Task for 26-07-2023

Question 1: Describe the concept of demographic dividend. Illustrate the concept with a
country where demographic dividend is present. Do you think an ageing population can have
negative impact on economic growth? Discuss in the context of a particular country.

Note: The 2 countries illustrated, respectively, for demographic dividend and ageing
population should be different.

Answer: This answer is divided into the following parts:

1. Concept of Demographic Dividend: The demographic dividend refers to the economic
growth potential that arises from changes in a country's age structure, particularly
when it experiences a decline in fertility and mortality rates. This demographic
transition leads to a shift in the population's age distribution, resulting in a higher
proportion of working-age individuals relative to dependent populations (children and
elderly). The increased proportion of working-age individuals creates a window of
opportunity for accelerated economic growth, given that these individuals are more
likely to be productive and contribute to the economy.
Illustration of Demographic Dividend:India is a prime example of a country that has
experienced or is experiencing a demographic dividend. The country's population profile
shifted dramatically over the past few decades due to declining birth rates and improvements
in healthcare, leading to an increase in the working-age population.
India's demographic dividend emerged around the early 2000s and is expected to continue
until approximately 2040. During this period, a significant portion of the population will be in
their productive years, providing a potential boost to the economy. This demographic
advantage offers India an opportunity to harness its youthful workforce and promote
economic development through increased labor supply, higher savings, and investments.
2. Impact of Ageing Population on Economic Growth:An ageing population,
characterized by a rising proportion of elderly individuals relative to the working-age
population, can indeed have negative implications for economic growth. One country
facing this demographic challenge is Japan.
Illustration: Japan
Japan has been grappling with an ageing population for several decades. The country has one
of the highest life expectancies in the world and a declining birth rate, resulting in a rapidly
ageing society. The demographic shift poses several economic challenges:

1. Labor Force Shrinkage: As the working-age population declines, there is a reduction in the
available labor force, leading to potential labor shortages in various sectors.
2. Increased Dependency Ratio: With a larger proportion of elderly individuals, there is an
increased burden on the working-age population to support them through social welfare
systems, pensions, and healthcare services. This can strain public finances.
3. Reduced Consumer Spending: Older individuals tend to spend less and save more, which
can dampen overall consumer spending, impacting businesses and economic growth.
4. Innovation and Productivity:Ageing societies may face challenges in fostering innovation
and maintaining productivity levels as the workforce ages.
5. Pressure on Healthcare System: The ageing population requires more healthcare services,
further straining the healthcare system.
6. Potential for Deflation: An ageing population can lead to reduced aggregate demand,
potentially contributing to deflationary pressures.
To address these challenges, Japan has been exploring policies such as increasing the
retirement age, promoting women's participation in the workforce, and encouraging
immigration to mitigate the impact of an ageing population on economic growth.
In summary, while a demographic dividend can present a unique opportunity for economic
growth, an ageing population can indeed have negative effects on a country's economic
prospects. By understanding these demographic dynamics, policymakers can devise
appropriate strategies to harness the benefits of a young population and navigate the
challenges of an ageing society.
3. Mathematical Exposition of Demographic Dividend:
Let's consider a country's population over time and examine the concept of demographic
dividend mathematically. Suppose we have a population at time t, denoted by P(t). The
population can be divided into three age groups: children (C), working-age individuals (W),
and elderly (E).
We can express the population at time t as follows:
P(t) = C(t) + W(t) + E(t)
Now, let's focus on the working-age population (W) and denote it as W(t). The size of the
working-age population can be represented as the difference between the total population and
the populations of children and elderly:
W(t) = P(t) - C(t) - E(t)
As the country experiences a demographic transition with declining birth and mortality rates,
the proportion of children (C) and elderly (E) in the population decreases, leading to an
increase in the proportion of working-age individuals (W). This change can be quantified
using the dependency ratio, which represents the number of dependents (C and E) relative to
the working-age population (W).
Dependency Ratio (DR) at time t:
DR(t) = (C(t) + E(t)) / W(t)
As the dependency ratio decreases over time due to a declining proportion of children and
elderly, there is a corresponding increase in the proportion of working-age individuals. This
shift in the age structure indicates the onset of the demographic dividend.
 4. Mathematical Exposition of Ageing Population:
Let's now mathematically explore the concept of an ageing population using the example of
Japan. Consider the population of Japan at time t, denoted by P(t). We'll again divide the
population into the same three age groups: children (C), working-age individuals (W), and
elderly (E).
Population at time t:
P(t) = C(t) + W(t) + E(t)
The proportion of elderly individuals in the population can be represented as follows:
Proportion of Elderly (PE) at time t:
PE(t) = E(t) / P(t)
As Japan experiences low birth rates and longer life expectancy, the proportion of elderly
individuals in the population (PE) increases over time. This leads to a higher dependency
ratio, as there are more elderly individuals to support relative to the working-age population.
Dependency Ratio (DR) at time t:
DR(t) = (C(t) + E(t)) / W(t)
With a rising dependency ratio and a shrinking working-age population, Japan faces
challenges in terms of labor shortages, increased pressure on social welfare systems, reduced
consumer spending, and potential impacts on economic growth, as described in the previous
explanation.
5. Numerical Example of Demographic Dividend in India:
Let's consider the population data for India for the years 2020, 2035, and 2050:

