GDP Limitations of GDP 4

Question 1

Which of the following best describes the 'leisure paradox' in GDP measurement?

Accepted Answer

GDP does not assign value to leisure time, so a society that works less but enjoys more free time appears worse off

Answer

Because GDP only counts market output, choosing leisure over paid work reduces GDP even if people's subjective well-being increases.

Question 2

Why do economists say GDP is a 'flow' measure rather than a 'stock' measure?

Accepted Answer

GDP measures output produced during a specific time period, not the total accumulated wealth of a nation

Answer

GDP captures economic activity within a period (a flow), so it misses the existing stock of wealth, infrastructure, and human capital a country possesses.

Question 3

How can GDP growth be misleading if population health outcomes are simultaneously worsening?

Accepted Answer

Rising GDP can mask declining life expectancy, mental health, or chronic disease rates that reduce actual welfare

Answer

More hospital spending raises GDP, but if it reflects sicker people rather than better care, the GDP figure overstates improvements in well-being.

Question 4

What is the 'composition problem' associated with GDP as a welfare measure?

Accepted Answer

GDP cannot distinguish between spending on weapons versus spending on education and healthcare

Answer

GDP treats military spending the same as spending on schools or hospitals, so its composition reveals nothing about whether output serves human welfare.

Question 5

A country legalizes and begins taxing a previously illegal market. What typically happens to measured GDP?

Accepted Answer

GDP rises because the previously unreported activity now enters official accounts

Answer

Legalization moves activity from the shadow economy into measured GDP, increasing the official figure even though real output may be unchanged.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP Limitations of GDP 4