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Question
Which of the following are the limitations of using GDP as an index of the welfare of a country?
Options
Non-monetary exchanges
Inflation
Externalities
All of the above
MCQ
Solution
All of the above
Explanation:
The following are some of the drawbacks of using GDP as an indicator:
- Non-monetary exchanges
GDP is a metric that measures the number of goods and services produced in a given economy over a given time period. It does not, however, take into account transactions that are not monetary in nature. Non-monetary exchanges exist in less developed countries, notably in rural areas. As a result, these transactions are not included in GDP. The home and volunteer sectors are underrepresented in GDP. - Inflation
GDP does not take into account a country's price level. As a result of inflation, the cost of living rises, lowering one's standard of life. GDP, as a measure of welfare, does not account for the loss of welfare caused by this drop. - Externalities
Increased national wealth is linked to increased pollution, accidents, disasters, natural resource scarcity, and depletion, among other things. These elements have an impact on human health and have a negative impact on the environment. The costs or values of such elements are not factored into GDP.
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Gross and Net Domestic Product (GDP and NDP)
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