The GDP tends to:
Question 22 options:
a) understate economic welfare because it does not take into account increases in leisure.
b) overstate economic welfare because it does not reflect improvements in product quality.
c) understate economic welfare because it includes expenditures undertaken to offset or correct pollution.
d) overstate economic welfare because it does not include certain nonmarket activities such as the productive work of housewives.
The correct answer and explanation is :
The correct answer is:
a) understate economic welfare because it does not take into account increases in leisure.
Explanation:
Gross Domestic Product (GDP) is a widely used indicator to measure the economic output of a country. It includes the total market value of all goods and services produced within a country during a specific period. However, GDP has several limitations as a measure of economic welfare, and one of the key limitations is that it does not account for increases in leisure time, which is a significant factor in overall well-being.
1. Leisure and Economic Welfare:
Economic welfare is a broader concept than mere economic output. It includes the quality of life and overall satisfaction of individuals, which can be affected by many factors beyond material goods and services. One important factor is leisure. People value their free time, and as societies become wealthier, they may prioritize more leisure, resulting in higher quality of life. However, GDP does not measure this increase in leisure. If people are working fewer hours while maintaining their standard of living, GDP may remain the same or increase, but the true welfare of individuals could be improving.
2. Limitations of GDP:
While GDP does provide insight into the economic output, it is not a comprehensive measure of welfare because it fails to account for non-market activities like household labor (e.g., care provided by housewives), the impact of environmental degradation, or improvements in product quality. Additionally, it does not consider the distribution of wealth or income inequality, which are crucial for assessing the well-being of a population.
3. Other Answer Choices:
- Option b is incorrect because GDP doesn’t directly overstate economic welfare by not considering product quality; rather, it omits it.
- Option c is incorrect as GDP does not subtract costs related to pollution cleanup, but rather includes the economic activity surrounding it.
- Option d is incorrect because while GDP does not measure nonmarket activities like housework, it doesn’t directly “overstate” welfare. It simply fails to capture certain dimensions.
Thus, the failure of GDP to include increases in leisure time is a key reason why it underestimates economic welfare.