If output rises but most of the increase is in goods people consider harmful, what conclusion is appropriate?
Answer and explanation
Correct answer: GDP may rise but the welfare effect is uncertain because of the composition of output
GDP is an accounting measure that adds the market value of legal final goods and services; it does not judge whether their social or moral value is beneficial. Therefore, if output growth is concentrated in harmful or demerit goods, measured GDP may rise while welfare rises less, stays unchanged or even falls after considering social costs. The composition of output matters, so option D is correct.
Frequently asked questions
What is the correct answer to this question?
GDP may rise but the welfare effect is uncertain because of the composition of output
Why is this the correct answer?
GDP is an accounting measure that adds the market value of legal final goods and services; it does not judge whether their social or moral value is beneficial. Therefore, if output growth is concentrated in harmful or demerit goods, measured GDP may rise while welfare rises less, stays unchanged or even falls after considering social costs. The composition of output matters, so option D 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.
