If prices of pollution-causing goods rise, the GDP deflator may increase, but what does this not prove?
Answer and explanation
Correct answer: Economic welfare has increased
A rise in the GDP deflator indicates that the average price of measured domestic final output has increased. It says nothing by itself about whether people are better off. If higher prices are associated with pollution, health risks, or environmental damage, welfare may even decline despite a higher measured price level. Hence option A is correct. The other statements are compatible with what a higher deflator can indicate.
Frequently asked questions
What is the correct answer to this question?
Economic welfare has increased
Why is this the correct answer?
A rise in the GDP deflator indicates that the average price of measured domestic final output has increased. It says nothing by itself about whether people are better off. If higher prices are associated with pollution, health risks, or environmental damage, welfare may even decline despite a higher measured price level. Hence option A is correct. The other statements are compatible with what a higher deflator can indicate.
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.
