Basic Economic Concepts

What you'll learn

Learn the core ideas of economics tested in UPSC Prelims: scarcity, opportunity cost, factors of production, economic sectors, GDP/GNP, and economic systems.

This chapter has

Basic Economic Concepts — solved practice questions

8 UPSC Indian Economy questions with step-by-step solutions. Attempt each, then reveal the answer.

1. Q1medium

   Consider the following statements regarding national income aggregates: 1. Gross National Product (GNP) is obtained by adding net factor income from abroad to Gross Domestic Product (GDP). 2. Net National Product (NNP) is obtained by subtracting depreciation from GNP. Which of the statements given above is/are correct?

   • A1 only
   • B2 only
   • CBoth 1 and 2
   • DNeither 1 nor 2
   Show answer & solution

   Correct answer: (C) Both 1 and 2

   GNP = GDP + net factor income from abroad, and NNP = GNP − depreciation (consumption of fixed capital). Both relationships are correct as stated.

2. Q2medium

   In national income accounting, the term 'National Income' technically refers to which of the following aggregates?

   • ANet National Product at factor cost
   • BGross Domestic Product at market price
   • CGross National Product at market price
   • DNet Domestic Product at factor cost
   Show answer & solution

   Correct answer: (A) Net National Product at factor cost

   National Income is defined as Net National Product at factor cost (NNP at FC), i.e., GNP less depreciation and less net indirect taxes.

3. Q3medium

   The difference between the value of an aggregate measured at market price and the same aggregate measured at factor cost is accounted for by which of the following?

   • ADepreciation of capital
   • BNet factor income from abroad
   • CNet indirect taxes (indirect taxes minus subsidies)
   • DTransfer payments by the government
   Show answer & solution

   Correct answer: (C) Net indirect taxes (indirect taxes minus subsidies)

   Market price valuation equals factor cost valuation plus net indirect taxes, where net indirect taxes = indirect taxes minus subsidies.

4. Q4hard

   Which of the following best describes the GDP deflator?

   • AThe ratio of real GDP to nominal GDP
   • BThe ratio of nominal GDP to real GDP, expressed as an index
   • CThe percentage change in wholesale prices over a year
   • DA fixed basket of consumer goods and services
   Show answer & solution

   Correct answer: (B) The ratio of nominal GDP to real GDP, expressed as an index

   The GDP deflator is the ratio of nominal GDP to real GDP, expressed as an index. Unlike the CPI or WPI, it covers all goods and services produced domestically and reflects a changing basket.

5. Q5medium

   In a given year, a country's nominal GDP increases while its real GDP remains unchanged. This situation most directly indicates that:

   • APhysical output has increased
   • BPopulation has increased
   • CDepreciation has increased
   • DOnly the general price level has increased
   Show answer & solution

   Correct answer: (D) Only the general price level has increased

   Real GDP is measured at constant base-year prices. If real GDP is unchanged while nominal GDP rises, the increase reflects a rise in the price level (inflation), not higher physical output.

6. Q6hard

   Which one of the following would typically be a cause of cost-push inflation rather than demand-pull inflation?

   • AA sharp increase in the price of crude oil and other inputs
   • BA large increase in government spending
   • CA sustained rise in consumer demand
   • DA rapid expansion in the money supply
   Show answer & solution

   Correct answer: (A) A sharp increase in the price of crude oil and other inputs

   Cost-push inflation arises from rising input costs (e.g., a spike in crude oil or wages) that reduce aggregate supply. Higher government spending, stronger consumer demand, and rising money supply are demand-side (demand-pull) factors.

7. Q7medium

   Consider the following statements about types of goods: 1. All Giffen goods are inferior goods. 2. For an inferior good, quantity demanded falls as consumer income rises. Which of the statements given above is/are correct?

   • A1 only
   • B2 only
   • CBoth 1 and 2
   • DNeither 1 nor 2
   Show answer & solution

   Correct answer: (C) Both 1 and 2

   Giffen goods are a special subset of inferior goods for which demand rises as price rises. For inferior goods generally, demand falls when consumer income rises. Both statements are correct.

8. Q8medium

   In the theory of factors of production, the reward earned by the factor 'capital' is termed:

   • AInterest
   • BRent
   • CWages
   • DProfit
   Show answer & solution

   Correct answer: (A) Interest

   Land earns rent, labour earns wages, capital earns interest, and entrepreneurship earns profit.

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