Real GDP is the same in two periods, but product quality is better in the second period and the price index fails to capture the improvement. What may result?
Answer and explanation
Correct answer: Growth in real output and welfare may be understated
Real GDP is obtained by separating price changes from changes in quantities and quality, but a price index may fail to record improved quality. If better products are treated as merely the same products at different prices, the statistical measure can miss part of the real gain. Consequently, growth in real output and welfare may be understated, so B is correct. The other options either reverse the bias or make unrelated claims.
Frequently asked questions
What is the correct answer to this question?
Growth in real output and welfare may be understated
Why is this the correct answer?
Real GDP is obtained by separating price changes from changes in quantities and quality, but a price index may fail to record improved quality. If better products are treated as merely the same products at different prices, the statistical measure can miss part of the real gain. Consequently, growth in real output and welfare may be understated, so B is correct. The other options either reverse the bias or make unrelated claims.
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.
