Identify the correct statements about the externalities as a limitation of GDP and welfare.

1. GDP as measured does not include external production of goods.
2. Inverse relationship between negative externality and welfare.
3. No relation between GDP and welfare.
4. Economic activities have both positive and negative externalities.
5. Producers are rewarded with profit for positive externalities.

Choose the correct answer from the options given below:

A, B, and D only

GDP as measured does not include external production of goods - There are certain costs that cannot be measured such as external costs that are important in the production process like chemical wastes produced by factories that harm the environment. These are not included in the calculation of the GDP which results in overestimation of the welfare.

Inverse relationship between negative externality and welfare- Inverse relationship means a higher value of one variable will result in a lower value of the other. Negative externality means the harms which are caused in the production process. Thus, an increase in the negative externality would cause a reduction in the welfare of the nation.

No relation between GDP and welfare- There exists a relationship between GDP and welfare as GDP is often used as an index to measure the welfare of people.

Economic activities have both positive and negative externalities- By externalities we mean when there are positive or negative consequences of economic activities on unrelated third parties.

Producers are rewarded with profit for positive externalities - Externalities refer to benefits or harms which are caused by one unit to another with no payment received for the benefit and no payment is made for the harm.