is progress but it is steady, uniform and
regular like a tree. But this explanation of the process of development is not satisfactory
because dev. takes place by 'fits and starts' and is not uniform and steady. Thus, the
assumption of stationary state is unrealistic.
Ricardian Theory of Development:
Ricardo presented his view on Economic Development in an unsystematic manner in his book
The Principles of Political Economy and Taxation. Like Smith, Ricardo never propounded any theory of
development; he simply discussed the theory of distribution. Ricardo makes two-sector analysis of the
economy. He draws distinction between an agricultural sector and industrial sector he assumes agriculture
is subject to law of diminishing return whole industry is subject to constant return. In agricultural sector
as more and more dose of labour and capital are employed, marginal product of labour and capital
diminish. The capitalist employer will employ labour to the extent that he just meets the expense of
production on the margin. According to Ricardo, surplus of capitalist farmers will be saved and reinvested.
As a result of reinvestment both the output and employment will increase. In equilibrium, rate of profit
in agriculture must equal to rate of profit in industry during the development process as profit rate in
agriculture falls capital will be shifted to industry.
Assumptions of the theory:
(a) all land is used for production of corn,
(b) law of diminishing returns operates,
(c) supply of land is fixed,
(d) demand for corn is perfectly is elastic,
(e) labour and capital are variable inputs,
(f) state of technical knowledge is given,
(g) all workers are paid a subsistence wage,
(h) supply price and labour is given and constant,
(i) demand for labour depends upon accumulations,
(j) capital accumulation results from profit and
(k) there is perfect competition.
Features of the theory
The Ricardian model is based on the interrelation of three groups in the economy. They are
landlords, capitalists and labourers among whom the entire produce of land is distributed.
Rent, Profit and Wages :
(a) Rent is that portion of the produce of earth which is paid to the landlord for the use of original
and indestructible powers of the soil. It is the difference between average and marginal product. If all the
land had the same properties of unlimited in supply and uniform in quality, no charge would make for its
use.
(b) The wage rate is determined by wage fund divided by number of workers employed at the
subsistence level. According to the model, out of the total corn produced rent has the first right and the
residual is distributed between wage and profit while interest is included in profit.
Capital Accumulation : According to Ricardo capital accumulation is the outcome of profit because
profit leads to saving of wealth which is used for capital formations. Capital formation depends upon will
to save and capacity to save which is more important. The larger the surplus i.e. profit; the larger will
be capacity to save.
(i) The Profit Rate : The rate of profit is equal to the ratio of profit to capital employed. But
since capital consists of only working capital, it is equal to the wage bill. So long as the
rate of profit is positive, capital accumulation will take place. Profits depend upon wages,
wages on price of corn and the price of corn depends upon the fertility of the marginal
land. So, there is an inverse relation between wages and profits. When due to improvement
in agriculture, production increases, the price of corn falls, and subsistence wages also
fall, and profits will increase leading to capital accumulation. This will raise demand for
labourers raising wage rate and reducing profits.
(ii) Increase in Wages : The wage rate increases when the prices of commodities forming
the subsistence of the workers increase. As the demand for food increases, less fertile
land is brought under control and more labourers are needed raising wage rate. Thus,

wages would rise with the increase in the price of corn. In a situation rent also increases,
with the decline of capitalists' profit capital accumulation also declines.
(iii) Declining profits in other industries : The profits of the farmer regulate the profits of
all other trades. Therefore, the money rate of profit earned on capital must be equal both
in agriculture and industry. If profit rate declines in the agricultural sector it will also decline
is the manufacturing industry.
Other Sources of Capital Accumulation : According to Ricardo economic development depends
upon difference between production and consumption. Capital may be increased by an increased production
or by a diminished unproductive consumption. However, the productivity of labour may be increased
through technological changes and better organization. It is in this way that capital accumulation can be
increased. But the use of more machines employs less workers leading to unemployment. So, Ricardo
regards technological conditions as given and constant.
(a) Taxes : Taxes are a source of capital accumulation in the hands of government. According
to Ricardo, taxes are to be levied to reduce conspicuous consumption. Otherwise the
imposition of taxes on capitalists land lords and labourers will transfer resources from
these groups to the government, adversely effecting investment. So he does not favour
the imposition of taxes.
(b) Free Trade : Ricardo is in favour of free trade. The profit rate can be saved from declining
by importing corn. The capital accumulation therefore continues to be high. In this way the
resources of the world can be used more efficiently through trade.
Stationary State : According to Ricardo there is natural tendency for the rate of profit to fall in
the economy so that the country ultimately reaches the stationary state. When capital accumulation
rises, with increase in profits, production increases which raises the wage fund, population increases,
which raise the demand for corn and its price. Inferior grades of land are cultivated. Rents on superior
land increase and reduce the share of the capitalists and labourers. Profits decline and wages fall to
subsistence. The process of rising rents and falling profits continues till the output from the marginal land
just covers the wages of labour employed and profits are zero. There is no accumulation of capital, no
increase in population and wage rate but rent is extremely high and there is economic stagnation.
In above figure, AP and MP represent average product and marginal wage bill is OWLM at the
subsistence level. Total profits are WPTL product. OM labour is employed OQRM corn is produced.
Share of rent is PQRT and Total output increases with economic development. This leads to increase
in wage fund leading to increase in amount of labour. Demand for corn goes up raising price of corn.
OM1 labour is employed, total output is OABM1, and there are no profits. Share of rent has increased.

Criticisms
(1) Neglects the impact of technology : Ricardo pointed out that improved technology in
industrial field leads to the displacement of labour and other adverse consequences. But
Ricardo failed to visualize the impact that science and technology had on the rapid economic
development of the new developed nations.
(2) Wrong Notion of Stationary State : The Ricardian view that the system reaches the
stationary state automatically is baseless because no economy attains the stationary
state is which profits are increasing, production is rising, and capital accumulation is
taking place.
(3) Baseless Notion of Population : The Ricardian view that wage rate can (does) not rise
above. The subsistence level is wrong. In western countries there has been rise in wage
rate, but population has decreased.
(4) Unnecessary Importance to the law of Diminishing Returns : Ricardian theory is
primarily based on the law of diminishing returns but the rapid increase of farm produce
in advanced nations has proved that Ricardo under-estimated the potentialities of
technological progress is counteracting diminishing returns to land.
(5) Impracticable laissez-faire Policy : According to this theory there should be no government
interference and the economy will operate automatically through perfect competition. I
reality no economy is free from government interference and in which perfect competition
prevails.
(6) Neglects Institutional factors and Interest-rate : Institutional factors have been assumed
as given but they are crucial in Economic Development and cannot be overlooked. It
neglects rate of interest also the does not regard the interest rate as an independent
reward of capital but includes it in profits. He does not distinguish between capitalist and
entrepreneur.
(7) Distribution rather than growth theory : The Ricardian model is not a growth theory
but a theory of distribution which determines the share of workers, landlords and capitalists.
Even is this he regards the share of land as primary and the residual as the share of
labour and profit. He did not determine the share of each factor separately.
(8) Land also produces goods other that corn : Ricardo believes that one product corn
is produced on land. But this is an old notion because land produces a variety of products
other than corn.
(9) Capital and labour not fixed co-efficients : The Ricardian assumption that capital and
labour are fixed co-efficients of production is not correct. This assumption is invalid.
Marxian Theory of Economic Development
Marx contributed to the theory of economic development in three respects.
(i) Materialistic Interpretation of History
The materialistic interpretation of history attempts to show that all historical events are the result
of a continuous economic struggle between different classes and groups in society. The main cause of
this struggle is the conflict between the mode of production and the relation of production.
The mode of production refer to a particular arrangement of production in a society that determines
the entire social, political, and religious way of living.
The relation of production relate to the class structure of a society uniquely characterised by the
following components.
1. The organization of labour in a scheme of division & cooperation, the skill of labour.
2. The geographical environment & knowledge of the use of resource & materials.
3. Technical means and process and state of science generally.
(ii) Surplus Value

