(a) Critically examine 'per capita' GDP as a crude indicator of development. (10 marks) (b) Explain managed floating and…

(a) Per capita GDP Per capita GDP is a useful, comparable measure of average income and long-run growth, but it is a crude development indicator because it compresses welfare into one number. It ignores income distribution: two countries with same per capita GDP can have very different Gini coefficients, and growth may accrue to a small elite. It also excludes non-market activities such as unpaid care, subsistence production and household labour, and it does not subtract environmental externalities, so resource depletion and pollution can raise GDP while lowering well-being. It further misses human development dimensions captured by HDI, such as health, education and capability. It also overlooks social exclusion and institutional quality. India’s GDP rank has often been higher than its HDI rank, showing that income growth alone does not guarantee development; Bhutan’s GNH highlights alternative welfare metrics. Thus per capita GDP is a necessary but insufficient signal of development.

(b) Managed floating and sterilized intervention Managed floating is a hybrid exchange-rate regime in which the market determines the rate, but the central bank intervenes within a band or to prevent excessive volatility. In unsterilized intervention, buying or selling foreign exchange changes the monetary base: buying currency raises domestic money supply, while selling reduces it. Sterilized intervention offsets this monetary effect using open-market operations: if the central bank buys foreign currency and injects rupees, it sells government securities to absorb liquidity; if it sells foreign currency and drains rupees, it buys securities to restore money supply. In India, the Reserve Bank of India has used foreign-exchange swaps, repo operations and open-market operations to smooth rupee movements while protecting the monetary stance and price stability. This is especially relevant when capital flows are volatile. Sterilization preserves monetary policy independence but can be costly, limited by reserves and credibility, and may fail if expectations dominate.

(c) Carbon trading Carbon trading reduces environmental degradation by putting a price on emissions and allowing firms to meet a cap at lowest cost. Under cap-and-trade, a regulator sets an aggregate emissions ceiling and distributes or auctions allowances; firms that cut emissions cheaply can sell surplus allowances to higher-cost emitters. This creates carbon price discovery and incentives for abatement, energy efficiency and low-carbon investment. Theoretically, it applies the Coase theorem: when property rights are well defined and transaction costs are low, bargaining leads to efficient allocation of pollution rights. In reality, transaction costs are non-zero, so market design, monitoring and enforcement matter. A binding cap is essential; a loose cap merely redistributes allowances and compliance costs. India's Perform, Achieve and Trade scheme for energy efficiency and the Carbon Credit Trading Scheme under the Energy Conservation (Amendment) Act, 2022 illustrate this logic. The Indian scheme is an intensity-based baseline-and-credit system: emission-intensity targets were notified for aluminium, cement, chlor-alkali and pulp and paper in 2025 and for refining, petrochemicals and textiles in 2026, and entities that beat their targets earn tradable carbon credit certificates. The EU's Carbon Border Adjustment Mechanism, in its definitive phase from 2026, adds an external reason for Indian exporters to price carbon.

(d) Tariffs and employment The statement is broadly correct under full-employment assumptions, but not universally. Tariffs raise the price of imported goods, making domestic import-competing sectors more profitable. In the Specific Factors Model, labour moves from export or unprotected sectors to the protected sector, raising its wage and employment, while other sectors lose workers; total employment need not rise if the economy is at full capacity. The Stolper-Samuelson theorem is relevant to factor rewards, not aggregate jobs: protection can raise the return to the factor used intensively in the protected sector and lower returns elsewhere. Tariffs may increase aggregate employment only under Keynesian unemployment, fixed exchange rates and no retaliation, by stimulating domestic demand; with retaliation, exchange-rate effects and misallocation, they can reduce welfare, and when all countries raise tariffs (as with the Smoot–Hawley tariff of 1930), world trade and employment fall together. Evidence on the 2018 US steel and aluminium tariffs found small job gains in metal production outweighed by job losses in steel-using manufacturing, owing to higher input costs and foreign retaliation. So the statement is largely true for the economy as a whole, though a tariff can raise employment in a particular sector or, briefly, during a demand slump.

(e) Offer curves and terms of trade Offer curves, or reciprocal demand curves, show the quantities of one good a country is willing to export in exchange for imports of another good. Each curve traces exports offered against imports demanded at different terms of trade. The equilibrium terms of trade are determined where the two offer curves intersect: at that point, the quantity of goods A is willing to export equals the quantity B is willing to import, and vice versa. This is Mill’s equation of international demand, where the value of exports equals the value of imports. If a country’s offer curve shifts outward due to growth, technical change or rising demand for foreign goods, the equilibrium terms of trade move against that country, more sharply the less elastic the partner's offer curve is. Thus offer curves explain how relative demand, supply and growth determine the international price ratio. The equilibrium terms of trade always lie between the two countries' autarky price ratios.