UPSC Prelims 2000 · General Studies

Question 94: Economy and Social Development

In an open economy, the national income (Y) of the economy is: (C, I, G, X, M stand for Consumption, Investment, Government Expenditure, total exports and total imports respectively.)

aY = C + I + G + X

bY = C + I + G – X + M

cY = C + I + G + (X – M)

dY = C + I – G + X – M

AnswerThe answer is (c).

In an open economy, national income equals Consumption plus Investment plus Government expenditure plus net exports: Y = C + I + G + (X - M). Exports add to demand for domestic output and imports are demand met from abroad, so imports are subtracted. In a closed economy X and M are zero and the identity becomes Y = C + I + G.

Why each option is right or wrong

(a) Leaves out imports, so it counts only exports.
(b) Subtracts exports and adds imports, which is the wrong way round.
(c) Right: Y = C + I + G + (X - M).
(d) Subtracts government expenditure instead of adding it.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2000, General Studies. UPSC's own paper isn't online; the words are from a published compilation. The paper on upsc.gov.in.