GDP Limitations of GDP 2

Question 1

Why does GDP fail to capture income inequality within a country?

Accepted Answer

It reports a single aggregate figure that masks how income is distributed among individuals

Answer

GDP is an aggregate measure, so a high GDP can coexist with extreme poverty if wealth is concentrated among few people.

Question 2

Which of the following household activities is EXCLUDED from GDP calculations?

Accepted Answer

A parent cooking meals for their own family

Answer

GDP only counts market transactions, so unpaid household labor like cooking for one's own family is excluded.

Question 3

How does GDP treat environmental degradation caused by industrial production?

Accepted Answer

It ignores it and counts only the market value of goods produced

Answer

Standard GDP does not deduct environmental damage, so pollution-heavy growth can appear as economic progress.

Question 4

A country rebuilds infrastructure after a major hurricane. How does this affect GDP?

Accepted Answer

GDP rises because reconstruction spending counts as economic activity

Answer

Reconstruction spending adds to GDP even though it merely restores what was lost, illustrating GDP's inability to distinguish beneficial from defensive spending.

Question 5

What does the term 'underground economy' refer to in the context of GDP limitations?

Accepted Answer

Legal but unreported cash transactions and illegal economic activity not captured in GDP

Answer

The underground economy includes unreported legal work and illegal activity, both of which are excluded from official GDP figures.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP Limitations of GDP 2