In year 1, an imaginary country has 50 people, each earning Rs 20. In year 2, 40 of them earn Rs 18 each and the other 10 earn Rs 35 each. Prices do not change. Which of the following is correct?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → GDP rises by Rs 70, and 80 per cent of the people are worse off
Given:
Year 1: 50 people earn Rs 20 each
Year 2: 40 people earn Rs 18 each
Year 2: 10 people earn Rs 35 each
Prices do not change
GDP is the total income: the number of people times what each earns, added up.
GDP in year 1 = 50 × 20 = Rs 1,000
GDP in year 2 = 40 × 18 + 10 × 35 = 720 + 350 = Rs 1,070
Change = 1,070 − 1,000 = +Rs 70
Worse off = 40 of 50 = 80 per cent
GDP rises, yet most people earn less. A rise in GDP may be concentrated in a few hands, so it does not always mean higher welfare.
NCERT (2026-27): “2.5 GDP and Welfare 1. Distribution of GDP – how uniform is it: If the GDP of the country is rising, the welfare may not rise as a consequence. 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. In such a case the welfare of the entire country cannot be said to have increased. …” |