Marx uses his theory of surplus value as the economic basis of the .class struggle. Under
capitation and it is based on his theory of surplus value that he builds the super structure of his analysis
of economic development.
Capitalism, according to Marx, is divided into two great protagonists the worker who sell them
labour-power and the capitalist who own the means of production. The extra labour that a labourer puts
in and for which he receives nothing, Marx called it surplus value.
(iii) Capital Accumulation
According to Marx, it is surplus labour that leads to capital accumulation. The capitalist's main
motive is to increase the surplus value which goes to swell his profits.
He tries to maximize his profits in three ways
1. By prolonging the working day in order to increase the working hours of surplus value. If
the working hours are extended from ten to twelve the surplus will automatically increase
from four to six.
2. By diminishing the number of hours required to produce the labour sustenance. If they
were reduced from six to four, the surplus would again rise from four to six.
3. By speeding up to labour. i.e. increasing the productivity of labour. This requirement a
technological change that helps in raising the total output and lowering the cost of production.
Criticisms of the theory
Marx's theory of capitalist development has been accepted by his followed as a Gospel truth.
While it has been severely criticised by his opponents for the following reasons
1. Surplus value as unrealistic.
2. In increasing employment technological progress is helpful.
3. Falling tendency of profits not correct.
4. Marx could not understand flexibility in capitalism.
5. Static analysis.
Schumpeter's Theory of Economic Development
Schumpeter assumes a perfectly competitive economy which is in stationary equilibrium. This
equation in Schumpeter terms is known as "Circular flow" which continue to repeat itself in the same
manner years after year. In circular flow the same products are produced every year in the same
manner. Schumpeter believe in the existence of the Kondratieff long wave of upswings and downswings
in economic activity. Each long-wave up swings is brought about by an innovation in the form of new
product which leads to further innovation in the methods of production new form of business organization,
new source of supply of raw material in the world of Schumpeter. Mass production means production
for the masses. Once the upswing ends, the long wave downswing begins and the painful process of
readjustment to the. Point of previous neighbourhood of equilibrium statistics.

Rostow's Theory of Economic Development

Rostow's stages of economic growth model is one of the major historical models of economic
growth. The model postulates that economic growth occurs in five basic stages of development.
1. Traditional Society
2. The pre conditions of take-off
3. Take off
4. Drive to technological maturity
5. High mass consumption
Rostow's model is one of the more structuralist models of economic growth.
1. Traditional Society : This initial stage of traditional society signifies a primitive society
having no access to modern science and technology.
2. Pre-Condition of Take-off : These conditions comprise fundamental changes in the
social, political, and economic fields.
3. Take off : This is the crucial stage which covers a brief period of two to three decades
in which the economy transforms itself in such a way that economic growth after takes
place automatically. The take-off is defined as the interval during which the rate of investment
increases in such a way that real output per capital rises and this initial increase carries
with it radical changes in the technique of production and the disposition of income flows.
4. Drive to technological maturity : This stage of economic growth occurs when the
economy becomes mature and can generate self-sustained growth. The rates of saving
and investment are of such a size that economic development becomes automatic.
5. High mass consumption : In this stage of development per-capita income of country
rises to such a high level that consumption basket of the people increases beyond food,
clothing & shelters to articles of comforts and luxuries on a mass scale. With progressive
industrialization & urbanization of the economy values of people change in favour of more
conditions of luxuries and high styles of living. New types of industries producing durable
consumer goods come into existence which satisfied the wants for more constant. These
new industries producing durable consumers goods become the new leading sectors of
economic growth.
Theory of Balanced and Unbalanced growth of Economic Development
The theory of balanced growth says that there should be simultaneous investment in a variety of
enterprises and there should be harmonious growth of the different regions of the economy. It implies
balance between agriculture and industry, between domestic and export sectors, between economic and
social overheads and between vertical and horizontal external economies. The theory of balance growth
implies that the state must ensure simultaneous investment. It also implies controlled planning. The
theory of balanced growth has been developed by Rosenstein Rodan, Ragnar Nurkse, Arthur Lewis,
Scitovsky and Harvey Leibenstein.
Big Push approach
The Big Push theory has been presented by Rosenstein Rodan in 1943. The idea behind this
theory is that a big push or a big and comprehensive investment package can be helpful to bring
economic development i.e. A certain amount of resources must be devoted for development programs,
of the success of programs is required. Rasenstein Rodan has presented three types of indivisibilities
and economic of scale. They are as:
1. Indivisibilities in Production function : When so many industries are established the
economies regarding factors of production, goods and techniques of production are
accrued.

2. Indivisibilities in Demand : The complementarily with respect to demand requires that

UDGs should establish such industries which could support each-other to make investment
in one project may be risky because in UDCs the demand for goods and services is
limited due to lower incomes.
3. Indivisibility in supply of savings : The supply of savings also serves as an indivisibility.
A specific amount of investment can be made in the presence of specific savings but in
case of Under Developed Countries because of lower incomes the savings remain low.
4. Psychological indivisibility : Rodan says "Isolated and small efforts may not add up to
a sufficient impact on growth and atmosphere of development effervescence may also
arise with a minimum speed or size of investment."
Demerits
Rosenstein theory is better in the sense that it identified that market imperfections are the big
obstacles in the way of economic development. Despite this merit there are few demerits of this theory.
1. Negligible economies in export and impart substitute sectors.
2. Negligible economies from cost reducing investment.
3. Negligible investment in Agricultural sector
4. Inflationary pressure
5. Administrative & Institutional Difficulties
Criticisms
1. Inadequacy of Resources : This theory fails to recognize that the amount of resources
in an underdeveloped country is very limited. They lack in capital, skilled labour, dynamic
entrepreneurial ability, power etc. So, these countries cannot adopt Big Push theory.
2. Danger of Inflation : Since the underdeveloped countries do not adopt Big Push theory
but it envisages the investment in different industries of consumption goods, capital goods
as well as other social overheads. As a result, they are likely to yield returns after a long
time.
3. Problem of Co-ordination : Another defect according to Prof. Hla Myint, it is very difficult
to co-ordinate the various development plans in Big Push theory. Sometimes the problem
of co-ordination is beyond the efficient administrative machinery of even developed countries.
4. Neglect of Agricultural Sector : Big Push is a programme of comprehensive
industrialization. It lays more stress on the heavy dose of investment in different industries
such as capital goods industries, consumer goods industries and social overhead capital
etc., but it ignores the development of agricultural sector.
5. Difficulties in Mixed Economy : The concept of Big Push ignores the difficulties faced
in a mixed economy. The mixed economy, in underdeveloped countries, provides co-
existence for both private and public sectors. If these are complementary in nature, then
it faces no constraints. But the problem becomes formidable and acute when two sectors
are competitive to each other.

