Economic growth — practice question

During 2016, India’s economy expanded by 7.5%, making it the fastest-growing large economy in the world. By comparison, China’s economy increased by 6.8%. India also recorded several other macroeconomic achievements. In 2016, the rise in its price level was smaller than in any year since 2004. Oil prices declined in 2016 and India imports a lot of oil. Government use of monetary policy helped to limit increases in the general price level. India’s manufacturing industry expanded quickly in 2016. One sector that did especially well was the vehicle industry. India was the world’s sixth biggest producer of vehicles and it employed 26 million workers. India was also the world’s largest producer of tractors. In 2015, tractor prices were raised. This caused demand to fall in the short run, but revenue increased. Expansion of the vehicle industry has allowed firms in the industry to hire more specialist workers and has made bank borrowing easier for these larger firms. It is expected that the industry will be able to take on additional workers in the future because India’s labour force is increasing. In 2014, India’s labour force was 500m and this rose by 4% between 2014 and 2016. Fig. 1.1 shows the economic growth rate and the population growth rate in recent years. The rate and steadiness of economic growth influence households’ choices about how much they spend and how much they save. Fig. 1.1 India’s economic growth rate and population growth rate 2010-2016. Growing optimism about how India’s economy is performing has raised total demand in the economy. Even so, the Reserve Bank of India, which is the country’s central bank, has been fairly effective at keeping the inflation rate close to the government’s target, which in 2016 was 4%. A factor affecting the country’s future macroeconomic performance will be changes in its population. By 2020, India is expected to have one of the youngest populations in the world, with an average age of just 29.