Day-556 | Daily MCQs | UPSC Prelims | ECONOMICS

Answer: A
Explanation:
• In 1954, economist William Arthur Lewis put forth the “Economic Development with Unlimited Supplies of Labor”. For this work Lewis won the Nobel Prize in Economics in 1979.
• The crux of the model suggested that surplus labor in agriculture could be redirected to the manufacturing sector by offering wages just high enough to attract workers away from the farm.
• This shift, in theory, would stimulate industrial growth, enhance productivity, and lead to economic development.
Challenges in Implementation of Lewis Model in India:
• Obstacles of Low Wages: Low wages and inadequate social security in urban manufacturing facilities fails to entice rural agricultural laborers to relocate, given the high costs of urban living, posing a hurdle to the implementation of the Lewis model.
• Technological Shift in Manufacturing: Manufacturing industries are increasingly capital-intensive, relying on labor-displacing technologies like robotics and artificial intelligence.
• This transition restricts the absorptive capacity of labor-intensive sectors to accommodate surplus agricultural workers.
• Disguised Unemployment: India faces a scenario of disguised unemployment in the agricultural sector, where a surplus of workers is engaged in activities that do not significantly contribute to increased productivity or income.
• This surplus labor situation complicates the transition of workers to other sectors.
• Skill Mismatch: There exists a mismatch between the skills demanded by the industries and the skills possessed by the workforce.
• The education system might not adequately prepare individuals for the demands of the modern job market, resulting in a skill gap that impedes labor absorption in industries.
• Overemphasis on White-Collar Jobs: Societal perceptions often prioritize white-collar jobs over vocational or technical skills.
• This bias against blue-collar work can limit the workforce available for skilled trade positions and technical jobs, affecting industrial growth.

Answer: B
Explanation:
Statement 1 is incorrect: Mutual funds collect money from investors and invest the money, on their behalf, in different securities (debt, equity or both).
Statement 2 is correct: Equity mutual funds pool money from multiple investors to create a diversified portfolio of stocks. Due to risk diversification, the volatility in returns generated from mutual funds investments are generally lower than that of direct equity investing.
Statement 3 is correct: Infrastructure investment Trust (InvIt) and Real estate Investment Trust(ReITs) are similar to mutual funds. This is because both REITs and InvITs pool money from a large number of investors and invest money on physical assets to generate income which is distributed as dividend.
Additional information:
● An equity mutual fund is a type of mutual fund that primarily invests in stocks or equities. It allows individual investors to pool their money together and invest in a diversified portfolio of stocks selected and managed by professional fund managers.
● The objective of equity mutual funds is to provide investors with the opportunity to participate in the potential returns and dividends generated by a wide range of publicly traded companies.
● Equity funds are actively managed by experienced fund managers who conduct research and analysis to make investment decisions. These professionals aim to select stocks that they believe will generate positive returns for investors.

Answer: A
Explanation
• Pair 1 is incorrect: Laffer curve explains the relationship between tax revenue and tax rate. It states that at lower as well as higher rate of tax, the tax revenue is low but tax revenue is high at the optimal rate of tax. According to the Laffer curve, if tax rates are increased above a certain level, then tax revenues can actually fall because higher tax rates discourage people from working, also there is high tax evasion.
• Pair 2 is incorrect: The Phillips curve is an economic theory that inflation and unemployment have a stable and inverse relationship. Developed by William Phillips, it claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment.
• Pair 3 is correct: Lorenz Curve is a graphical distribution of wealth. It shows the proportion of income earned by any given percentage of the population.

Answer: A
Explanation:
• Statement 1 is correct: GVA is the value added to the product to enhance the various aspects of the product whereas GDP is the total amount of products produced in the country. While GDP gives the picture from the consumers’ side or demand perspective, GVA gives a picture of the state of economic activity from the producers’ side or supply side. Both measures need not match because of the difference in treatment of net taxes.
• Statement 2 is incorrect: Both GDP as well as GVA do not include the value of intermediate goods. GDP is calculated by adding Net Taxes (taxes earned by the government – subsidies paid by the government) to the GVA. GDP fails to gauge the real economic scenario because a sharp increase in the output can be due to higher tax collections which could be on account of better compliance or coverage, rather than the real output situation. As a result, GVA is a more precise measure of the value added by each sector of the economy.
Additional information:
● GDP is the sum of private consumption, gross investment in the economy, government investment, government spending and net foreign trade (the difference between exports and imports).
● GDP = private consumption + gross investment + government investment + government spending + (exports-imports)
● GDP measures the value of a country’s final goods and services (those purchased by the final user) generated in a specific time period (say, a quarter or a year). It includes all of the output produced within a country’s borders.
GDP = Private consumption + gross investment + government investment + government spending + (exports – imports)
● Private Consumption Expenditure refers to the value of all goods and services purchased for consumption by households.
● Government Consumption Expenditure refers to the value of all goods and services purchased for consumption by the government.
● Gross Investment refers to the total value of all capital investments made in the economy.
The GVA of a sector is defined as the value of output minus the value of its intermediary inputs. This “value added” is distributed among the primary production factors, labour and capital. By examining GVA growth, one may determine which sectors of the economy are doing well and which are struggling.
Calculation of GVA
● GVA is the sum of a country’s GDP and net of subsidies and taxes in the economy at the macro level, according to national accounting.
● Gross Value Added = GDP + product subsidies – product taxes
● Previously, India measured GVA at ‘factor cost’ until a new methodology was implemented, in which GVA at ‘basic prices’ became the primary measure of economic output.
● GVA at basic prices will include production taxes and exclude production subsidies.
● GVA at factor cost included no taxes and excluded no subsidies

Answer: C
Explanation:
Statement 1 is correct: A Nominal Effective Exchange Rate (NEER) adjusted for inflation equals its Real Effective Exchange Rate (REER). The important aspect of NEER is that it is not adjusted for inflation. Thus, it does not say anything about the real strength of a currency; it is just a relative value. REER is considered a more accurate measure to gauge a currency’s strength. The Real Effective Exchange Rate (REER) is the NEER adjusted by inflation differentials between the domestic currency and that of the trading partners. Thus, it says about the real strength of a domestic currency against a basket of currencies, unlike NEER.
Statement 2 is correct: An increase in a nation’s REER is an indication that its exports are becoming more expensive and its imports are becoming cheaper.
Additional information:
● The Real Effective Exchange Rate (REER) is the weighted average of a country’s currency in relation to an index or basket of other major currencies.
● The weights are determined by comparing the relative trade balance of a country’s currency against that of each country in the index.
● The Nominal Effective Exchange Rate (NEER) is an index of the weighted average of bilateral exchange rates of home currency with respect to a basket of currencies of trading partners. It is also known as the trade-weighted currency index.
● An increase in NEER indicates that the domestic currency has appreciated against the basket of currencies whereas a decrease indicates a relative depreciation.
NEER and REER in the Indian context
● The Reserve Bank compiles and disseminates indices of NEER and REER of the Indian rupee.
● The latest series was constructed with the base year 2015-16. The new indices of NEER and REER replaced the old series from 2004-05 onwards.
● The coverage of the NEER and REER basket has been expanded from 36 to 40 currencies. This was in view of the growing importance of emerging markets and developing economies in India’s foreign trade and to better reflect shifts in external competitiveness.
● The selection of currencies for NEER and REER in the new series is based on two criteria:
● Trading partners with extremely high and volatile inflation are excluded. This is because their currencies tend to experience rapid nominal declines, undermining the stability of the NEER and REER indices. This obscures their usefulness in the assessment of external competitiveness.
● Data on inflation and exchange rates of trading partners should be available on a regular basis.