MPSC 2024 Prelims Paper-I · Question 47 of 100

Correct — option (3), only (a). The question turns on the distinction between autonomous and induced investment, and on the fact that population growth does not act the same way in a rich economy as in a poor one. Autonomous investment is investment undertaken independently of the current level of income or profit: houses, schools, water supply, roads, power and the other capital a larger population requires simply by existing. Induced investment is investment called forth by a rise in income and demand that has already happened — the accelerator mechanism. In a developed economy, additional people arrive into an economy that already has savings, entrepreneurship, credit and an integrated market, and they arrive as both a larger workforce and a larger market; the housing and infrastructure they need has to be built whether or not profits are currently high, so population growth acts as a standing outlet for autonomous investment. That is precisely the channel Alvin Hansen relied on in reverse when he argued that the slowing of population growth in mature economies had removed one of the great historical outlets for investment and helped produce secular stagnation. In an under-developed economy the arithmetic is different: additional people arrive without additional purchasing power, so effective demand does not rise in step, the extra output goes into feeding a larger population rather than into savings, and scarce capital has to be spread more thinly over more workers instead of being deepened. Population growth there is a claim on resources rather than an inducement to invest, which is why statement (b) does not stand and why the argument printed here as Higgins's — the paper spells the name 'Higins' — leaves statement (a) alone as the surviving proposition.

• (1)(a) and (b) — This keeps statement (a) but adds statement (b), which claims population growth motivates induced investment in under-developed countries. Induced investment responds to a rise in income and demand that has already occurred, and that is exactly what a growing population in a poor economy fails to deliver: the additional people bring additional mouths but not additional purchasing power, so the extra numbers show up as pressure on land, food and existing capital rather than as the expanding market an investor would respond to. This is the standard case for treating rapid population growth in a poor economy as a burden on capital formation, and adding it to the correct statement converts a right answer into a wrong one.
• (2)only (d) — Statement (d) — that population growth demotivates autonomous investment in a developed country — is the flat contradiction of statement (a), and it inverts the historical argument. A growing population in a rich economy creates an unavoidable programme of construction in housing, schooling, transport and utilities, which is investment that proceeds without waiting on current profitability; it is the fall in population growth, not its rise, that removes that stimulus, which is the core of the secular stagnation argument. Taking this statement alone therefore asks the candidate to believe the opposite of the proposition the item is testing.
• (4)(b) and (c) — This pairs statement (b) with statement (c) and so gets both halves wrong. Statement (b) attributes an inducement to invest to population growth in poor economies, which is the burden case reversed. Statement (c) then restricts the developed-country effect to induced investment 'only' — and the single word 'only' is what destroys it, because the argument's whole point is that a rising population in a rich economy generates autonomous investment in social and physical overhead capital, quite apart from any accelerator response. A statement can be made false by an exclusion added to an otherwise reasonable claim, and that is what has happened here.

Investment is classified by what triggers it. Induced investment is a response to a change in output or income already realised — the accelerator says that a rise in demand requires more capital equipment to service it, so investment moves with the change in national income. Autonomous investment is independent of current income: it is undertaken because of population growth, technical innovation, the opening of new territory or a public decision, and it continues even in a depression. The distinction matters for population economics because the two channels respond to demographic change in opposite ways depending on the stage of development. A rich economy has idle savings, a developed capital market and entrepreneurs looking for outlets, so an extra million people constitute an extra million houses to build, schools to staff and services to lay on — a demand for capital that does not wait for profits to justify it. A poor economy has the opposite problem: savings are already scarce, and an extra million people consume the surplus that might have financed investment, so capital has to be widened across a larger workforce rather than deepened, and output per head stagnates. The same demographic fact is therefore an investment opportunity in one setting and a drag on capital formation in the other, which is the asymmetry the four statements in this question permute.

MPSC's population-and-development questions are usually built by taking one clean proposition and generating three near-misses from it — swapping developed for under-developed, autonomous for induced, motivate for demotivate, or inserting a restrictive word such as 'only'. The correct statement is generally the one that survives all four substitutions, which means the productive way to attack such an item is to hold the two axes in mind separately: the type of investment on one axis, the stage of development on the other, and then check each printed statement against the cell it claims. That discipline is more reliable here than trying to recall the exact wording of any one author, particularly since the Commission prints economists' names in unusual transliteration — this stem gives 'Higins' for Higgins — and a candidate who does not recognise the name can still answer the question from the economics.

• Autonomous investment is undertaken independently of the current level of income or profit and is driven by population growth, innovation and public decision; induced investment is the accelerator response to a rise in income and demand that has already occurred.
• In a developed economy a growing population creates an unavoidable demand for housing, schooling, transport and utilities, which is autonomous investment because it proceeds whether or not current profitability justifies it.
• In an under-developed economy population growth adds consumers without adding purchasing power, absorbing the surplus that might have financed investment and forcing capital to be widened across more workers rather than deepened.
• Alvin Hansen's secular stagnation thesis argued the same relation in reverse — that the slowing of population growth in mature economies removed one of the historic outlets for investment and depressed the demand for capital.
• Benjamin Higgins, to whom this stem attributes the proposition, is a development economist known for the textbook Economic Development: Principles, Problems and Policies and for the theory of technological dualism, which explains persistent underemployment by the different factor proportions of the modern and traditional sectors.

• Swapping developed for under-developed while keeping the rest of a statement intact, which is how the wrong statements in this item are manufactured
• Treating autonomous and induced investment as interchangeable words for investment, when the whole question rests on what triggers each
• Missing a restrictive word such as 'only' that converts a broadly reasonable statement into a false one
• Assuming population growth must have the same sign everywhere, when the same demographic fact is an investment outlet in a capital-rich economy and a claim on scarce savings in a capital-poor one

MPSC sets development-economics propositions as four-statement lists in which the statements are systematic permutations of one another, so the examiner is testing whether a candidate can hold two variables at once rather than whether a quotation has been memorised. The recurring pairs worth carrying are autonomous against induced investment, capital widening against deepening, absolute against relative poverty, and spread against backwash effects. Expect the associated names — Higgins, Nurkse, Myrdal, Hansen, Lewis — to appear in transliterations that differ from the standard spelling, and answer from the economics rather than from the spelling.

No directly related past PYQ was found.

• practice — not a real PYQ

  Which one of the following is the defining feature of autonomous investment as distinct from induced investment ?

  • (a)It is undertaken only by the public sector
  • (b)It is independent of the current level of income and profit
  • (c)It always exceeds induced investment in magnitude
  • (d)It occurs only during periods of inflation

  Answer(b) It is independent of the current level of income and profit — autonomous investment is driven by population growth, innovation, new territory or a public decision, and continues even in a depression, whereas induced investment is the accelerator response to a rise in income that has already occurred. It is not confined to the public sector, has no fixed relation of magnitude to induced investment, and is not tied to inflation.

• practice — not a real PYQ

  The proposition that a slowing rate of population growth reduces the outlets for investment and thereby contributes to stagnation in a mature economy is associated with which economist ?

  • (a)Alvin Hansen
  • (b)Ragnar Nurkse
  • (c)Gunnar Myrdal
  • (d)Arthur Lewis

  Answer(a) Alvin Hansen — his secular stagnation thesis attributed the weakness of investment demand in mature economies partly to demographic slowdown and the exhaustion of new territory, which is the same population-to-autonomous-investment link read in reverse. Nurkse is associated with the vicious circle of poverty, Myrdal with circular and cumulative causation, and Lewis with the dual-sector model of unlimited labour supply.