If GDP rises but food prices increase faster than the incomes of poor households, what may happen?
Answer and explanation
Correct answer: The real welfare of the poor may fall
The governing concept is real purchasing power: it depends on income after considering the prices of goods. If poor households’ incomes rise more slowly than food prices, the quantity of necessities they can buy decreases. Thus their real income and likely welfare may fall, even though aggregate GDP has increased. Option A confuses nominal income with real purchasing power; C and D have no economic basis.
Frequently asked questions
What is the correct answer to this question?
The real welfare of the poor may fall
Why is this the correct answer?
The governing concept is real purchasing power: it depends on income after considering the prices of goods. If poor households’ incomes rise more slowly than food prices, the quantity of necessities they can buy decreases. Thus their real income and likely welfare may fall, even though aggregate GDP has increased. Option A confuses nominal income with real purchasing power; C and D have no economic basis.
Which subject and chapter does this question cover?
This is a Class 11 Economics question. Chapter: National Income and Related Aggregates. Topic: GDP and Welfare.
