Question

Why does GDP underestimate actual productive activity and welfare in underdeveloped and remote regions?

Options

• Because externalities are always positive

• Because monetary transactions are fully excluded

• Because all production is recorded twice

• Because barter exchanges are common and are excluded from GDP

Answer 1

Barter exchanges are common in underdeveloped and remote regions. Since these direct exchanges involve no money, they are excluded from GDP, causing GDP to underestimate actual productive activity and welfare.