GDP Limitations of GDP 3

Question 1

How does GDP handle the depreciation of capital goods over time?

Accepted Answer

Gross GDP does not subtract depreciation; Net Domestic Product (NDP) does

Answer

Gross GDP counts total output without deducting capital wear-and-tear; NDP corrects this by subtracting depreciation.

Question 2

Why is GDP per capita considered an imperfect measure of the average citizen's welfare?

Accepted Answer

It divides total output equally across the population, ignoring unequal distribution

Answer

GDP per capita assumes income is evenly distributed, but in reality wealth concentration means many people earn far less than the average suggests.

Question 3

A surge in healthcare spending due to a widespread disease causes GDP to rise. This illustrates which GDP limitation?

Accepted Answer

GDP counts defensive and remedial spending the same as productive spending

Answer

GDP treats money spent fighting illness as positively as money spent on innovation, failing to distinguish between desirable and undesirable economic activity.

Question 4

Which of the following is a limitation of using nominal GDP to compare economies across different years?

Accepted Answer

Nominal GDP is distorted by price-level changes, making real output comparisons unreliable

Answer

Nominal GDP rises with inflation even if actual output stays flat, so real GDP (adjusted for prices) is needed for accurate comparisons over time.

Question 5

How does the digital economy challenge the accuracy of GDP measurement?

Accepted Answer

Many digital services are free to users and thus have zero market price, so their value is understated in GDP

Answer

Free digital services like social media and search engines provide enormous consumer value but record no market revenue, causing GDP to understate their contribution.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP Limitations of GDP 3