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If heavy expenditure on cleaning a river is recorded as production activity, which limitation of GDP becomes clear?

Answer and explanation

Correct answer: Defensive expenditure may appear as an increase in welfare

Expenditure on river cleaning is a paid service and can increase measured GDP. However, if the cleaning merely repairs damage caused by earlier pollution, it may restore environmental quality rather than create a comparable net improvement in welfare. GDP records the defensive activity but does not clearly subtract the original environmental loss. This illustrates why defensive expenditure can make welfare appear higher than it really is. Option A is correct.

Related tags

Gdp LimitationDefensive ExpenditureEnvironmental DamageWelfarePollutionGdp And WelfareNational Income And Related AggregatesEconomics

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