8.3 MODELS OF ECONOMIC GROWTH
8.3.1 Harrod-Domer Model

Assumptions of the model
1. A full-employment level of income already exists.
2. There is no government interference in the functioning of the economy.
3. The model is based on assumption of “closed economy”.
4. There are no lags in adjustment of variables.
5. The average propersity to save and marginal propersity to save are equal to each other.
6. Income, investment, savings are defined in the net sense.
This model is based on the capital factor as the crucial factor of economic growth it concentrates
on the possibility of steady growth through adjustment of supply of demand for capital.
Harrod-domer assign a crucial role to capital accumulation in the process of growth. In fact they
emphasize the dual role of capital accumulation. On one hand new investment generates income, on
the other hand it increases productivity capacity of the economy by expanding its capital stock.
Saving (S) is same proportion s of national income (Y)
i.e. S = sY ...(1)
Net investment (I) defined as the change in capital stock, K can be represented by K, such that
I = K ...(2)
K
Now = k  Average capital output ratio
Y
K
= k  incremental capital output ratio
Y
 K = kY ...(3)
 Net saving must equal to net investment.
S=I ...(4)
 S = sY
& from equation (2) & (3) we get
I = K = kY
The “identity” of saving equaling investment shown by equation (4) as
S = sY = kY = K = I ...(5)
sY = kY ...(6)
sY kY
  (dividing by Y we gets)
Y Y
Y S
  Harrod’s theory of economic growth
Y K
Y
Here, rate of change or rate of growth of GNP
Y
Harrod’s Instability Problem
Let; Actual growth rate  gt

Expected growth rate  ĝ

Warranted growth rate  S/C
 1  gˆ t  S
gt = 1 –  
 ĝt  C
Here gt = ĝt if and only if
S
ĝt 
C
S
or gt  gˆ t according as ĝt 
  C
If the investors anticipate more than the warranted rate of growth S/C then the actual growth rate
of demand will exceeds even the high-expected growth rate, so that instead of reading that they expected
too little. Similarly if they anticipated a growth rate will fall short of even the expected growth rate and
the investors may decide that they expected too much rather than too little. The market thus seems to
give a perverse signal to the investor, this is the source of harrod’s problems.
8.3.2 Solow Model
Assumption of solow model
1. One composite commodity is produced.
2. Output is regarded as net output after making allowance for the depreciation of capital.
3. There are constant returns to scale.
4. The two factors of production, labour and capital, are paid according to their marginal
physical productivities.
5. Prices and wages are flexible.
6. There is perpetual full employment of labour.
7. Labour and capital are substitutable for each other.
8. There is neutral technical progress.
9. The saving ratio is constant.
Given these assumptions Solow shows in his model that with variable technical coefficient there
would be a tendency for capital-labour ratio to adjust itself through time in the direction of equilibrium
ratio. If the initial ratio of capital to labour is more, capital and output would grow more slowly than labour
force and vice versa. Solow’s analysis is convergent to equilibrium path (steady state) to start with any
capital-labour ratio.
Annual rate of production  Y(t)  Real income of the community
Part of which that saved  s,
Rate of saving is sY(t).
Stock of capital  K(t)
net investment is the rate of increase of
dk
Stock of capital  or K.
dt
K = sY ...(1)
Output is produced with capital and labour, technological possibilities are represented by

Y = F(K, L) ...(2)
From (1) & (2)
K = sF(K, L) ...(3)
L represents total employment.
Population is growing exogenously, the labour force increases at a constant relative rate n.
L(t) = K(t) ...(4)
From (3) & (4)
K = sF(K, L(t)) ...(5)
In order to find out if there is always a capital accumulation path consistent with any rate of growth
of the labour force towards steady state,
r = sF(r, 1) – nr ...(6)
r  Ratio of capital to labour (K/L)
n  Relative rate of change of the labour force (K/L).
sF(r, 1) output per worker as a function of capital per worker.
r
nr
sF (r, 1)
O r
r’
The ray through the origin is the function nr. The other curve represents the function sF(r, 1). It
is so drawn as to show diminishing marginal productivity of capital. At the point of intersection of the two
curves nr = sF(r, 1), and r = 0. The capital-labour ratio is a constant and the capital stock must expand
at the same rate as the labour force.
8.3.3 Robinson’s Model
Robinson’s growth model clearly incorporates the problem of population growth in a developing
economy and analyses the effects of population on the rate of capital accumulation and growth of output.
The model is based on two condition
1. Capital formation depends upon the manner of distribution of income.
2. The rate at which the labour is used depends upon the supply of capital and that of labour.
Assumptions
(1) Total income in real terms is divided between two class
(a) workers (b) entrepreneurs
(2) Workers spend all their wages on consumption and save nothing.
(3) Profit seekers save and invest all their profits and consume nothing.
(4) Capital and labour are combined in fixed proportions to produce a given output.
(5) There is a laissez-faire closed economy.
(6) There is no shortage of labour.
Features
This model is a dynamic two sector model in which he examines what happens in the quasi-long
period. Workers consume every thing they get while businessmen invest whole of their profit. The
process of growth is eased and barriers are overcome if there is smooth flow of innovation.
The distribution equation which is most significant in growth model is shown as

pY = wN + pK
w
C = Cn = .N
p
S = Sk = K
Cn  workers consumption out of wage income
SK  saving out of profit income
Net investment means an increase in real income.
I = K = K
K
 S = I. Therefore = = 
K
K K
or 
K K
W
P
P
but  =

K K P  W /P
Therefore  = =
K K 
Rate of growth of capital given by equation (vi) is the rate which is attainable by entrepreneurs.
According to this equation rate of growth of capital is capable of increase, if the net return of
capital rise in greater proportion than the capital labour ratio.
Robinson’s rotation of “Golden age” i.e., equation with full employment of labour & full utilization
of capital.
K
This is possible if we assume = 
N
Rate of growth of fully employed labour
N K /  K /  K
  
N N K/ K
So fully employed labour force grows at the same rate as the rate of growth of capital, i.e., rate
 N   K 
of change in labour force   is equal to rate of change in capital stock  .
 N   K 
Thus given the perfect supply of labour with respect to output, this equation signifies a golden age
equilibrium with full employment of both labour and capital.
8.3.4 Kaldor Model
Assumption
1. There are two factor of production capital and labour.
2. Two types of income profits & wages
3. There are CRS & production function remain constant over time.
4. There is perfect competition as such the rates of wages & profits are same over different
places.

