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.
Frequently asked questions
What is the correct answer to this question?
Defensive expenditure may appear as an increase in welfare
Why is this the correct answer?
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.
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.
