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If prices of environmentally harmful goods rise, the deflator may increase, but what does this not prove?

Answer and explanation

Correct answer: Economic welfare has increased

A higher GDP deflator indicates that the prices of goods and services included in measured domestic output have risen relative to the base period. It is a price measure, not a direct welfare measure. If harmful goods become more expensive, the index may rise even while pollution, health damage or cleanup costs reduce well-being. Thus the increase does not prove that economic welfare has improved.

Related tags

Environmental HarmEconomic WelfareGdp DeflatorPrice LevelGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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