5. The marginal propensity to consume of worker is greater than that of capitalist.

6. These is state of full employment.
7. These is an unlimited supply of labour of a constant wage in terms of wage goods.
According to kaldor, there is no recorded tendency for a falling of rate of growth of productivity,
there is a continued increase in the amount of capital per worker. There is a steady rate of profit on
capital at least in the developed country. There is no change in the ratio of profits and wages.
The starting point of kaldor is the belief that the income of the society is distributed between
different classes each having its own propensity to save. The equilibrium can be brought about only by
a just & appropriate distribution of Income.
i.e. growth rate & income distribution are inherently connected element.
In kaldor model, on the one hand, the relations of distribution of income determine the given level
of saving & therefore investment & economic growth rate. On the other hand, the achievement of this
or definite growth rate require a given level of investment & therefore saving hence, a corresponding
distribution of income.
Y = W + P
I=S
S = Sw + Sp,
Y  National income
W  Wages
P  Profit
I  Investment
S  Saving
Sw  Saving from wages
Sp  saving from profits.
 Sw = swW Sp = spP
share of saving share of saving
from wages from profit
 I = S = SN + SP = sWW + sPP
 I = sPP + sW (Y – P)
 I = sPP + sWY – sWP
 I = (sP – sN)P + sWY
Dividing by Y both sides we get
I P
  SP  S W   SW
Y Y
Dividing again by (SP – SW) we gets;
I 1 P SW
*  
Y  SP  S W  Y SP  S W
P 1 I 
    SW 
Y SP  S W  Y 
P
 Share of profit in total income
Y

I
 Investment income ratio
Y
an increase in the income-investment ratio will result in an increase in the share of profits out of
total income as long as sw and sp are constant and (Sp > Sw)
Necessary condition for both stability in the entire system & an increase in the share of profit in
income when the investment–income ratio rises.

8.4 TECHNICAL PROGRESS
Technical progress can be classified into two parts.

1. Embodied Technical Progress : Improved technology which is exploited by investing in
new equipment. New technical changes made are embodied in the equipment.
2. Disembodied Technical Progress : Improved technology which allows increase in output
produced from given inputs without investing in new equipment.
In real world, many innovations do not require replacing the entire or some past of the equipment.
It can be improved for better use depending upon the change requirement. Hence technological
progress, embodied or disembodied, is matter of degree. In equilibrium capital/input per worker & output
per worker grow at the same rate, the equilibrium rate of growth.
Endogenous Growth
The endogenous growth theory is an economic theory which argue that economic growth is
generated from within a system as a direct result of internal processes. The theory notes that the
enhancement of a nation's human capital will lead to economic growth by means of the development of
new forms of technology and efficient and effective means of production.
The theory contracts with neoclassical economics, which contends that technological progress
and other external factors are the main source of economic growth.
Under this theory knowledge-based industries play a particularly important rule especially
telecommunications, software and other high-tech industries as they are becoming of even more influential
in developed and emerging economies.
Central tenets to endogenous growth theory include:
1. There are increasing returns to scale from capital investment especially in infrastructure
and investment in education and health and telecommunications.
2. Private sector investment in research & development is a key source of technological
progress.
3. Investment in human capital.
4. Government policy should encourage entrepreneurship as a means of creating new
businesses and ultimately as an important source of new jobs, investment and further
innovation.
The AK model is simplest endogenous model, gives a constant savings rate of endogenous
growth & assume a constant exogenous, saving rate. It models technological progress with a single
parameter A. It uses the assumption that the production function does not exhibit diminishing returns to
scale leads to endogenous growth.
The AK model production function is a special case of a Cobb-Douglas Production function
Y = AKL1–
This equation shows a cobb-dougles function
Y  total production in an economy
A  total factor productivity
K  Capital
L  Labour
  Output elasticity of capital
where  = 1, the production function becomes linear in capital thereby giving constant returns to
scale.
Y = AK

Economics (MSP)
Economics
Model Solved Paper
Time : 2hrs. Maximum Marks : 200
Note : This paper contains hundred (100) objective type questions, each question carries two
(2) marks. Attempt all the questions.
1. The assumption/s of law of variable proportions is/are

(A) Only one factor is changed, others are kept constant
(B) The various units of variable factors are homogenous
(C) Conditions of production are constant
(D) All of the above
2. Total costs are:

(A) total fixed cost plus average variable costs
(B) total fixed costs plus total variable costs
(C) total average fixed costs plus total average variable costs
(D) total costs plus opportunity costs
3. In game theory, a choice that is optimal for a firm no matter what its competitors do is referred
to as
(A) the dominant strategy (B) the game-winning choice.
(C) super optimal (D) a gonzo selection
4. Which one of the following does measure risk?

(A) Coefficient of variation (B) Standard deviation
(C) Expected value (D) All of the above are measures of risk
5. Under monopoly price discrimination, equilibrium of a firm is obtained when

(A) The AR of the two markets is equal
(B) The MR of the two markets is equal
(C) The quantity in the two markets is equal
(D) The total revenue in the two markets is equal
6. Adverse selection in competitive insurance markets harms

(A) high risk individuals. (B) low risk individuals.
(C) owners of insurance companies (D) Everyone

Economics (MSP)
7. Assertion (A) : An oligopolist faces demand curve which has a kink at the level of the prevailing
price.
Reason (R) : The segment of the demand curve above the prevailing price level or kink is highly
inelastic and the segment of the demand curve, below the prevailing price level is elastic.
Codes :
(A) Both A and R are individually true and. R is the correct explanation of A
(B) Both A and It are individually true but R is not the correct explanation of A
(C) A is true but R is false
(D) A is false but R is true
8. Who amongst the following is not regarded as a neoclassical economist?

(A) J. S. Mill (B) A. Marshall
(C) A.C. Pigou (D) Edwin Cannan
9. Match List - I with List-II and select the correct answer using the code given below the lists:
List - I List - II
(Market Type) (Implication)
a. Perfect competition 1. Collusion of firms
b. Monopoly 2. Excess capacity
c. Monopolistic competition 3. Uniform price
d. Oligopoly 4. Blocked entry
Codes :
a b c d
(A) 2 4 3 1
(B) 3 1 2 4
(C) 2 1 3 4
(D) 3 4 2 1
10. The cross elasticity of demand between x and y measures the relationship between
(A) The price of x and the price of y
(B) The demand for x and the supply of y
(C) The price of x and the quantity for y
(D) The quantity of x and price of x
11. The value of national income adjusted for inflation is called

(A) Per capita income (B) Disposable income
(C) Inflation rate (D) Real national income
12. Zero-based budgeting (ZBB) lays emphasis on

(i) unlimited deficit financing
(ii) Preparing new budget right from scratch
(iii) Preparing the budget neglecting history of expenditure
(A) i, ii, iii (B) i and iii
(C) ii and iii (D) i and ii
Economics (MSP)
13. If the Keynesian consumption function is C = 10 + 0.8 Yd then, if disposable income is £1000,
what is amount of total consumption?
(A) £800 (B) £810
(C) £0.8 (D) £0.81
14. Consider the following statements

The study of national income accounts is of great importance because it:
1. reveals the changes in the size and composition of the national product.
2. provides us with information about the distribution of national income in the society among
various groups.
3. reveals the manner in which national expenditure is divided between consumption and
investment. Of these statements
(A) 1 and 2 are correct (B) 2 and 3 are correct
(C) 1 and 3 are correct (D) 1,2 and 3 are correct
15. If money supply increases