Year Population in Children till 14 years Working age from

millions of age 15-64
2020 1400 400 800
2035 1600 350 1000
2050 1800 300 1200

Let us now calculate the dependency ratio (DR) for each time period:
1. For 2020:
DR(2020) = (Children + Elderly) / Working-Age = (400) / (800) = 0.5
2. For 2035:
DR(2035) = (350) / (1000) = 0.35
3. For 2050:
DR(2050) = (300) / (1200) = 0.25
As we can see, India's dependency ratio decreases over time, indicating a declining
proportion of dependents (children) relative to the working-age population. This demographic
transition presents a demographic dividend opportunity for India, as a larger proportion of the
population enters the working-age category, potentially leading to higher economic growth.

6. Numerical Example of Ageing Population in Japan:

Let's consider the population data for Japan for the years 2020, 2035, and 2050:
Year Population in Children (to 14) Working age Elderly (65+)
millions (15-64)
2020 125 20 70 35
2035 110 15 60 35
2050 100 10 50 40

Now, let's calculate the dependency ratio (DR) for each time period:
1. For 2020:
DR(2020) = (Children + Elderly) / Working-Age = (20 + 35) / (70) = 0.7857
2. For 2035:
DR(2035) = (15 + 35) / (60) = 0.8333
3. For 2050:
DR(2050) = (10 + 40) / (50) = 1.0

As we can observe, Japan's dependency ratio increases over time, indicating a rising
proportion of dependents (elderly) relative to the working-age population. This demographic
shift signifies an ageing population, which can pose economic challenges for Japan, such as
labor force shrinkage, increased burden on social welfare, reduced consumer spending, and
potential impacts on economic growth.

Questions for UGC NET-Economics

1. Question: Which economic theory suggests that people form their expectations about
future inflation based on past inflation rates?
a) Adaptive expectations theory
b) Rational expectations theory
c) Behavioral economics
d) Friedman's monetarism
2. Question: In game theory, what is the outcome when each player chooses the best response
given the other players' choices?
a) Nash equilibrium
b) Pareto optimality
c) Prisoner's dilemma
d) Dominant strategy equilibrium

3. Question: According to the "Efficient Market Hypothesis," what happens when new
information becomes available in financial markets?
a) Prices adjust slowly to new information
b) Prices overreact to new information
c) Prices quickly and accurately reflect new information
d) Prices remain unaffected by new information

4. Question: The term "balance of payments" in international economics refers to the:

a) Difference between total exports and total imports
b) Sum of all government revenues and expenditures
c) Difference between capital inflows and capital outflows
d) Record of all international financial transactions over a specific period

5. Question: In the context of the "Heckscher-Ohlin model," which factor of production is

considered to be most abundant in a country?
a) Capital
b) Labor
c) Technology
d) Land

6. Question: The "Lorenz curve" is used to represent:

a) The relationship between unemployment and inflation
b) Income inequality in an economy
 c) The production possibilities frontier
d) The impact of government spending on GDP

7. Question: Which type of unemployment occurs when workers' skills do not match
available job opportunities?
a) Cyclical unemployment
b) Structural unemployment
c) Frictional unemployment
d) Seasonal unemployment

8. Question: The "Hicksian demand" is derived from the consumer's utility-maximizing

choice subject to:
a) The consumer's income and prices of goods
b) The consumer's preferences and budget constraints
c) The consumer's willingness to pay for goods
d) The consumer's price elasticity of demand for goods

9. Question: According to the "Ricardian equivalence," when the government increases its
borrowing and runs a budget deficit, what will households do?
a) Increase saving to pay for future tax liabilities
b) Increase consumption due to the expectation of higher government spending
c) Reduce saving to take advantage of government spending programs
d) Reduce consumption due to the expectation of higher future taxes

10. Question: The "Fisher effect" suggests that an increase in expected inflation will lead to:
a) An increase in nominal interest rates
b) A decrease in nominal interest rates
c) A decrease in real interest rates
d) No change in nominal interest rates

