Question

Q. Consider the following statements with reference to GDP:

Which of the statements given above is/are correct?

• A. 1 only
• B. 1 and 2 only
• C. 1 and 3 only
• D. 2 and 3 only

Answer 1

The correct option is A 1 only

Explanation:

Statement 1 is correct:

• The total monetary or market value of all finished goods and services produced inside a country's borders in a certain time period is known as GDP. It serves as a comprehensive scorecard of a country's economic health because it is a wide measure of entire domestic production. GDP is a measure of a country's economic health that is used to estimate its size and rate of growth.
• There are three different approaches for calculating GDP which are used by economists. All these approaches produce the same results, theoretically.

1. Output Approach
2. Income Approach
3. Expenditure Approach

Statement 2 is incorrect:

Although the GDP is a pretty good indicator of the economy, there are some disadvantages of the GDP, including the concepts that the GDP does not take into consideration.

• Non-monetary exchanges: Many activities in an economy that add value to the people are not evaluated in monetary terms. For example, domestic services women perform at home are not paid for. This is a case of underestimation of GDP. GDP ignores voluntary and charitable work, social service as it is unpaid.
• Underground Economy: The underground economy (or black market) refers to cash and barter transactions that are not formally recorded and are often used to support the trade of illegal goods and services (i.e., drugs, weapons, etc). Some nations’ economic output may be understated by GDP.
• GDP does not value intangibles like leisure, quality of life, etc.
• GDP does not take into account the economic value of the environment. Rather it neglects services provided by ecosystems and incentivizes economic activities causing environmental degradation by counting them.
• Gender disparities are not reflected through GDP measures.

Statement 3 is incorrect:

• The rising GDP of a country does not necessarily mean a rise in the welfare of its citizens. This is because the rise in GDP may be concentrated in the hands of very few individuals or firms. GDP does not reflect inequality present within the economy. Economic inequality is not revealed by GDP figures.
• Externalities: Externalities refer to the benefits (or harms) a firm or an individual causes to another for which they are not paid (or penalized). Externalities do not have any market in which they can be bought and sold. For example, the output of oil refineries is taken into GDP calculation but pollution and ill effects are not deducted from GDP. This is the case of the overestimation of GDP.
• The normal GDP also does not have any way of knowing whether the level of income created in a country will be sustainable or not. To overcome this limitation the green GDP is sought after.