(A) LM curve shifts to right (B) LM curve shifts to left
(C) IS curve shifts to left (D) IS curve shifts to right
16. Given the total investment expenditure, an increase in the propensity to save will lead to a
(A) fall in the quantity of income (B) fall in income.
(C) rise in interest rate (D) rise in income.
17. If there is an expectation of a rise in the price level, investment will be encouraged because:
(A) there will be an increased production of capital goods
(B) there will be arise in the prospective return from capital.
(C) the people save more and interest rate will fall.
(D) None of these
18. The Phillips curve shows the relationship between inflation and what?
(A) The balance of trade
(B) The rate of growth in an economy
(C) The rate of price increases
(D) Unemployment
19. The business cycle length measured from __________

(A) Peak to peak (B) Trough to peak
(C) Peak to trough (D) B and C
20. An open market operation is an instrument of monetary policy which involves buying or selling of
________from or to the public and banks:
(A) Bonds and Other local securities (B) Debentures and Shares
(C) Government Securities (D) None of These

Economics (MSP)
21. The test which is lot obeyed by any of the weighted index numbers unless the weights are
constant :
(A) Circular test (B) Time reversal test
(C) Factor reversal test (D) None of them
22. The formula should be independent of unit for which price and quantities are quoted in
(A) Factor Reversal Test (B) Circular test
(C) Unit Test (D) None
23. From the following data construct index nos. by using simple average of price relative method.
Com modity A B C D
Pr ice in 1990 60 45 80 25
Pr ices in 1995 75 50 70 40
(A) 100 (B) 120.90
(C) 165.40 (D) 105.10
24. An enquiry into the budget of the middle class family are as
Expenses on Items Food 35% Fuel 10% Clothing 20% Re nt 15% Misc. 20%
Pr ice in 2004 1500 250 750 300 400
Pr ice in 1995 1400 200 500 200 250
(A) 185.50 (B) 134.5
(C) 185.65 (D) 175.10
25. Standard deviation of sampling distribution of a statistic is called :

(A) Serious error (B) Dispersion
(C) Standard error (D) Difference
26. In probability sampling, probability of selecting an item from the population is known and is :
(A) Equal to zero (B) Non zero
(C) Equal to one (D) All of the above
27. Sampling based upon equal probability is called :

(A) Probability sampling (B) Systematic sampling
(C) Simple random sampling (D) Stratified random sampling
28. Standard deviation of sample mean without replacement is__________ standard deviation of
sample mean with replacement :
(A) Less than (B) More than
(C) 2 times (D) Equal to
29. Which of the following statement is not true?

(A)  
S.E X  0 (B)  
S.E X  1
(C) S.E  X   2 (D) All of the above

Economics (MSP)
30. The standard error increases when sample size :

(A) Increase (B) Decrease
(C) Fixed (D) More than 30
31. Net Exports is equal to

(A) Exports x Imports (B) Exports - Imports
(C) Exports + Imports. (D) Exports of services only
32. A Tariff leads to

(A) Reduction in the volume of trade
(B) Increase in the volume of trade
(C) Has no effect on volume of trade
(D) (a) and (c) of above
33. A tariff is
(A) A restriction on the number of export firms
(B) Tax on imports & exports
(C) Limit on the amount of imported goods
(D) All of above
34. Dumping refers to

(A) Reducing tariffs
(B) Buying goods at low prices from abroad and selling at higher prices locally
(C) Expensive goods selling for low prices
(D) Sale of goods abroad at low price, below their cost and high price in home market
35. 'General acceptability' is a feature of

(A) money (B) bank draft
(C) bill of exchange (D) none of these
36. Which among the following is the primary reason for nations to conduct international trade
(A) Some nations prefer to produce one thing while others produce another
(B) Trade enhances opportunities to accumulate profits
(C) Resources are not equally distributed to all trading nations
(D) Interest rates are not identical in all trading nations
37. International trade forces domestic firms to become more competitive in terms of
(A) The introduction of new products
(B) Product design and quality
(C) Product price

Economics (MSP)
38. Increased foreign competition tend to

(A) Intensify inflationary pressure at home
(B) Induce falling output per worker-hour for domestic workers
(C) Increase profits of domestic import-competing industries
(D) Place constraints on the wages of domestic workers
39. International trade tends to cause welfare losses to at least some groups in a country
(A) The less mobile the country's resources
(B) The more mobile the country's resources
(C) The lower the country's initial living standard
(D) The higher the country's initial living standard
40. International trade in goods and services tends to:

(A) Increase all domestic costs and prices
(B) Increase the amount of competition facing home manufacturers
(C) Lessen the amount of competition facing home manufacturers
(D) Keep all domestic costs and prices at the same level
41. When market failure occurs governments may intervene in order to:
(A) Reduce company profits, and increase producer surplus
(B) Move towards the optimal allocation of resources
(C) Increase consumer surplus, but not producer surplus
42. Which one of the following refers to a situation in which those who purchase a product are less
able to appreciate its quality than those who supply it ?
(A) Positive externality (B) Asymmetric information.
(C) Natural monopoly (D) Negative externality
43. The basis of the argument in favour of regulation derives from the concept of:
(A) Competitive laxity (B) Government failure
(C) Moral hazard (D) Market failure
44. Tax incidence refers to

(A) How often a tax is collected
(B) How a tax is collected
(C) Whether a tax is progressive, proportional or regressive
(D) The person or group who ends up paying tax
45. Fiscal deficit in the budget means :

(A) revenue deficit plus the net borrowing of the governments
(B) budgetary deficit plus the net borrowings of the government
(C) capital deficit plus revenue deficit
(D) primary deficit minus capital deficit

Economics (MSP)
46. Match the following :

List-I List-II
a. Fiscal Deficit 1. Revenue and interest receipt minus revenue
expenditure
b. Revenue deficit 2. Revenue receipts and recovery loans and
other receipt minus loans and other receipt
minus total expenditure
c. Budgetary deficit 3. Receipts minus disbursements in capital
account
d. Capital deficit 4. Total receipts total disbursements
Codes :
a b c d
(A) 3 2 4 1
(B) 1 2 3 4
(C) 4 3 1 2
(D) 2 1 4 3
47. Which of these is a side effect of deflation?

(A) Decreasing unemployment (B) Increase in demand
(C) Economic depression (D) Increase in personal expenditure
48. Which one of the following is not an objective of fiscal policy ?

(A) economic growth
(B) Maximization of employment level
(C) Regulating of financial institutions
(D) Price stability
49. Which of the following is not a reason why markets fail?

