In a country, output of a polluting industry rises and health expenditure also increases, causing GDP to rise. What does this situation show?
Answer and explanation
Correct answer: Defensive expenditure may enter GDP and overstate welfare
This illustrates defensive expenditure and the distinction between measured output and welfare. Medical treatment or pollution-control spending is recorded as expenditure on goods and services, so it can increase GDP even when the spending merely repairs damage caused by pollution. Option B is correct. GDP does not automatically deduct environmental loss; health expenditure can be included, and pollution does not mechanically reduce measured national income in every case.
Frequently asked questions
What is the correct answer to this question?
Defensive expenditure may enter GDP and overstate welfare
Why is this the correct answer?
This illustrates defensive expenditure and the distinction between measured output and welfare. Medical treatment or pollution-control spending is recorded as expenditure on goods and services, so it can increase GDP even when the spending merely repairs damage caused by pollution. Option B is correct. GDP does not automatically deduct environmental loss; health expenditure can be included, and pollution does not mechanically reduce measured national income in every case.
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.
