If technological improvement raises product quality but the price index does not fully capture the quality change, what problem arises in real GDP as a welfare indicator?
Answer and explanation
Correct answer: Quality improvement and the real welfare gain may be understated
Real GDP depends on a price index to separate changes in prices from changes in quantities or quality-adjusted output. If a product becomes better but the index fails to recognize that improvement, part of the gain may be treated as an ordinary price increase rather than as additional real output. Measured real GDP and the associated welfare improvement can then be understated. The effect is not necessarily always an overstatement, so option C is the accurate qualification.
Frequently asked questions
What is the correct answer to this question?
Quality improvement and the real welfare gain may be understated
Why is this the correct answer?
Real GDP depends on a price index to separate changes in prices from changes in quantities or quality-adjusted output. If a product becomes better but the index fails to recognize that improvement, part of the gain may be treated as an ordinary price increase rather than as additional real output. Measured real GDP and the associated welfare improvement can then be understated. The effect is not necessarily always an overstatement, so option C is the accurate qualification.
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.
