When reconstruction spending rises after a natural disaster, what welfare caution is needed regarding GDP?
Answer and explanation
Correct answer: GDP may rise, but actual welfare may not necessarily increase
Reconstruction activities generate current production and incomes, so the additional spending can increase measured GDP. However, GDP does not deduct the destruction of homes, infrastructure, leisure, safety, or psychological well-being caused by the disaster. Therefore, a rise in GDP after reconstruction does not necessarily mean that people are better off than before. Option A correctly states this important limitation of GDP as a welfare indicator.
Frequently asked questions
What is the correct answer to this question?
GDP may rise, but actual welfare may not necessarily increase
Why is this the correct answer?
Reconstruction activities generate current production and incomes, so the additional spending can increase measured GDP. However, GDP does not deduct the destruction of homes, infrastructure, leisure, safety, or psychological well-being caused by the disaster. Therefore, a rise in GDP after reconstruction does not necessarily mean that people are better off than before. Option A correctly states this important limitation of GDP as a welfare indicator.
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.
