2.Nature of Indian Economy and the Concept of Income Inequality

Question 1

What type of economy does India have?

Answer 1

India has a mixed economy.

Question 2

Define a capitalist economy.

Answer 2

A capitalist economy is characterized by private businesses controlling and regulating factors of production such as capital goods, labor, natural resources, and entrepreneurship. Example: USA.

Question 3

What is a socialist economy?

Answer 3

A socialist economy is an economic system where the factors of production, such as labor, natural resources, or capital goods, are under the control of the government, with the main motive being the welfare of the people. Example: USSR.

Question 4

How would you define a mixed economy?

Answer 4

A mixed economic system combines aspects of both capitalism and socialism. Example: India.

Question 5

What are the key features of the Indian economy?

Answer 5

The key features of the Indian economy include being a mixed economy, combining elements of both capitalism and socialism.

Question 6

What type of economy is the Indian economy classified as?

Answer 6

The Indian economy is classified as a developing economy.

Question 7

How is per capita income calculated?

Answer 7

Per capita income is calculated by dividing a country’s national income by its population, providing the average income per person in that country or region.

Question 8

What are the criteria for classifying countries based on their income levels?

Answer 8

The criteria for classifying countries based on their income levels are as follows:

Lower Income Countries: Per capita income < $1046
Lower Middle-Income Countries: Per capita income $1046 to $4095
Upper Middle-Income Countries: Per capita income $4096 to $12,695
Higher Income Countries: Per capita income > $12695

Question 9

What is meant by “capital” in economics?

Answer 9

In economics, “capital” refers to anything that confers value or benefits to its owners, such as factories, machinery, financial assets, or cash used for productive or investment purposes.

Question 10

What is one of the main challenges faced by the Indian economy in terms of natural resources?

Answer 10

The Indian economy faces underutilization of natural resources due to limited capital and inaccessibility.

Question 11

What does “income inequality” mean, and how is it characterized in the Indian economy?

Answer 11

Income inequality refers to the uneven distribution of income throughout a population. The Indian economy is characterized by high income inequality.

Question 12

What are the four factors of production, and what specific factor income is associated with each?

Answer 12

The four factors of production are Land, Labour, Capital, and Entrepreneurship. The specific factor income associated with each factor is:

Land: Rent
Labour: Wages
Capital: Interest
Entrepreneurship: Profit

Question 13

What was the condition of the Indian economy regarding the scarcity of capital after independence?

Answer 13

After independence, the Indian economy was characterized by a scarcity of capital.

Question 14

What improvement was seen in the Indian economy after 1991 regarding capital formation?

Answer 14

After 1991, there was a steady improvement in capital formation in the Indian economy.

Question 15

What are the two types of inequality discussed in the text?

Answer 15

The two types of inequality are Pay Inequality and Wealth Inequality.

Question 16

Define Pay Inequality.

Answer 16

Pay Inequality refers to the disparity in payment received from employment only.

Question 17

What does Wealth Inequality measure?

Answer 17

Wealth Inequality measures the total amount of assets owned by an individual or household.

Question 18

What is the Kuznets Curve used for?

Answer 18

The Kuznets Curve is used to demonstrate the hypothesis that economic growth initially leads to greater inequality followed by later reduction of inequality.

Question 19

Who developed the Lorenz Curve and what does it represent?

Answer 19

The Lorenz Curve was developed by Max O. Lorenz in 1905 and represents the inequality of wealth distribution within a population.

Question 20

What does the Lorenz Curve indicate as it moves away from the line of Equality?

Answer 20

As the Lorenz Curve moves away from the line of Equality, the Inequality will increase.

Question 21

What is the Gini Coefficient and how is it derived?

Answer 21

The Gini Coefficient is a statistical measure of inequality derived from the Lorenz Curve. It describes how equal or unequal income or wealth is distributed among the population of a country.

Question 22

What is the range of the Gini Coefficient, and what do its values signify?

Answer 22

The Gini Coefficient ranges from 0 to 1. A value of 0 represents perfect equality, and a value of 1 represents perfect inequality. The higher the Gini Coefficient, the higher the level of inequality.

Question 23

Who proposed the hypothesis of the Kuznets Curve?

Answer 23

Simon Kuznets

Question 24

What does the Kuznets Curve show the relationship between?

Answer 24

Income per capita and inequality

Question 25

What type of economy is associated with high inequality and low income per capita on the Kuznets Curve?

Answer 25

Developing economy

Question 26

What type of economy is associated with low inequality and high income per capita on the Kuznets Curve?

Answer 26

Developed economy

Question 27

What is the Kuznets curve?

Answer 27

The Kuznets curve is a hypothesis advanced by economist Simon Kuznets in the 1950s and 1960s. It states that economic growth initially leads to greater inequality, followed by later reduction of inequality.

Question 28

What is the relationship between income and capital?

Answer 28

The Kuznets curve hypothesizes that as income per capita increases, inequality initially increases as well. This is because the benefits of economic growth are initially concentrated among the wealthy, who own more capital. However, as the economy continues to grow, the benefits of growth become more widely distributed, leading to a decline in inequality.

Question 29

What are the two phases of the Kuznets curve?

Answer 29

Some of the factors that explain the Kuznets curve include:

The distribution of capital. As the economy grows, the distribution of capital becomes more unequal. This is because the wealthy are more likely to invest in new businesses and technologies, which leads to even more wealth accumulation.
The nature of economic growth. If economic growth is driven by capital-intensive industries, such as manufacturing, then inequality will tend to increase. However, if economic growth is driven by labor-intensive industries, such as services, then inequality will tend to decrease.
Government policies. Government policies can also affect the Kuznets curve. For example, progressive taxation and social welfare programs can help to reduce inequality.