11. Question: In the context of environmental economics, what is the "Coase theorem" about?
 a) Government intervention to correct market failures related to environmental issues
b) The tragedy of the commons and overexploitation of resources
c) The efficient allocation of resources through bargaining between parties
d) The negative externality associated with pollution

12. Question: Which theory of exchange rate determination suggests that the exchange rate is
determined by the relative price levels of two countries?
a) Purchasing power parity (PPP)
b) Interest rate parity (IRP)
c) Uncovered interest rate parity (UIP)
d) Asset market model

13. Question: In the context of "public goods," what is meant by the "free-rider problem"?
a) The government providing goods and services without charging for them
b) The inability to exclude non-payers from benefiting from a public good
c) The government providing subsidies for public goods
d) The exclusion of private firms from providing public goods

14. Question: Which economic model explains trade patterns based on differences in factor
endowments between countries?
a) Ricardian model
b) Heckscher-Ohlin model
c) Gravity model
d) Linder's theory

15. Question: According to the "Phillips curve," what happens in the long run if policymakers
attempt to reduce unemployment below the natural rate?
a) Inflation will decrease
b) Inflation will increase
c) Unemployment will decrease
d) Unemployment will increase
16. Question: In the context of fiscal policy, what is "crowding out"?
a) A situation where government spending increases private sector investment
b) A situation where government spending displaces private sector investment
c) A situation where government debt is fully financed by private investment
d) A situation where government spending leads to increased inflation

17. Question: Which economic model assumes that individuals have rational expectations and
adjust their behavior based on all available information?
a) Classical economics
b) Keynesian economics
c) Rational expectations theory
d) Adaptive expectations theory

18. Question: What is the "comparative advantage" of a country in international trade?

a) The ability to produce a good at a lower opportunity cost than other countries
b) The ability to produce a good with superior technology and capital resources

c) The ability to produce a good at a higher opportunity cost than other countries
d) The ability to produce a good with a higher market share

19. Question: In the context of financial markets, what does the term "systematic risk" refer
to?
a) Risk specific to a particular investment or asset
b) Risk that affects the entire market or a broad range of investments
c) Risk associated with interest rate fluctuations
d) Risk associated with changes in exchange rates

20. Question: The "Tragedy of the Commons" refers to the:

a) Failure of government regulation in managing common-pool resources
 b) Overconsumption or depletion of shared resources due to self-interested behavior
c) Inability of markets to efficiently allocate public goods
d) Inequitable distribution of resources in a market economy

21. Question: The "Taylor rule" is a monetary policy guideline that recommends adjusting
nominal interest rates based on changes in:
a) Inflation and unemployment rates
b) Government spending and fiscal deficits
c) The money supply and exchange rates
d) Exchange rates and international trade balances

22. Question: Which market structure is characterized by a few firms producing identical or
homogeneous products?
a) Monopoly
b) Monopolistic competition
c) Oligopoly
d) Perfect competition

23. Question: The concept of "marginal rate of substitution" measures the rate at which a
consumer is willing to:
a) Substitute one good for another while keeping utility constant
b) Reduce consumption of a good to maximize utility
c) Increase consumption of a good to maximize utility
d) Invest in capital goods to increase future consumption

24. Question: According to the "expectations-augmented Phillips curve," what will happen if
policymakers try to reduce unemployment below the natural rate?
a) The short-run trade-off between inflation and unemployment will hold
b) The short-run trade-off between inflation and unemployment will disappear
c) The natural rate of unemployment will increase
d) The natural rate of unemployment will decrease
25. Question: In the Mundell-Fleming model, what happens to the domestic currency's
exchange rate when there is an increase in money supply?
a) The currency appreciates due to higher interest rates
b) The currency appreciates due to lower interest rates
c) The currency depreciates due to higher interest rates
d) The currency depreciates due to lower interest rates

26. Question: The "Kuznets curve" suggests that income inequality tends to decrease with
economic development due to:
a) Changes in government policies promoting redistribution of wealth
b) The natural convergence of income levels over time
c) The positive relationship between economic growth and income distribution
d) The negative relationship between economic growth and income distribution

27. Question: In the context of international trade, which theory suggests that countries
should specialize in producing goods in which they have a(n):
a) Absolute advantage
b) Comparative advantage
c) Autarky advantage
d) Increasing opportunity cost

28. Question: The "Laffer curve" illustrates the relationship between tax rates and tax
revenue. At what point on the curve does tax revenue maximize?
a) At the point where tax rates are zero
b) At the point where tax rates are 100%
c) At the point where tax rates are 50%
d) It depends on the elasticity of taxable income

29. Question: Which of the following is an example of a fiscal policy tool used to combat
inflation?
a) Decreasing government spending
b) Increasing taxes
 c) Reducing the money supply
d) Lowering interest rates

30. Question: According to the "efficient market hypothesis," what is the implication of
weak-form efficiency in financial markets?
a) Technical analysis can consistently beat the market
b) Fundamental analysis can consistently beat the market
c) Historical price patterns cannot be used to predict future prices
d) All publicly available information is fully reflected in security prices

Answers and Explanations:

1. Answer: a) Adaptive expectations theory
Explanation: Adaptive expectations theory suggests that people form their expectations
based on past inflation rates.

