Which of the following statements about GDP and welfare are correct?
(A) With positive externalities, GDP overestimates the actual welfare of the economy.
(B) Externalities do not have any market in which they can be bought and sold.
(C) Leaving out barter exchanges in remote regions leads to overestimation of GDP.
(D) With negative externalities, taking GDP as a measure of welfare overestimates the actual welfare.
(E) A rise in GDP may leave most people worse off if the rise is concentrated in a few hands.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (B), (D) and (E) only
GDP may not measure welfare well for three reasons: its distribution, non-monetary exchanges and externalities.
(A) With positive externalities, GDP overestimates the actual welfare of the economy. — Incorrect. With positive externalities, GDP underestimates welfare.
(B) Externalities do not have any market in which they can be bought and sold. — Correct. Externalities have no market where they can be bought and sold.
(C) Leaving out barter exchanges in remote regions leads to overestimation of GDP. — Incorrect. Leaving out barter exchanges leads to underestimation of GDP.
(D) With negative externalities, taking GDP as a measure of welfare overestimates the actual welfare. — Correct. GDP ignores harms like pollution, so it overestimates welfare.
(E) A rise in GDP may leave most people worse off if the rise is concentrated in a few hands. — Correct. A rise in GDP concentrated in a few hands may leave the rest worse off.
NCERT (2026-27): “2.5 GDP and Welfare … 3. Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalised). Externalities do not have any market in which they can be bought and sold. …” “2.5 GDP and Welfare … 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. This was an example of negative externality. There can be cases of positive externalities as well. In such cases, GDP will underestimate the actual welfare of the economy.” “2.5 GDP and Welfare … This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. For the rest, the income may in fact have fallen. …” “2.5 GDP and Welfare … 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. In developing countries, where many remote regions are underdeveloped, these kinds of exchanges do take place, but they are generally not counted in the GDPs of these countries. This is a case of underestimation of GDP. …” |