If part of income shifts from poor households to rich households while total GDP remains unchanged, what may happen to social welfare?
Answer and explanation
Correct answer: Social welfare may fall
Total GDP can remain unchanged even when its distribution changes. Under the usual diminishing marginal utility of income, one additional unit of income tends to provide greater welfare to a poor household than to a rich household. Transferring income from poor to rich may therefore reduce aggregate social welfare, though the word “may” recognises that welfare judgments require assumptions. B is correct; GDP does not double and households are affected.
Frequently asked questions
What is the correct answer to this question?
Social welfare may fall
Why is this the correct answer?
Total GDP can remain unchanged even when its distribution changes. Under the usual diminishing marginal utility of income, one additional unit of income tends to provide greater welfare to a poor household than to a rich household. Transferring income from poor to rich may therefore reduce aggregate social welfare, though the word “may” recognises that welfare judgments require assumptions. B is correct; GDP does not double and households are affected.
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.