(A) Lack of Public Goods (B) Under Supply of Merit Goods
(C) The existence of externalities (D) Perfect Competition
50. Which one of the following refers to a situation in which the minimum efficient size for firm output
is greater than the current output of the industry ?
(A) Positive externality (B) Negative externality
(C) Asymmetric information. (D) Natural monopoly
51. International Economics deals with the implications of

(i) International Service (ii) International Trade
(iii) International monetary resources (iv) International Investment
(A) Only (iii) (B) Both (i) & (iv)
(C) Both (ii) & (iv) (D) Both (ii) & (iii)

Economics (MSP)
52. Which among the following is a sub-field of International Economics

(A) International Investment (B) International Finance
(C) International Service (D) International goods
53. Who among the following presented the theory of Comparative advantage
(A) Ricardo (B) Adam Smith
(C) Hicks (D) J.M.Keynes
54. Foreign Trade among countries creates

(A) Conflicts (B) Investments
(C) Cooperation (D) Both (B) & (C)
55. Which of the following is International trade

(A) Trade between regions (B) Trade between provinces
(C) Trade between countries (D) All of above
56. According to Hecksher and Ohlin basic cause of international trade is

(A) Difference in ideology (B) Difference in Political systems
(C) Difference in markets (D) Difference in factor endowments
57. Two countries can gain from foreign trade if

(i) Cost ratios are different (ii) price ratios are different
(iii) Tariff ratios are different
(A) Both (ii) & (iii) (B) Both (i) & (ii)
(C) Both (i) & (iii) (D) Only (iii)
58. The Term of Trade of a Country is depicted by

(A) Ratio of import duties
(B) Ratio of prices of exports and imports
(C) Ratio of goods exported and imported
(D) All of above
59. Trade between two countries can be useful only if cost ratios of goods are
(A) Different (B) Equal
(C) undetermined (D) Decreasing
60. Modern theory of international trade is based on the views of

(A) Robbins and Ricardo (B) Heckcsher and Ohlin
(C) Adam Smith and Marshall (D) Saleem and Kareem
61. Consider the following statements and identify the right ones.
I. Unbalanced growth strategy is also known as Mahalanobis strategy.
II. This strategy was adopted in India after the 7th five year plans.
(A) I only (B) II only
(C) both (D) none

Economics (MSP)
62. Which one of the following pairs of economists and doctrines they advocated, is correctly matched?
(A) A W Lewis -'Big Push' theory
(B) A O Hirschman -Strategy of unbalanced growth
(C) Rosenstein Rodan (BIG)-stages of economic growth
(D) W W Rostow -Theory of development with unlimited supplies of labour
63. Match the following:

List-I List-II
a. Invisible Hand 1. Karl Marx
b. Warrier Knight 2. Adam Smith
c. PQLI 3. Schumpeter
d. Surplus Value 4. Morris D. Morris
Codes :
a b c d
(A) 1 4 2 3
(B) 2 3 4 1
(C) 1 2 3 4
(D) 4 3 2 1
64. The concept of economic growth is:

(A) Identical with the concept of economic development
(B) Narrower than the concept of economic development
(C) Wider as compared to that of economic development
(D) Unrelated to the concept of economic development
65. Economic growth can be measured by:

(A) The CBI (B) GDP
(C) The CPI (D) MPC
66. Which of the following is inconsistent with Adam Smith's theory of development?
(A) Development process is cumulative in nature
(B) There is no limit to the growth process
(C) Capital accumulation and market extension are two prerequisites for output expansion
(D) There should be no government interference in the working of the economy
67. Lorenz Curve is used to show that

(A) Extent of inequality of income or wealth
(B) Long term inflation rate
(C) Growth rate of GDP over a long period
(D) Investment and income relationship

Economics (MSP)
68. Which of the following is not correctly matched?

(A) Big-push strategy: Paul N. Rosenstein- Rodan
(B) Balanced growth theory: R. Nurkse
(C) Development with unlimited supplies of labour: A-o. Hirschman
(D) Critical minimum strategy: H. Uebenstein
69. Dependency of underdeveloped countries are on

(A) Human capital (B) Physical capital
(C) Natural resources (D) Technology
70. Big-Push strategy of development is based on concept of

(A) backlash effect (B) productivity
(C) internal economics (D) external economics
71. Many environmental resources are public goods, which are characterized by
(A) rivalry and exclusion in consumption
(B) nonrivalry and nonexclusion in consumption
(C) rivalry but nonexclusion in production
(D) nonrivalry but exclusion in usage
72. Measuring number of people who die is

(A) Infant rate (B) Migration rate
(C) Mortality rate (D) Fertility rate
73. How much of rural population in India are in a population to avail safe drinking water and basic
sanitation amenities ?
(A) 66.7% (B) 50%
(C) 15% (D) 33.3%
74. Relationships based on a cost benefit analysis are explained by which theory
(A) exchange theory (B) reciprocal liking
(C) similarity attraction theory (D) matching effect
75. The 'Compensation criterion' that state X is socially preferable to state Y, if those who gain from
X can compensate the losers and still be in a better position than at Y has been proposed by:
(A) Bergson (B) Pareto
(C) Kaldor (D) Walras
76. The Compensation Principle was suggested by

(A) Kaldor (B) Scitovsky
(C) Hicks (D) All of the above

Economics (MSP)
77. Market failure occurs because of:

1. Externality 2. Asymmetric information
3. Perfect competition
Select the correct answer using the code given below
(A) 1, 2 and 3 (B) 1 only
(C) 1 and 2 (D) 2 and 3
78. Match List- I (Economist) with List -II (Concept) and select the correct answer using the codes
given below the lists:
List- I List -II
(Economist) (Concept)
a. Pareto 1. Compensation Principle
b. Hicks-Kaldor 2. Social Welfare Function
c. Bergson 3. Social Optimum
d. Scitovsky 4. Double Criterion Compensation
Code :
a b c d
(A) 3 1 2 4
(B) 2 4 3 1
(C) 3 4 2 1
(D) 2 1 3 4
79. “State A is socially preferable to state B, if the losers in A cannot profitably change from B to A.”
This statement relates to
(A) Hicks Criterion (B) Scitovsky
(C) Little Criterion (D) None of the above
80. The Coase theorem suggests that private negotiation will lead to the correction of market failure
when
(A) only a few people are involved
(B) property rights are clearly recognized
(C) people are willing to cooperate
(D) all of the above
81. Among the following states, which one has the most suitable climatic conditions for the cultivation
for a large variety of Orchids with the minimum cost of production and can develop an export
oriented in this field ?
(A) Uttar Pradesh (B) Madhya Pradesh
(C) Andhra Pradesh (D) Arunachal Pradesh
82. Assertion (A) : NEP, 1991 was focused on liberalization, privatization and globalization
Reason (R) : The policy was necessitated because of crisis situation in the economy in 1991
Codes:
(A) A is true but B is false (B) A is false but B is true
(C) Both A and B are true (D) Both A and B are false

Economics (MSP)
83. Which of the following industry is known as sun rising industry?

(A) Dairy industry (B) Information Technology
(C) Health and clinic (D) None of these
84. Infrastructure provides supporting services in the main areas of industrial and agricultural production,
domestic and foreign trade and commerce. Consider the following statements about infrastructure.
1. Infrastructure associated with energy, transportation, housing and communication are
included in the economic Infrastructure.
2. Agriculture does not depend on infrastructure as it is labour intensive.
3. Infrastructure contributes to economic development of a country by improving the quality
of life of its people.
Which of the statements given above is/are not correct?
(A) 1 and 2 only (B) 1 and 3 only
(C) 2 and 3 only (D) All of the above
85. Unlike village community, urban society lacks in

(A) secondary social control (B) Social tolerance
(C) self-sufficiency (D) All of the above
86. Consider the following statements and identify the right ones.
(i) India adopted LERMS in 1992
(ii) In 1993, dual exchange rate system was replaced by a unified floating exchange rate.
(A) (i) only (B) (ii) only
(C) both (i) and (ii) (D) none
87. If there were a balance of payments deficit then in a floating exchange rate system:
(A) The external value of the currency would tend to fall
(B) The external value of the currency would tend to rise
(C) The injections from trade are greater than the withdrawals
(D) Aggregate demand is increasing
88. Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment
in a country. Which one of the following statements best represents an important difference
between the two ?
(A) FII helps bring better management skills and technology, while FDI only brings in capital
(B) FII helps in increasing capital availability in general, while FDI only targets specific sectors
(C) FDI flows only into the secondary market, while FII targets primary market
(D) FII is considered to be more stable than FDI

