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If technological improvement raises product quality but the price index does not fully capture the quality change, what problem arises in real GDP as a welfare indicator?

Answer and explanation

Correct answer: Quality improvement and the real welfare gain may be understated

Real GDP depends on a price index to separate changes in prices from changes in quantities or quality-adjusted output. If a product becomes better but the index fails to recognize that improvement, part of the gain may be treated as an ordinary price increase rather than as additional real output. Measured real GDP and the associated welfare improvement can then be understated. The effect is not necessarily always an overstatement, so option C is the accurate qualification.

Related tags

Quality ChangePrice IndexReal GdpWelfare MeasurementGdp And WelfareNational Income And Related AggregatesEconomicsClass 11 Mcq

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