2. Answer: a) Nash equilibrium

Explanation: Nash equilibrium occurs when each player chooses the best response given
the other players' choices.

3. Answer: c) Prices quickly and accurately reflect new information

Explanation: The Efficient Market Hypothesis states that prices fully reflect all available
information.

4. Answer: d) Record of all international financial transactions over a specific period

Explanation: The balance of payments is a record of all international financial transactions.

5. Answer: b) Labor
Explanation: The Heckscher-Ohlin model considers labor to be the most abundant factor of
production in a country.

6. Answer: b) Income inequality in an economy

Explanation: The Lorenz curve illustrates income distribution in an economy.
7. Answer: b) Structural unemployment
Explanation: Structural unemployment occurs when workers' skills do not match available
job opportunities.

8. Answer: b) The consumer's preferences and budget constraints

Explanation: Hicksian demand is derived from utility-maximizing choices subject to budget
constraints.

9. Answer: a) Increase saving to pay for future tax liabilities

Explanation: According to the Ricardian equivalence, households increase saving when the
government runs a budget deficit.

10. Answer: a) An increase in nominal interest rates

Explanation: The Fisher effect suggests that an increase in expected inflation will lead to
higher nominal interest rates.

11. Answer: c) The efficient allocation of resources through bargaining between parties
Explanation: The Coase theorem is about efficient resource allocation through private
bargaining.

12. Answer: a) Purchasing power parity (PPP)

Explanation: The PPP theory suggests that exchange rates adjust to equalize price levels
across countries.

13. Answer: b) The inability to exclude non-payers from benefiting from a public good
Explanation: The free-rider problem arises because public goods are non-excludable.

14. Answer: b) Heckscher-Ohlin model

Explanation: The Heckscher-Ohlin model explains trade patterns based on differences in
factor endowments.

15. Answer: b) Inflation will increase

 Explanation: According to the Phillips curve, reducing unemployment below the natural
rate will increase inflation in the long run.

16. Answer: b) A situation where government spending displaces private sector investment
Explanation: Crowding out occurs when increased government spending reduces private
investment.

17. Answer: c) Rational expectations theory

Explanation: Rational expectations theory assumes that individuals form expectations
based on all available information.

18. Answer: a) The ability to produce a good at a lower opportunity cost than other countries
Explanation: Comparative advantage is the ability to produce a good at a lower opportunity
cost.

19. Answer: b) Risk that affects the entire market or a broad range of investments
Explanation: Systematic risk is also known as market risk and affects all investments.

20. Answer: b) Overconsumption or depletion of shared resources due to self-interested

behavior
Explanation: The Tragedy of the Commons occurs when individuals overuse or deplete
shared resources.

21. Answer: a) Inflation and unemployment rates

Explanation: The Taylor rule links nominal interest rates to inflation and unemployment
rates.

22. Answer: d) Perfect competition

Explanation: In perfect competition, there are many firms producing identical products.

23. Answer: a) Substitute one good for another while keeping utility constant
Explanation: The marginal rate of substitution represents the rate at which a consumer is
willing to trade one good for another while maintaining the same level of utility.
24. Answer: b) The short-run trade-off between inflation and unemployment will disappear
Explanation: According to the expectations-augmented Phillips curve, the short-run trade-
off is temporary.

25. Answer: c) The currency depreciates due to higher interest rates

Explanation: An increase in money supply leads to higher inflation and, in the Mundell-
Fleming model, depreciation of the domestic currency.

26. Answer: c) The positive relationship between economic growth and income distribution
Explanation: The Kuznets curve suggests that income inequality decreases with economic
development.

27. Answer: b) Comparative advantage

Explanation: Comparative advantage is the ability to produce a good at a lower opportunity
cost than other countries.

28. Answer: b) At the point where tax rates are 100%

Explanation: At 100% tax rates, taxpayers would have no incentive to earn taxable income,
resulting in zero tax revenue.

29. Answer: d) Lowering interest rates

Explanation: Lowering interest rates is a fiscal policy tool used to combat inflation.

30. Answer: c) Historical price patterns cannot be used to predict future prices
Explanation: Weak-form efficiency implies that past price patterns are not useful for
predicting future prices in financial markets.

I hope you find these questions and explanations helpful for your UGC NET Economics
preparation!