In a remote region, farmers pay for labour with grain and no money is used. In the same region, an oil refinery pollutes the river on which fishermen depend. Which of the following is/are correct for the GDP of the economy?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Both (1) and (2)
The region shows two limits of GDP at once. Barter leaves activity out of GDP, and pollution leaves harm out of it.
Option (1) GDP underestimates the productive activity of the region. — Correct. Exchanges without money are not registered as economic activity, so GDP is lower than the real activity.
Option (2) GDP overestimates the welfare of the people of the region. — Correct. The refinery’s output is counted, but the harm to the fishermen is not. This negative externality makes GDP overstate welfare.
Option (3) The grain-for-labour exchanges are counted in GDP at their market value. — Incorrect. Barter exchanges are generally not counted in GDP.
NCERT (2026-27): “2.5 GDP AND WELFARE … 2. Non-monetary exchanges: Many activities in an economy are not evaluated in monetary terms. For example, the domestic services women perform at home are not paid for. The exchanges which take place in the informal sector without the help of money are called barter exchanges. In barter exchanges, goods (or services) are directly exchanged against each other. But since money is not being used here, these exchanges are not registered as part of economic activity. … This is a case of underestimation of GDP. … In this case, the GDP is not taking into account such negative externalities. Therefore, if we take GDP as a measure of welfare of the economy we shall be overestimating the actual welfare.” |