Question 30

What are the two phases of the Kuznets curve?

Answer 30

Some of the factors that explain the Kuznets curve include:

The distribution of capital. As the economy grows, the distribution of capital becomes more unequal. This is because the wealthy are more likely to invest in new businesses and technologies, which leads to even more wealth accumulation.
The nature of economic growth. If economic growth is driven by capital-intensive industries, such as manufacturing, then inequality will tend to increase. However, if economic growth is driven by labor-intensive industries, such as services, then inequality will tend to decrease.
Government policies. Government policies can also affect the Kuznets curve. For example, progressive taxation and social welfare programs can help to reduce inequality.

Question 31

What are the limitations of the Kuznets curve?

Answer 31

The Kuznets curve has a number of limitations, including:

It is based on historical data from a limited number of countries.
It is a simplistic model that does not take into account all of the factors that affect inequality.
It is difficult to predict when the downswing phase of the curve will occur.
Despite its limitations, the Kuznets curve remains an important tool for understanding the relationship between economic growth and inequality.

Question 32

What does the Lorenz Curve measure?

Answer 32

The degree of income inequality in a population

Question 33

What does the line of equality represent on the graph?

Answer 33

A hypothetical situation where income is equally distributed among all households

Question 34

What does the shaded area between the Lorenz Curve and the line of equality indicate?

Answer 34

The extent of income inequality in a population

Question 35

What does it mean if the Lorenz Curve is closer to the line of equality?

Answer 35

It means that income inequality is lower in that population

Question 36

What is a Lorenz curve?

Answer 36

A Lorenz curve is a graphical representation of the distribution of income or wealth within a population. It is a cumulative distribution function that plots the cumulative percentage of income or wealth against the cumulative percentage of people.

Question 37

What does the Lorenz curve show us?

Answer 37

The Lorenz curve shows us how evenly income or wealth is distributed in a population. A perfectly equal distribution would be represented by a line that goes straight up from the bottom left corner to the top right corner. A more unequal distribution would be represented by a curve that is further away from the line of perfect equality.

Question 38

What is the Gini coefficient?

Answer 38

The Gini coefficient is a measure of income inequality that is calculated from the Lorenz curve. It is a number between 0 and 1, where 0 represents perfect equality and 1 represents perfect inequality.

Question 39

What does the Gini coefficient tell us?

Answer 39

The Gini coefficient tells us how unequal income or wealth is distributed in a population. A higher Gini coefficient indicates a more unequal distribution, while a lower Gini coefficient indicates a more equal distribution.

Question 40

What are some factors that can affect the Gini coefficient?

Answer 40

Some factors that can affect the Gini coefficient include:

The level of economic development. In general, countries with lower levels of economic development tend to have higher Gini coefficients.
The distribution of wealth. Countries with more unequal distributions of wealth tend to have higher Gini coefficients.
Government policies. Government policies can affect the Gini coefficient by redistributing income or wealth. For example, progressive taxation and social welfare programs can help to reduce inequality.

Question 41

What are some of the limitations of the Lorenz curve and the Gini coefficient?

Answer 41

The Lorenz curve and the Gini coefficient have a number of limitations, including:

They are only a measure of income or wealth inequality. They do not take into account other factors that can affect inequality, such as access to education and healthcare.
They are based on a snapshot of a population at a single point in time. They do not take into account changes in inequality over time.
They are sensitive to the way that income or wealth is measured. Different methods of measurement can lead to different results.
Despite their limitations, the Lorenz curve and the Gini coefficient are important tools for understanding income or wealth inequality. They can be used to compare inequality across countries and over time, and to identify factors that can affect inequality.

Question 42

What is the Gini coefficient?

Answer 42

The Gini coefficient is a measure of income inequality that is calculated from the Lorenz curve. It is a number between 0 and 1, where 0 represents perfect equality and 1 represents perfect inequality.

Question 43

What are some factors that can affect the Gini coefficient?

Answer 43

Some factors that can affect the Gini coefficient include:

The level of economic development. In general, countries with lower levels of economic development tend to have higher Gini coefficients.
The distribution of wealth. Countries with more unequal distributions of wealth tend to have higher Gini coefficients.
Government policies. Government policies can affect the Gini coefficient by redistributing income or wealth. For example, progressive taxation and social welfare programs can help to reduce inequality.

Question 44

What are some of the limitations of the Gini coefficient?

Answer 44

The Gini coefficient has a number of limitations, including:

It is only a measure of income inequality. It does not take into account other factors that can affect inequality, such as access to education and healthcare.
It is based on a snapshot of a population at a single point in time. It does not take into account changes in inequality over time.
It is sensitive to the way that income is measured. Different methods of measurement can lead to different results.
Despite its limitations, the Gini coefficient is an important tool for understanding income inequality. It can be used to compare inequality across countries and over time, and to identify factors that can affect inequality.

Question 45

What is the name of the statistical measure of inequality that is derived from the Lorenz Curve?

Answer 45

Gini Coefficient

Question 46

What does the Gini Coefficient range from and what do the values mean?

Answer 46

The Gini Coefficient ranges from 0 to 1, where 0 means perfect equality and 1 means perfect inequality.

Question 47

What does the perfect distribution line on the graph represent?

Answer 47

A hypothetical situation where income or wealth is equally distributed among all people.

Question 48

What does the area between the Lorenz Curve and the perfect distribution line indicate?

Answer 48

The degree of inequality in a population.

Question 49

How can the Gini Coefficient be calculated from the graph?

Answer 49

The Gini Coefficient can be calculated by dividing the area between the Lorenz Curve and the perfect distribution line by the total area under the perfect distribution line.