What effect does a rise in the disposable income of people, due to an increase in the gross domestic product of a country, have?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → It creates increasing demand for products
Option (1) It reduces profit margins of firms — Incorrect. Increased competition in the market may reduce profit margins of firms. A rise in income does not do this.
Option (2) It increases the various costs of business — Incorrect. High inflation rates raise the costs of business, such as raw materials, machinery and wages.
Option (3) It makes things expensive to buy — Incorrect. An increase in taxes by the government can make things expensive to buy.
Option (4) It creates increasing demand for products — Correct. When GDP rises, people’s disposable income, the money they have left to spend, rises. With more money to spend, people buy more, so the demand for products increases.
NCERT (2026-27 Edition): “(i) Economic Environment: Interest rates, inflation rates, changes in disposable income of people, stock market indices and the value of rupee are some of the economic factors that can affect management practices in a business enterprise. Short and long term interest rates significantly affect the demand for product and services. For example, in case of construction companies and automobile manufacturers, low longer-term rates are beneficial because they result in increased spending by consumers for buying homes and cars on borrowed money. Similarly, a rise in the disposable income of people due to increase in the gross domestic product of a country creates increasing demand for products. High inflation rates generally result in constraints on business enterprises as they increase the various costs of business such as the purchase of raw materials or machinery and payment of wages and salaries to employees. …” |