What caution is needed while interpreting a rise in disaster-repair spending in GDP?
Answer and explanation
Correct answer: GDP may rise, but the disaster-related loss may reduce welfare
Expenditure on repairing buildings, roads, vehicles, or equipment can create current production and therefore increase measured GDP. However, the repair activity is responding to destruction caused by a disaster; GDP does not fully record the lost assets, suffering, disruption, or reduced quality of life. Consequently, higher repair spending can raise GDP without representing a genuine improvement in welfare, and it may only restore conditions that existed earlier.
Frequently asked questions
What is the correct answer to this question?
GDP may rise, but the disaster-related loss may reduce welfare
Why is this the correct answer?
Expenditure on repairing buildings, roads, vehicles, or equipment can create current production and therefore increase measured GDP. However, the repair activity is responding to destruction caused by a disaster; GDP does not fully record the lost assets, suffering, disruption, or reduced quality of life. Consequently, higher repair spending can raise GDP without representing a genuine improvement in welfare, and it may only restore conditions that existed earlier.
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.
