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@DrKingSchultz in today's economy quiz in Q4, what is the ans, D? can you explain me? As far as i know, all 3 steps will lead to increase in capital stock. Is it?
I think it would be C. Because the first two options won't "definitely" cause an increase in GCF.
This is what I reasoned: Notion of GDP growth without a growth in gross capital formation seems implausible to me. In practice, increase in gross savings is correlated with an increase in GCF but it will not certainly boost GCF, especially if the savings are channeled into non-financial instruments like physical gold etc. (I don't know if investment in physical gold or real estate is considered under "gross savings" or not) Increase in gross consumption would result in a decrease in gross savings. So GCF is only indirectly correlated with consumption, and that too a negative correlation.
Only Statement 1 seems true to me.
Savings increase would mean increase in Investment, and under certain assumptions Savings is indeed equal to Investment. Investment is a proxy for Capital Formation.
Statement 2 has an opposite impact to what is being asked in the question.
Statement 3 GDP can grow due to any of the factors: Consumption, Investment, Government Spending, Trade Surplus. So may not necessarily lead to increase in GCF.
As I said, more consumption means less savings means less money for capital formation. Statement 1 would not always be correct; but there can be no GDP growth with zero growth in capital formation. Hence my choice for Option C.
At your service Captain.
GDP = Private Consumption + Investments + Government Expenditure + Trade Surplus (Exports - Imports).
1. The growth in consumption may be driven by imports. You may counter-argue that this may offset Trade surplus and result in fall in GDP. But then overall GDP may still increase because of increase in Govt expenditure due to subsidies. Overall GDP increased without any Capital Formation.
2. The growth in consumption may be supported by excess capacity already present in the economy. It may be possible earlier consumption levels were low, and industry was not utilizing its whole capacity. The increase in consumption was met by bringing this idle capacity into use.
I would like to clarify one thing. In my argument above, I’ve said that an increase in Savings would mean an increase in Investments. However all savings may have been invested in financial assets. Had the question been “Gross Fixed Capital” then Statement 1 may not have been necessarily true because fixed capital excludes financial assets like stocks, bonds, mutual funds. But the statement mentions Gross Capital formation, hence Financial assets are included and Savings will increase investment and capital formation even though it may be 100% in financial assets.
If you say all true, why option d then? Option d says none of above. d would have been true if questions statement was "Gross Fixed Capital Formation".
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Comments
Savings increase would mean increase in Investment, and under certain assumptions Savings is indeed equal to Investment. Investment is a proxy for Capital Formation.
Statement 2 has an opposite impact to what is being asked in the question.
Statement 3
GDP can grow due to any of the factors: Consumption, Investment, Government Spending, Trade Surplus.
So may not necessarily lead to increase in GCF.
I would have gone with b.
GDP = Private Consumption + Investments + Government Expenditure + Trade Surplus (Exports - Imports).
1. The growth in consumption may be driven by imports. You may counter-argue that this may offset Trade surplus and result in fall in GDP. But then overall GDP may still increase because of increase in Govt expenditure due to subsidies. Overall GDP increased without any Capital Formation.
2. The growth in consumption may be supported by excess capacity already present in the economy.
It may be possible earlier consumption levels were low, and industry was not utilizing its whole capacity. The increase in consumption was met by bringing this idle capacity into use.
I would like to clarify one thing.
In my argument above, I’ve said that an increase in Savings would mean an increase in Investments. However all savings may have been invested in financial assets. Had the question been “Gross Fixed Capital” then Statement 1 may not have been necessarily true because fixed capital excludes financial assets like stocks, bonds, mutual funds. But the statement mentions Gross Capital formation, hence Financial assets are included and Savings will increase investment and capital formation even though it may be 100% in financial assets.
If you say all true, why option d then? Option d says none of above.
d would have been true if questions statement was "Gross Fixed Capital Formation".
Apologies Captain.
http://forumias.com/portal/the-friday-general-science-and-tech-quiz-3/
http://forumias.com/portal/monday-polity-quiz-4/
Also, CSAT mailer could not be dropped. Here is the URL
http://forumias.com/portal/saturday-csat-quiz-3/
http://forumias.com/portal/tuesday-economy-quiz-4/
Btw...great test series by forumias..as close as it can get to the real exam.
Thank you @andy133
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