When both polluting production and spending on cleanup services rise, what problem arises in conventional GDP?
Answer and explanation
Correct answer: It may count both the damaging activity and its cleanup as positive output
The governing accounting principle is that GDP adds the market value of final goods and services, without subtracting every social cost. Pollution-producing activity can raise GDP through its sale, and later cleanup services can also raise GDP through their payment. Thus measured GDP may increase even though environmental damage has occurred; it is not a complete measure of net welfare. Option D is correct.
Frequently asked questions
What is the correct answer to this question?
It may count both the damaging activity and its cleanup as positive output
Why is this the correct answer?
The governing accounting principle is that GDP adds the market value of final goods and services, without subtracting every social cost. Pollution-producing activity can raise GDP through its sale, and later cleanup services can also raise GDP through their payment. Thus measured GDP may increase even though environmental damage has occurred; it is not a complete measure of net welfare. Option D is correct.
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.
