UPSC Prelims 2013 Q92: Indian Economy – National Income & Economic Growth
Economic growth in country X will necessarily have to occur if
- (a) there is technical progress in the world economy
- (b) there is population growth in X
- (c) there is capital formation in X
- (d) the volume of trade grows in the world economy
Answer: (c) there is capital formation in X
Explanation
What makes economic growth necessarily occur
Economic growth is a rise in a country's output of goods and services.
It needs more productive capacity, which comes from capital formation: new factories, machines, roads and skills.
| Option | Verdict | Reason |
|---|---|---|
| (a) Technical progress in the world economy | Incorrect | Country X may not adopt it |
| (b) Population growth in X | Incorrect | More people do not by themselves mean more output; income per head may fall |
| (c) Capital formation in X | Correct | Adds directly to X's capacity to produce |
| (d) Volume of trade grows in the world economy | Incorrect | X may not share in it |
Capital formation and growth:
| Term | Meaning |
|---|---|
| Gross capital formation | Investment in fixed assets and stocks |
| Savings rate | The source of funds for investment |
| ICOR | Capital needed to produce one more unit of output; lower is better |
The key word is 'necessarily': only something happening inside X can guarantee growth in X.
Answer: (c) there is capital formation in X.
Why each option is right or wrong
- (a) Incorrect. Technical progress elsewhere does not ensure growth in X.
- (b) Incorrect. Population growth alone does not raise output.
- (c) CORRECT. Capital formation in X necessarily adds to its productive capacity.
- (d) Incorrect. Growth in world trade does not guarantee growth in X.
Key point
Economic growth needs capital formation (investment in productive assets); savings fund it; ICOR measures how efficiently capital becomes output.
Remember
Growth needs capital formation at home.
Common mistakes
- Ignoring the word 'necessarily'.
- Thinking a bigger population means a bigger economy.
- Assuming world trends automatically reach every country.
Exam tip
'In X' matters: only what happens inside the country can guarantee its growth.
Sources
- NCERT Class XI — Indian Economic Development (Indian Economy 1950-1990)
- NCERT Class XII — Introductory Macroeconomics, Ch 2 (National Income Accounting)