Economics (MSP)
89. Consider the following statements about the Foreign Trade Policy 2015-20 unveiled on 1st Apr'15.
1. This policy focuses on boosting exports and create jobs while supporting the Centre's
Make In India' and Digital India' programs.
2. The new policy is to create architecture for the Indian economy so that it can gain global
competitiveness and promote the diversification of Indian export.
3. The policy is to move towards paperless working in 24x7 environments.
4. The policy comes at a time when export growth contracted 15 per cent in February 2014-
15, reporting a negative growth for the third consecutive month.
(A) 1 & 2 is correct (B) 2 & 3 is correct
(C) 1, 2 & 4 is correct (D) All of the above is correct
90. Over the years, India has built up a vast health infrastructure and manpower at different levels.
Consider the following statements related to Health infrastructure in India.
1. More than 70 per cent of the hospitals in India are run by the private sector.
2. Nearly 60 per cent of dispensaries are run by the public sector.
3. More than 80 per cent of the medical service providers in private sector are single person
owned
Select the correct statements using the codes given below.
(A) 1 and 2 only (B) 1 and 3 only
(C) 2 and 3 only (D) All of the above
91. Write a differential equation for the statement :

"The rate of change of P is proportional to the product of P and 4 – P."
(A) dP/dt = kP (B) dP/dt = k(4 – P)
(C) dP/dt = kP(4 – P) (D) dP/dt = kP/(4 – P)
92. Find MR and AR at x = 5, where TR is 12x – x2.

(A) MR = 2 AR = 7 (B) MR = 5 AR = 8
(C) MR = 2.5 AR = 6 (D) MR = 0 AR = 0
93. If Qd = 60 – 3P Qs = –40 + 5P. Calculate the quantity demanded if the price is 6.

(A) 40 (B) 52
(C) 42 (D) 39
94. If Qd = 8 - P, Qs = –4 + P2 .Calculate the equilibrium Quantity.

(A) 5 (B) 8
(C) 3 (D) 2
95. Cobb- douglas function general form is

(A) AKaLb (B) AaKL
(C) AaKLb (D) Aa+bKL
96. If the percentage change in the demand is 10% and that in the price is 20% then price elasticity
of demand is
(A) -1/2 (B) -2
(C) -1 (D) None of these
Economics (MSP)
97. Suppose the market demand for pizza is given by Qd = 300 – 20P and the market supply for pizza
is given by Qs = 20P – 100. Calculate producer surplus at equilibrium.
(A) Rs. 280 (B) Rs. 350
(C) Rs. 150 (D) Rs. 250
98. The third term of a geometric progression is 4. The product of the first five terms is
(A) 43 (B) 45
(C) 44 (D) none of these
99. If x1,x2,x3, as well as y1,y2,y3 are in GP with the same common ratio, then the points (x1,y1),(x2,y2)
and (x3,y3)
(A) lie on a straight line (B) lie on an ellipse
(C) lie on a circle (D) are vertices of a triangle
100. In a triangle the lengths of the two larger sides are 10 and 9, respectively. If the angles are in
AP, then the length of third side can be
(A) 911/2 (B) 3(3)1/2
(C) 5 (D) none of the above
ANSWER KEY
1 2 3 4 5 6 7 8 9 10
D B A A B B C A C C
11 12 13 14 15 16 17 18 19 20
D C B D A D B D A C
21 22 23 24 25 26 27 28 29 30
A C B B C B C A D B
31 32 33 34 35 36 37 38 39 40
B A B D A C D D A B
41 42 43 44 45 46 47 48 49 50
B B D D B D C C D D
51 52 53 54 55 56 57 58 59 60
C B A D C D B B A B
61 62 63 64 65 66 67 68 69 70
A B B B B B A B C D
71 72 73 74 75 76 77 78 79 80
B C D A C D B A A D
81 82 83 84 85 86 87 88 89 90
D C B A C C A B D B
91 92 93 94 95 96 97 98 99 100
C A C A A A D B A A

Economics (MSP)
SOLUTIONS
1. (D) All of the above

2. (B) total fixed costs plus total variable costs
3. (A) the dominant strategy
4. (A) Coefficient of variation
5. (B) The MR of the two markets is equal
6. (B) low risk individuals.
7. (C) A is true but R is false
8. (A) J. S. Mill
9. (C) 2 1 3 4
10. (C) The price of x and the quantity for y
11. (D) Real national income
12. (C) A method of budgeting in which all expenses must be justified for each new period. Zero-
based budgeting starts from a “zero base” and every function within an organization is
analyzed for its needs and costs. Budgets are then built around what is needed for the
upcoming period, regardless of whether the budget is higher or lower than the previous
one.
13. (B) If the Keynesian consumption function is C = 10 + 0.8 Yd then when disposable income
is £1000, total consumption = 10 + 0.8(1000) = 810.
14. (D) 1,2 and 3 are correct
15. (A) LM curve shifts to right
16. (D) rise in income.
17. (B) there will be arise in the prospective return from capital.
18. (D) Unemployment
19. (A) Peak to peak
20. (C) Government Securities
21. (A) Circular test
22. (C) Unit Test
23. (B)
P1
Com modity P0 P1 * 100
P0
A 60 75 125
B 45 50 111.11
C 80 70 87.50
D 25 40 16
P1
P * 100  483.61
0
P1 100 483.61
P01   *   120.90
P0 N 4

Economics (MSP)
24. (B)
P1
Items Weight in% P0 (1995) P1 (2004) R * 100 RW
P0
Food 35 1400 1500 107.14 3750
Fuel 10 200 250 125.00 1250
Clothing 20 500 750 150 3000
Re nt 15 200 300 150 2250
Misc. 20 250 400 160 3200
 W  100  RW  13450
CPI 
 RW  13450  134.5
 W 100
25. (C) Standard error
26. (B) Non zero
27. (C) Simple random sampling
28. (A) Less than
30. (B) Decrease
31. (B) Direct Formulae
32. (A) Imposition of tariff leads to reduction/fall in the volume of trade among nations
33. (B) a tax or duty to be paid on a particular class of imports or exports is called tariff
34. (D) Dumping is a term used in the context of international trade. It's when a country or
company exports a product at a price that is lower in the foreign importing market than
the price in the exporter's domestic market.
35. (A) 'General acceptability' is a feature of money as it is accepted by everyone.
36. (C) Option 'C' , Resources are not equitably distributed and are scarce but unlimited in wants
37. (D) Option 'D', The introduction of new products, Product design and quality, Product price
determines the competitiveness of the firm.
38. (D) Increase in foreign competition leads to reduction in the manufacturing cost to compete
and this adversely affects the labour market.
39. (A) A country having less mobility of factors doesn't enjoy the welfare of international trade
because those factors are limited within that country's boundaries itself
40. (B) International trade causes MNCs to penetrate into home market and adversely affect the
local producers by creating a competitive edge over it.
41. (B) Move towards the optimal allocation of resources
42. (B) Asymmetric information.
43. (D) Market failure
44. (D) The person or group who ends up paying tax
45. (B)
46. (D) 2 1 4 3
47. (C) Economic depression
48. (C) Regulating of financial institutions
49. (D) Perfect Competition

