In which example will GDP measure market production but not fully show social cost?
Answer and explanation
Correct answer: Output of a polluting factory
The output of a polluting factory has a market price and is therefore included in GDP as current production. However, GDP records the value of the goods produced and does not fully subtract external costs such as air pollution, health damage, ecological loss, or reduced quality of life. Thus, GDP may rise even when social welfare does not rise by the same amount.
Frequently asked questions
What is the correct answer to this question?
Output of a polluting factory
Why is this the correct answer?
The output of a polluting factory has a market price and is therefore included in GDP as current production. However, GDP records the value of the goods produced and does not fully subtract external costs such as air pollution, health damage, ecological loss, or reduced quality of life. Thus, GDP may rise even when social welfare does not rise by the same amount.
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.
