If total real GDP remains constant but income shifts from the poor to the rich, what may happen to social welfare?
Answer and explanation
Correct answer: Social welfare may fall
The governing concept is the distributional limitation of GDP. Real GDP can remain unchanged because total production is unchanged, yet welfare need not remain unchanged. Under diminishing marginal utility of income, transferring income away from poorer households can cause a larger utility loss than the gain enjoyed by richer households. Hence option B is the appropriate cautious conclusion. Options A and D ignore distribution, while C contradicts the stated constant GDP.
Frequently asked questions
What is the correct answer to this question?
Social welfare may fall
Why is this the correct answer?
The governing concept is the distributional limitation of GDP. Real GDP can remain unchanged because total production is unchanged, yet welfare need not remain unchanged. Under diminishing marginal utility of income, transferring income away from poorer households can cause a larger utility loss than the gain enjoyed by richer households. Hence option B is the appropriate cautious conclusion. Options A and D ignore distribution, while C contradicts the stated constant GDP.
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.
