If prices of environmentally harmful goods rise, the deflator may increase, but what does this not prove?
Answer and explanation
Correct answer: Economic welfare has increased
A higher GDP deflator indicates that the prices of goods and services included in measured domestic output have risen relative to the base period. It is a price measure, not a direct welfare measure. If harmful goods become more expensive, the index may rise even while pollution, health damage or cleanup costs reduce well-being. Thus the increase does not prove that economic welfare has improved.
Frequently asked questions
What is the correct answer to this question?
Economic welfare has increased
Why is this the correct answer?
A higher GDP deflator indicates that the prices of goods and services included in measured domestic output have risen relative to the base period. It is a price measure, not a direct welfare measure. If harmful goods become more expensive, the index may rise even while pollution, health damage or cleanup costs reduce well-being. Thus the increase does not prove that economic welfare has improved.
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.
