Static Quiz 18 March 2023 (Economy)

Capital Goods:
A particular good will be capital in nature only if it possesses the following three characteristics:
(i) It is a produced durable output of a man-made process
(ii) It again acts as an input for further production process (to be sold in the market)
(iii) While acting as an input, it does not get transformed or consumed

Consumption and Capital goods: A particular good can be consumption as well as capital good. For example washing machine. When a person is using washing machine at his home for washing of his own clothes then it will act as consumption good. But, if the same washing machine is purchased by a businessman for providing laundry services then it is acting as a capital good.

Intermediate and Final good: A particular good can be final as well as intermediate. For example, “tea leaves”. When a person is purchasing the “tea leaves” for his home consumption purpose then the “tea leaves” will be a final good. But when a tea seller is purchasing the “tea leaves” to prepare “tea” and sell it in the market then “tea leaves” is intermediate good and the “tea” is the final good.

Factor income is basically the income earned by the four factors of production i.e. profit, rent, interest and wages but it does not include the transfer incomes/payments.

A non-factor or a transfer income is the income without any good or service provided in return. National income includes only the factor incomes.

The inverse of “productivity of capital” is Capital/Output ratio.
Capital output ratio is the ratio of capital to output. It measures how much of capital is required per unit of output. So, if more capital is required per unit of output, then the capital is less efficient. Hence, it also measures (average) efficiency of capital (but it is inverse).

Capital Output Ratio = Capital /Output

Higher the capital/output ratio, it is bad for economy. If Capital/Output ratio is 3/1, that means Rs. 1 unit of output is produced from Rs. 3 units of capital. And if Capital/Output ratio is 4/1, that means to produce Rs. 1 unit of output, Rs. 4 units of capital is required. So, 3/1 is better than 4/1 for the economy.
We measured capital/output ratio because we are not interested in measuring the productivity of capital rather we want to know that in India how much (average) capital is required to produces one unit (Rupee one) of output/GDP

The World Economic Outlook (WEO, IMF) classifies the world into two major groups:
•  Advanced economies
•  Emerging market and developing economies

This above classification is based on three parameters:
1. Per capita income (using PPP exchange rate)
2. Export diversification
3. Degree of integration into the global financial system

The following are some basic differences in CPI, WPI and GDP deflator:
• In wholesale market services are not traded, so WPI does not include the inflation in services, while CPI and GDP deflator capture inflation in services also.

• The goods purchased by consumers in the retail market do not represent all the goods produced in the country (capital goods are purchased by the companies), so CPI does not include such capital goods but GDP deflator takes into account of all such goods and services produced in the country.

• CPI and WPI include prices of goods produced domestically and imported both but GDP deflator does not include prices of imported goods.

• The weights are constant (in the basket) in CPI and WPI, but they differ according to production level of each good and services in GDP deflator.