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When reconstruction spending rises after a natural disaster, what welfare caution is needed regarding GDP?

Answer and explanation

Correct answer: GDP may rise, but actual welfare may not necessarily increase

Reconstruction activities generate current production and incomes, so the additional spending can increase measured GDP. However, GDP does not deduct the destruction of homes, infrastructure, leisure, safety, or psychological well-being caused by the disaster. Therefore, a rise in GDP after reconstruction does not necessarily mean that people are better off than before. Option A correctly states this important limitation of GDP as a welfare indicator.

Related tags

GdpWelfareDisaster ReconstructionLimitations Of GdpNational Income And Related AggregatesGdp And WelfareEconomicsClass 11 Mcq

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