Economics (MSP)
50. (D) Natural monopoly

51. (C) Option 'C', As International economics is defined as the field of study which assess the
implications of International trade of goods and services and international investment.
52. (B) It comes under different types of International Economics
53. (A) The theory of comparative advantage is popularly attributed to English political economist
David Ricardo and his book "On the Principles of Political Economy and Taxation" in 1817
54. (D) It is a Fact
55. (C) As per the definition that International trade is the exchange of goods and services between
countries.
56. (D) According to Heckscher and Ohlin, the differences in factor-endowments of the countries
and also the differences in factor proportions required for producing various commodities
explain differences in comparative costs and hence from the ultimate basis of international
trade.
57. (B) A country gains by foreign trade, if and when, the traders find that there exists a broad
ratio of prices very different from that to which they are accustomed at home and the
gains from international trade also depends on differences in comparative cost ratios in
the two trading countries.
58. (B) It is a measure of the purchasing power of exports of a country in terms of its imports
and is expressed as the relation between exports prices and imports prices of its goods
59. (A) As per the definition
60. (B) Presented by Heckcsher and Ohlin: In 1919, Eli Heckscher propounded the idea that trade
results from differences in factor endowments in different countries The idea was further
carried forward and developed by Bertil Ohlin in 1933 in his famous book Inter-regional
and International Trade.
61. (A)
62. (B)
63. (B)
64. (B)
65. (B)
66. (B) There is no limit to the growth process
67. (A) Extent of inequality of income or wealth
68. (B) Balanced growth theory: R. Nurkse
69. (C) Natural resources
70. (D) external economics
71. (B) nonrivalry and nonexclusion in consumption
72. (C) Mortality rate
73. (D) 33.3%
74. (A) exchange theory
75. (C) Kaldor
77. (B) 1 only
78. (A) 3 1 2 4
79. (A) Hicks Criterion
80. (D) all of the above

Economics (MSP)
81. (D) Arunachal Pradesh

82. (C) Both A and B are true
83. (B) Information Technology
84. (A) 1 and 2 only
85. (C) self-sufficiency
86. (C) both (i) and (ii)
87. (A) The external value of the currency would tend to fall
88. (B) FII helps in increasing capital availability in general, while FDI only targets specific sectors
89. (D) The policy document was released by the Minister of Commerce and Industry Nirmala
Sitharaman in New Delhi. While releasing the FTP, Mrs Sitharaman said that the new
policy will support both manufacturing and service sector with special emphasis on
improving the ease of doing business.
90. (B) 1 and 3 only
91. (C) dP/dt = kP(4 – P)
d(TR) d(12x  x 2 )
92. (A) MR    12  2x
dx dx
MRat x  5  12  2(5)  2
(TR) (12x  x 2 )
AR    12  x
x x
AR at x  5  12  5  7
93. (C) Qd (at P = 6) = 60 – 3 × 6 = 42

94. (A) Qd = Qs
8 – P = – 4 + P2
– P2 – P + 12 = 0
– (P2 + P – 12) = 0
– (P + 4)(P – 3) = 0
[P1 = – 4] [no solution because P < 0]
P2 = 3
Qd = 8 – P = 8 – 3 = 5
95. (A) AKaLb
96. (A) Price elasticity of demand = – (Percentage change in the demand)/ (Percentage change
in the price)
Price elasticity of demand = –10/20 = –1/2
97. (D) Step 1 : Find equilibrium price and quantity.
At equilibrium, Qs = Qd
But Qs = 20P – 100
Qd = 300 – 20P
Hence 20P – 100 = 300 – 20P
20P + 20P = 300 + 100
40P = 400
P = 10

Economics (MSP)
Substitute 10 in either demand or supply equation to obtain equilibrium quantity.

Qs = 20P – 100
Qs = 20(10) – 100
Q = 100 units
Step 2 : Find prices when Qs and Qd are equal to zero
When Qs = 0
Qs = 20P – 100
0 = 20P – 100
20P = 100
P = 5
When Qd = 0
Qd = 300 – 20P
0 = 300 – 20P
20P = 300
P = 15
Step 3 : Sketch demand and supply diagram using the figures computed in the preceding
steps.
Producer surplus: Area shaded red

But Base = 100
Height = 10 – 5 = 5
Hence Area = 1/2 × 100 × 5 = Rs. 250
98. (B) Here, f3 = 4
 ar2 = 4
Product of first five term
= a .ar .ar2 .ar3.ar4
= a5 (r10) = (ar2)5 = 45
x2 x3 y y
99. (A) Let   r and 2  3  r
x1 x2 y1 y 2
 x2 = x1r, x3 = x1r2
and y2 = y1r and y3 = yr2

Economics (MSP)
x1 y1 1 x1 y1 1
Again  x 2 y 2 1  x1r y1r 1
2 2
x3 y3 1 x1r y1r 1
x1 y1 1
  0 0 1  r  0 [R2 and R3 are identical]
0 0 1 r
Then (x1 , y1), (x2, y2), (x3, y3) be on a straight line

100. (A) Since, angles of a triangle are in A.P.
 + ( – ) + (  + ) = 180°
  = 60°
(10)2  92  x 2
cos 60° =
2(1)(9)
1 181  x 2

2 2  90
x2 = 91
x  91

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8.1 ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

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8.2 THEORIES OF ECONOMIC DEVELOPMENT

Adam Smith's Theory of Economic Development

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(ii) Surplus Value

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Rostow's Theory of Economic Development

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2. Indivisibilities in Demand : The complementarily with respect to demand requires that

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8.3 MODELS OF ECONOMIC GROWTH

8.3.1 Harrod-Domer Model

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Expected growth rate  ĝ

Here gt = ĝt if and only if

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The distribution equation which is most significant in growth model is shown as

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5. The marginal propensity to consume of worker is greater than that of capitalist.

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8.4 TECHNICAL PROGRESS

Technical progress can be classified into two parts.

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1. The assumption/s of law of variable proportions is/are

2. Total costs are:

4. Which one of the following does measure risk?

5. Under monopoly price discrimination, equilibrium of a firm is obtained when

6. Adverse selection in competitive insurance markets harms

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8. Who amongst the following is not regarded as a neoclassical economist?

11. The value of national income adjusted for inflation is called

12. Zero-based budgeting (ZBB) lays emphasis on

14. Consider the following statements

15. If money supply increases

19. The business cycle length measured from __________

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25. Standard deviation of sampling distribution of a statistic is called :

27. Sampling based upon equal probability is called :

29. Which of the following statement is not true?

(C) S.E  X   2 (D) All of the above

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30. The standard error increases when sample size :

31. Net Exports is equal to

32. A Tariff leads to

34. Dumping refers to

35. 'General acceptability' is a feature of

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38. Increased foreign competition tend to

40. International trade in goods and services tends to:

44. Tax incidence refers to

45. Fiscal deficit in the budget means :

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46. Match the following :

47. Which of these is a side effect of deflation?

48. Which one of the following is not an objective of fiscal policy ?

49. Which of the following is not a reason why markets fail?

51. International Economics deals with the implications of

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