Daily Quiz

Solution.
A. Income tax, 1860. Introduced by James Wilson to repair the finances after the revolt of 1857,
the oldest entry by nine decades.

B. Finance Commission, 1950-51. Article 280 of the Constitution provided for it and the first commission
was constituted in 1951 under K.C. Neogy.

D. FRBM Act, 2003. The fiscal responsibility law setting deficit targets.

C. GST, 2017. Rolled out on 1 July 2017 after the 101st Constitutional Amendment.

E. 16th Finance Commission, 2023. Constituted in December 2023 under Arvind Panagariya, with its award
to run from 2026-27.

The order is A, B, D, C, E, option (1). Options (3) and (4) fail at the first step by placing the Finance
Commission before the income tax, a ninety-year error. Option (2) puts GST before the FRBM Act, reversing
2017 and 2003.

Solution.
Assertion A is correct. This is the central claim of Ricardo’s chapter on foreign trade: even a
country less productive in everything gains by trading, which is what separates his theory from Adam Smith’s
absolute advantage, under which such a country would have nothing to sell.

Reason R is correct. Comparative advantage is a statement about relative costs. A country exports the good
in which its cost disadvantage is smallest in proportional terms, because opportunity costs, not absolute input
requirements, decide the gains.

R explains A. It supplies the exact mechanism behind the assertion. The absolutely disadvantaged country
still has a good whose relative cost at home is lower than abroad, specialising in it and trading yields more
of both goods than self-sufficiency, and that is why absolute disadvantage in everything is no bar to gain.
Ricardo’s own England-Portugal example makes the point: Portugal is better at both wine and cloth, yet both
countries gain when each follows its comparative advantage.

Solution.
The benefit principle comes first. Taxation as payment for services received is the oldest justification,
running from the contract theorists of the seventeenth century through the early public finance writers:
taxes are the price of protection and public services.

Ability to pay follows, displacing benefit as the norm of fairness in the classical era. Smith’s first maxim
already gestures at it, and Mill made sacrifice the measure, taxing according to capacity rather than benefit
received.

Equity and efficiency considerations mark the next stage: the recognition that the two norms pull against
each other and that tax design must weigh fairness against the distortions taxes create.

The deadweight loss concept gave that trade-off its measuring rod, the excess burden triangle, quantifying
the efficiency cost of a tax beyond the revenue it raises.

Optimal taxation theory is the modern synthesis, from Ramsey’s rule to Mirrlees’s income tax analysis
(1971), which turns the equity-efficiency balance into a formal maximisation problem.

The sequence is B, A, D, E, C, option (1). Option (2) runs oldest-to-latest in the printed order, which fails at
the start since benefit precedes ability to pay. Option (3) begins with the newest theory.

Solution.
The notation follows one convention throughout statistics: Greek letters denote population parameters,
Latin letters denote sample statistics.

A. ¯X : II, the sample mean. A Latin letter with a bar, computed from observed data.

B. μ: III, the population mean. The Greek counterpart, a fixed but typically unknown parameter that ¯X
estimates.

C. σ: I, the population standard deviation. Greek again, the parameter measuring spread in the whole
population.

D. s: IV, the sample standard deviation. The Latin counterpart computed from the sample, the estimator of
σ.

The matching is A-II, B-III, C-I, D-IV.

Option (1) reverses the convention throughout, reading the Greek letters as sample quantities and the Latin as
population. Option (2) gets the two standard deviations right but swaps the means. Option (4) gets the means
right but swaps the two standard deviations.

Solution.
B is correct. The revenue deficit is the excess of revenue expenditure over revenue receipts, the gap
on the current account of the budget.

C is correct. The budget deficit is total expenditure less total receipts, where receipts include borrowings.
This is the old headline measure that the fiscal deficit replaced in Indian budgeting.

A is false. Subtracting interest payments from a deficit gives the primary version of that deficit, not the fiscal
deficit. The true relation is Fiscal Deficit = Budget Deficit + Borrowings, or equivalently total expenditure
less receipts excluding borrowings.

D is false by a sign: Primary Deficit = Fiscal Deficit − Interest Payments. Adding interest instead of removing
it defeats the measure’s purpose, which is to show the deficit created by current policy after stripping out the
inherited interest burden.

E is false. Budget deficit plus borrowings defines the fiscal deficit; “current deficit” is not a budget aggregate
at all, and the current account gap that exists, the revenue deficit, is defined in B.

Correct statements: B and C only.